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Brett Arends’s ROI: IRA ‘required distribution’ rules are bad policy

Dear Congress,

Now that you are taking another crack at retirement planning with the so-called SECURE Act 2.0, including the vexed issue of required minimum distributions from IRAs, could you do yourself—and everyone else—a big, big favor?

Read: The Secure Act 2.0 – Americans’ retirement security is top of mind for Congress this year

Don’t extend the date for starting RMDs from 72 to 75. Don’t extend it from 72 to 74 and then to 75. Don’t extend it to 80. Don’t reel it back to 70 ½.

Read: RMD age may rise to 75 as House passes Secure Act 2.0. Here’s what to know

Why don’t you just get rid of required minimum distributions altogether?

Or do you just like needlessly complicating everything?

For the uninitiated, “required minimum distributions” are the amount that you have to start withdrawing as taxable income every year from your traditional, pretax IRA. They are calculated using the kind of financial gymnastics that sound like a joke until you realize it’s serious.

You might have to calculate your annual withdrawal using something called the “uniform life expectancy” tables. That’s if you’re unmarried, or you’re married and your spouse is less than 10 years younger than you, or you’re married and your spouse isn’t the sole beneficiary of your IRA.

Got that?

There’s another table to use if you’re married, and your spouse is more than 10 years younger than you, and they are your sole beneficiary.

And there’s yet another table to use if you’re a beneficiary of an IRA and you aren’t the spouse.

The IRS publishes a helpful set of worksheets, because they seem to think that when you’re retired you have nothing better to do.

Hard to believe, but the rationale for these RMD rules is something mind-numbingly simple. The U.S. government, quite reasonably, doesn’t want IRA tax breaks to be used as an inheritance tax freebie. The purpose of giving you a tax break when you save money in your IRA is solely for your own retirement security. It’s not so you will have more money to hand on to Chad, Brad and Mitzi when you join the choir invisible.

Tax attorney Albert Feuer, an expert in this field, tells me RMDs “were first introduced in 1962 for so-called Keogh Plans, i.e., pension and profit-sharing plans of businesses operated as sole proprietorships or partnership. The original purpose of was to assure that tax-advantaged retirement plans were used primarily for the retirement of the participant and the participant’s spouse.” He adds, “This was before the 1974 introduction of IRAs. The RMD rules now apply not only to IRAs but to tax-advantaged employer profit-sharing and pension plans and now permit payments to be stretched beyond the lives of the participant and the participant’s spouse.”

Fair enough.

But it raises the simple question: If that’s the purpose, why doesn’t the IRS just…er…wind up your IRA when you die and tax it then?

Sounds simple, right?

It’s so simple that, as Feuer points out, this exactly what they do with Health Savings Accounts, a cousin of the IRA designed specifically for health expenses. You can save tons of money in your HSA over the years. You can spend that money—not just tax-deferred but tax-free, actually—for medical expenses, something that is especially helpful in your senior years. And there are no required minimum distributions. None.

When you die, your HSA gets wound up, the money distributed to your estate and included in your final year’s taxable income. So you get full and free use of it during your lifetime, without any crazy rules, and your kids and grandkids don’t get any of the tax break after you’re gone.

Simple, really. Who knew?

“The problem with RMD‘s is that they are confusing and complicated for seniors,” says Robin Giles, a Certified Financial Planner with Apex Wealth Management in Katy, Texas. “It’s easy for seniors to miscalculate, or even forget about accounts, and the penalties for missing an RMD are extremely onerous.”

Required distributions, she adds, aren’t just “an extra hassle” for seniors, but in many cases damaging. Seniors are forced to take distributions when they don’t need them, but don’t know what to do with the money. Often the RMDs “go right into their checking account and get spent, without regard to the needs they may have in the future,” she says. Net result: Government ends up having to spend more money helping them out later when they get in trouble.

If retirees don’t need the money at the time, she says, “why not let them hold on to a little more of their nest egg for the years when they do have higher expenses and have a need for the money.”

All excellent points — coming from someone who deals with ordinary Americans with real financial issues every day.

The RMD rules for IRAs don’t even do what they are supposed to do. They are supposed to wind up your IRA over your final decades, based on life expectancy tables. But in reality you can die with lots of money still in the account. If you and your spouse have both died, and the accounts pass on to your heirs, they then have another 10 years to wind up the IRA using their own RMD rules.

Mind-boggling. Really. And people wonder why the U.S. tax code is now about 8 times longer than War & Peace.

And Congress wonders why 4 times as many Americans disapprove of the job they do as approve.

More Americans believe that the government is hiding aliens at Area 51 than believe Congress is doing a good job. That’s not a rhetorical point. It’s mathematically correct. The numbers aren’t even that close.

The current rules also mean that Uncle Sam goes without that tax money for another 10 years after the intended beneficiary dies. It’s great precisely for people who need it the least.

So, instead of solving a simple problem with a simple solution, the government instead tried to solve it with an overcomplicated solution that didn’t entirely work, requiring a second, inefficient “fix” to fill in the holes.

Facepalm. D’oh!

If that sounds familiar, it means you may have also paid attention to the quasi-hilarious, dark, Kafkan nightmare known as the Alternative Minimum Tax. Fifty years ago Congress discovered that over the years it had inadvertently made the U.S. income tax code so convoluted and absurd that many very rich people were able to get around it pretty much altogether. But instead of doing the obvious, common sense thing—simplifying the code—Congress decided instead to double down on the complexity. So they created a second, parallel tax code, the AMT, allegedly to fill in the gaps left by the first one.

You can’t make these people up. And they are running our lives.

Meanwhile: Congress, please end RMDs on IRAs and just make the rules the same as they are for HSAs. If you need an incentive, please check the point about Area 51 above.

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