Required minimum distributions have been a bugaboo for retirees for decades and a central element of retirement, tax and income planning, but now retirement account and tax expert Ed Slott is arguing they should be done away with.

Required minimum distributions, or RMDs, are no longer helpful to retirees or to policymakers interested in assuring that taxes are eventually paid on retirement assets, Slott, president of Slott & Company, said yesterday during “Ed Slott’s Midyear Outlook: Top IRA Pitfalls & Planning Opportunities,” a presentation at Financial Advisor magazine’s Next Chapter—ReThinking Retirement conference.

“Right now they are just basically an annoyance and nuisance for seniors,” said Slott, echoing comment he had made earlier in the day on CNBC. “They’re a good way to keep seniors crotchety for the rest of their lives. If they got rid of them, the government would get all of their money anyway.”

Slott’s comments referred to 2019’s SECURE Act, which eliminated the “stretch IRA” strategy for inherited traditional retirement accounts. Thanks to that law, only eligible designated beneficiaries—heirs identified on an IRA’s beneficiary paperwork who meet certain characteristics—can stretch the required minimum distributions from an inherited traditional IRA over their own life expectancy.

For most designated beneficiaries, a new 10-year rule applies, stating that they must exhaust or withdraw the assets from the IRA and pay income taxes on them before the end of the tenth year after the former account owner died.

Thanks to that change, policymakers now have more certainty that taxes will eventually be paid on tax-deferred retirement assets, making the tax receipts from required minimum distributions during the original account owner’s life less relevant, Slott said. 

Slott’s comments also came amid criticism of proposals within new retirement legislation, colloquially deemed SECURE Act 2.0, that would gradually raise the age at which RMDs begin from 72 to 75. This would be the second increase in the RMD start age in recent years. The original SECURE Act raised the age from 70½ to 72.

“Every time they have one of these transitions it creates a problem of explaining it to clients,” said Slott.

Slott questioned the necessity of required distributions from retirement accounts.

“Eighty percent of the people subject to RMDs end up taking more than the RMD each year anyway because they need the money,” said Slott. “So let’s just kill the RMDs. Raising the age won’t help people who need the money anyway. That’s 80% of the people who will still take the same amount or more anyway.”

In fact, if RMD dates are pushed back by new retirement legislation, Slott counseled advisors to consider having their clients take the distribution anyway or engage in Roth IRA conversions to pay taxes on those asset now while their effective tax rate may be lower.

 

Using Roth IRA conversions may also help to rescue any plans that used the traditional IRA beneficiary process as part of an estate strategy, said Slott, who added that raising  the RMD age to 75 would also offer more time to convert assets to a Roth.

“You might want to work with clients, take RMDs, and do more Roth conversions to smooth out the tax bill,” said Slott. “Let’s say they do raise the RMD age to 75—maybe don’t wait until 75. Look at what the IRA balance might be. If it’s significantly larger, your client might get hit by giant RMDs and giant tax bills very late in life. The policy change might sound good, but I think it’s up to advisors to say it might pay off long term to take a littlle out every year, even if you don’t have to.”