When the IRA was invented many decades ago, the theory was that you could put away money while you were working and in a higher tax bracket, let it grow tax deferred, and then take it out when you were retired and in a lower tax bracket. Just to insure that the government got the taxes that you didn’t pay when you were contributing and also get the taxes you deferred on the earnings, they instituted the required minimum distribution. That pesky thing that starts when you turn age 70 ½.
Since that time, many things on the retirement scene have changed and my contention is that the required minimum distribution should be done away with. First, because of changes in tax law, the actual tax savings that individual’s realize on their IRA contributions now are much smaller than they were when the original idea came about. To add to that, most people’s tax bracket during retirement isn’t much less that it was when they were working. Because of that they are paying taxes on a larger amount at an equal or higher rate.
Retirement itself has changed. With people living longer, healthier lifestyles, not many are retiring and simply going to the golf course. Many are working longer, creating a new career, turning a hobby into a part time income producer or doing something that produces income and allows them free time. These people may not need to draw on their IRA’s to support their retirement, so why should they have to take money that they don’t want or need and pay taxes on it?
The Roth IRA has also added to the case against having RMD’s. The Roth doesn’t give you a tax deduction when you make a contribution, but the earnings and growth of the contribution is never taxed. For most people who would contribute $5000 into a Roth IRA, they would give up a $750 tax savings in the year of contribution, but would never pay tax on any withdrawals made in retirement when the $5000 has grown to a much larger amount. In addition, Roth IRA’s have no required minimum distributions, ever.
We keep hearing how little people have saved for retirement. If the government would like to stimulate retirement savings so that people are not solely reliant on Social Security, then combine the Roth and regular IRA’s. Give a tax deduction on the contributions in the year they are made, allow for tax free withdrawals during retirement and do away with the required minimum distributions.
These are the opinions of Mike Berry and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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