Retirement Plan Experts Applaud Raising RMD

They say it will give retirement plan participants a longer window in which to increase their savings, tax deferred.

Retirement plan experts have applauded the regulatory change to increase the required minimum distribution (RMD) age from 70.5 to 72, as directed by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The proposed Securing a Strong Retirement Act of 2020, which many are calling the “SECURE Act 2.0” would raise it even higher, to age 75.

Many experts say extending the period in which people are not required to begin withdrawing money from a qualified retirement account gives people a longer window in which to continue to contribute to their plans and grow their money while deferring taxes. Some even say the longer period might give plan participants a chance to think about various types of drawdown strategies, including investing some of their money in annuities with guaranteed lifetime income.

The Insured Retirement Institute (IRI) has long advocated for increasing the RMD age, says Paul Richman, chief government and political affairs officer at IRI.

“We know people are not only living longer but are working longer,” Richman says. “There is no reason to make them start paying taxes on it under the age of 75, and there are some recent retirees who may not need to take those savings yet.”

Richman said the RMD rule was first enacted in 1962 and set at age 70. In all that time, it was only raised nominally, to age 70.5. “Even as life expectancies have continued to increase in the last 58 years, no adjustment has been made until last year. The bill proposing to increase it to age 75 is what we should have done in the first place.”

Catherine Reilly, director of retirement solutions at Smart, says a longer window is advantageous for everyone. “The thinking about raising the required minimum distribution age is to give people more flexibility about drawing down their retirement savings,” Reilly says. “It is in everyone’s interest to help retirees make their savings last as long as possible. TIAA research has found that when people start complying with RMDs, few annuitize any of their money. This longer period of time might incentivize people to think about annuities or other decumulation strategies.”

However, Paul Sommerstad, a partner with Cerity Partners, says any change in RMD age really only benefits the wealthiest Americans, as most people who retire need to rely on the money in their workplace retirement accounts. “The majority of Americans need to draw down from qualified assets to maintain their lifestyles because Social Security benefits are inadequate to live on,” Sommerstad says. “It has the biggest impact on the most wealthy, who have other sources of income.”

That said, Sommerstad says increasing the RMD age is a move in the right direction as longevity continues to rise, and, he says, noting that a study by the World Economic Forum found that children born in 2007 have a 50% chance of living to age 104.