How the Rising RMD Age Could Affect Your Clients

A new report from the National Bureau of Economic Research has shed some additional light on the implications of changing the age to commence required minimum distributions from retirement plans. 

The Setting Every Community Up for Retirement Enhancement (Secure) Act raised the age to 72 for those starting RMDs on or after Jan. 1, 2020. The Securing a Strong Retirement Act, which House Ways and Means Chairman Richard Neal intends to reintroduce in this Congress, would raise the RMD age to 75.

The NBER study offers some insights for financial advisors in providing guidance to clients who are retired or entering retirement. 

Increased Retirement Account Balances 

One of the reasons those who support raising the age to commence RMDs cite is that this change will result in higher account balances through retirement and the ability for retirees to make their savings last longer. 

The data from the NBER study suggests that increasing the RMD age will have little discernible impact on retirement account balances throughout a person’s retirement. The study found that “… delaying the RMD age further would have little impact during the work life, including on workers’ savings and asset allocation inside and outside tax-qualified retirement accounts. Additionally, Social Security claiming behavior is almost unaffected.” 

The exception to this finding was among those retirees who had a strong “bequest motive,” according to the researchers. For those who have a desire to leave a legacy to their heirs, the study found: 

• These individuals tended to claim their Social Security benefits a bit later than those in the study with no bequest motive.
• These people tended to work several more hours per week than others in the study. This translates to generally higher Social Security benefits as well as higher levels of savings in both retirement accounts and non-retirement accounts.
• The study also found that individuals with a bequest motive tend to consume more in retirement. The study attributes this to two factors. First, the higher Social Security benefit. Second, a higher level of savings providing a higher level of investment income.

The Progressive RMD Approach 

Another potential RMD approach considered by the researchers was the progressive RMD. Under this scenario, the first $100,000 in retirement account assets would be withdrawn at a lower rate than would be applied to assets in excess of $100,000. Another version would completely exempt the first $100,000 in assets.  

If some version of this approach were to be enacted as part of a change in the RMD rules, the researchers found that those with a bequest motive would use all or most of this money as part of their efforts to pass money onto their heirs. Overall, this would likely result in lower tax payments from account distributions by this group over the course of their retirement. 

Implications for Financial Advisors 

This study reinforces the need for financial advisors to understand their clients’ intentions before providing blanket advice about RMDs. They should understand not only their retirement needs but also their desires as far as bequeathing some of their retirement assets to their heirs. 

Given some of the other changes brought on by the Secure Act, notably the changes to the rules for inherited IRAs for most non-spousal beneficiaries, other planning strategies such as converting at least some traditional retirement account assets to a Roth account might make sense for some clients. 

As clients save for retirement, these changes to the inherited IRA rules under the Secure Act might also lend themselves to advisors suggesting that clients fund Roth retirement accounts, at least as part of their annual contributions, in order to build a nest egg that will not be subject to RMDs or to taxes on the part of their non-spousal beneficiaries. 

Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.