If the Securing a Strong Retirement Act of 2021, which passed the House Ways and Means Committee Wednesday, is eventually passed by Congress and enacted into law, the age at which required minimum distributions from retirement accounts begin will be raised gradually to 75 from 72.
But perhaps a better idea would be to raise the maximum age for claiming Social Security from 70 to 72, and to extend delayed retirement credits — which increase benefits by 8% for every year a retiree waits to claim — to that age.
That, contends Wade Pfau, may be a better way to give retirees a chance to spend down their IRAs and make strategic Roth conversions to help reduce taxes on their Social Security benefits.
Pfau is professor of retirement income in the Ph.D. in Financial and Retirement Planning program at the American College of Financial Services. He also is co-director of the New York Life Center for Retirement Income. He is a certified financial analyst and retirement income certified professional and runs the RICP program for the college. Pfau has authored several books on retirement income and spending strategies.
We spoke with him Tuesday about the RMD age change, retirement spending strategies and Social Security. Here are excerpts of our conversation:
ThinkAdvisor: In a podcast recently, you mentioned another option rather than Congress pushing the RMD age to 75. Could you discuss?
Wade Pfau: If you’re doing tax-efficient retirement planning, unless you’re not spending anything in retirement, generally the RMDs won’t be binding on you. Likely you’ll want to spend more than your RMD anyway. When the RMD age was 70, it and Social Security were pretty well lined up. You could have this period, if you retired before 70, [to do] some strategic Roth conversions that would help you to lower subsequent taxes on your Social Security benefit.
With the way Social Security taxation works, once people hit 70 and turn on Social Security, delaying their RMD age later may not have much impact. I don’t know what the motivation of delaying the RMD age would be.
But if you’re trying to help retirees more, let them have further deferral on Social Security to be more aligned with them being able to do more strategic Roth conversions and [the like] before Social Security begins. Reward them by [offering] additional delay credits on Social Security.
[Pushing the RMD back to 75] is only affecting people with a lot of assets anyway.
Then what Congress is doing is counterintuitive?
Yeah, if you could wait till later to start Social Security and be rewarded for it through delayed credits, that would just give you more time to engage in tax strategies so that when RMDs begin and when Social Security begins, you’re in even better shape at that point. You’ve gotten down the value of your IRAs [etc.] so that the RMDs are not going to be very large.
But does raising the RMD age help the general population?
Well, and that’s the thing, it’s not really going to help the general population because already only a couple percent of people delay Social Security to 70. So it’s just going to be a subset of them who get any further benefit.
You’re working on a new book on strategies on spending down in retirement?
I like the idea of tax-efficient spending strategies. The basic starting point is about spending taxable assets, then tax-deferred, then tax-free. But what you’re really trying to do is tax bracket management.
[So] I may want to increase my taxable income, in some cases, to fill up a lower tax bracket, with the idea that in the future, I’ll be able to avoid going into a higher tax bracket. Then you spend [a blend] from your taxable and your tax-deferred accounts in the early years to get you up to the target. And then later when the taxable account runs out, you spend a blend of your tax-deferred and tax-free Roth accounts.