Is Age 70½ Too Early for RMDs?
September 7, 2008
A federal rule that requires those aged 70½ to begin taking required minimum distributions (RMDs) from their IRAs and 401(k) accounts each year might be outmoded, according to the leader of the Senate Finance Committee.
Sen. Charles Grassley (R-IA) said many seniors are unaware of the partial-distribution rule and accidentally incur a penalty (50% of the amount owed for the year but unpaid) for failing to comply. A second issue is that Americans in general are living longer and may need to hang on to their money longer, Grassley said.
The government originally gave IRAs and 401(k)s tax-deferred status to encourage Americans to amass a source of retirement income, and the age rule in effect forces retirees to use the money for that purpose before they die. Not incidentally, distributions are taxed as ordinary income and generate revenue for the U.S. Treasury.
To put teeth in the rule, the IRS penalizes those who don’t take their annual distributions. (In any case, it makes little sense to hoard tax-deferred assets for heirs, since heirs also inherit the tax liability.)
But for well-to-do individuals who don’t need the distributions from their IRAs or 401(k)s for living expenses, the forced distributions simply create paperwork and trigger an unwanted tax bill. And then there’s the penalty for forgetfulness, which the IRS, in practice, is said to assess sparingly.
Grassley said he wants to see the rule simplified, and might consider pushing the age requirement back, according to reports. “We haven’t reviewed this in a long time, and it needs to be reviewed in light of the fact that people are living longer,” he said.
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