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Do RMDs Matter?

We know that the IRS imposes a specific timeframe on when distributions of retirement savings from qualified plans must start — but what might happen if those requirements were removed?

A recent study considers that question, taking advantage of data from the one-time suspension of the required minimum distribution (RMD) rule  associated with qualified retirement plans in 2009, following the financial services crisis. Using panel data on retirement plan participants at TIAA-CREF, the researchers found that roughly one third of those who were affected by minimum distribution rules discontinued those distributions in 2009.     

(The RMD rules go back to 1962, when Congress established formal distribution requirements for Keogh plans, tax-qualified plans for self-employed individuals, requiring plan owners to begin taking distributions by the later of the year in which they retired or the year in which they reached age 70-1/2. The researchers acknowledge that while it’s not clear what led to the choice of age 70-1/2 at that point, it remains a “key trigger point” for current RMD rules despite significant increases in life expectancy over the intervening half a century.) 

Age, Income Differences

The researchers caution, however, that the average obscures a fair amount of differences in behavior by age and income. The report notes that the probability of suspension declines substantially with age and rises modestly with economic resources, and that individuals taking monthly distributions were less likely to suspend distributions than those taking annual distributions, especially at higher wealth levels. The study’s authors note that that pattern was consistent with the reality that those who choose monthly distributions are more likely to use their distributions to finance consumption.

For example, the younger elderly and wealthier individuals were more likely to suspend the distributions, given the opportunity. The probability that a participant with a retirement account balance of less than $50,000 suspended distributions was about 24%, compared with 34% for a participant with a balance between $100,000 and $150,000, and just over 40% for those with a balance above $250,000. The study found very little difference in suspension probabilities as a function of account balance above $250,000.

A separate survey of TIAA-CREF participants found that among those who have signed up for the minimum distribution option (MDO) at TIAA-CREF, 54.1% indicated that they would choose a smaller distribution if they could do so, while 40.4% indicated that they would not change from current practice (5.5% indicated that they would take a larger distribution, though they could, in fact, do so at any time).

Reasons for Suspending RMD 

That same survey revealed that taking advantage of the opportunity for accumulation of assets at the pre-tax rate of return is an important factor for many participants who chose to suspend their distributions in 2009 (81.7% said it was “very important”), while nearly half (49.7%) said that wanting to preserve more money for older ages was very important, and nearly as many (44.7%) cited as “very important” that they “didn’t need the money to support current spending.”

The rationales among those who chose not to suspend their RMD were more diverse: a third cited as “very important” that they depend on those distributions for their daily spending needs, while a quarter (24.0%) found it very important that they viewed the RMD as a good guide to the appropriate speed of the drawdown. The study’s authors note that even participants with large accumulated balances in their tax-qualified plans reported that they view RMD requirements as a useful guide to feasible consumption spending. Moreover, they found that many individuals view the RMD rules as informative with regard to the sustainability of their retirement distributions, despite the fact that strict adherence to RMD rules would lead to very low distributions at advanced ages.

However a full one in five (20.2%) said a very important consideration was that they were “uncertain about what to do” (another 36.8% said that was a “somewhat important” consideration).

Of course, another plausible rationale for not making changes to the RMD — and one not really explored in the paper — was simple inertia on the part of individuals who had already set up for the distributions, and then would have had to take an affirmative action to change that.

In total, the report provides guidance on the revenue consequences of changing the RMD rules, as well as insights about the role of various behavioral considerations, such as inertia, in modeling distribution behavior.

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