>The New York Times ran the following letter to the editor:
The biggest problem for many people over 85 is not having enough money to live on. This is especially true of retirees who depend on a 401(k) or an I.R.A. and are now facing inflation, a decline in the stock market and mandatory minimum distributions.
A retirement accumulation that is adequate at age 65 may not be adequate at 85 and will certainly not be at 100. But the mandatory minimum withdrawal schedule forces retirees to withdraw more than they need in their “young” old age, leaving less for their “old” old age, when their medical needs will probably increase.
Surely, it was not Congress’s intention to mandate poverty for the long-lived, most of whom are women. The mandatory minimum withdrawal schedule should be abolished or restructured to allow flexibility for retirees.
401ks and Traditional IRAs are an agreement between you and the US Government. The Government eliminates taxes on a part of your income, and you promise to not withdraw any of that money until you reach at least 59.5 years of age*, and that you promise to withdraw some of your money per year starting at age 70.5. When you withdraw your money, it is taxed as ordinary income. This ensures that the Government eventually receives the tax revenue that was deferred when you earned the original income.
If you eliminate the minimum required distributions, you’re backing out of your part of the deal. The government granted a favor by allowing the initial investment to be without income tax, and workers were earning money and making contributions tax-free as early as 1974, when the income tax rates were much higher, including top marginal rates as high as 70%. This was a chance to avoid tax when the top rates are 70%, then pay the tax when the rate has been cut to 34.5%.
Furthermore, by requiring you to take minimum distributions, the government is not forcing you into old-age poverty. The government has no power to force you to spend your money when it comes as a required distribution from an IRA any more than it does to force you to spend your paycheck when you work. When you take your required distributions, if you feel that you will need that money when you are 85, 90, 100 years old, you should put it in an investment account and purchase a mix of stocks, bonds, and cash equivalents that will last you for your retired years. Alternatively, you can open an account at your broker or investment company and purchase nearly the same investments you had before, minus the taxes that have been deferred. You’ll be just as wealthy as before, and you’ll have received a huge benefit by being able to defer income taxes for decades. Another option would be to purchase a life annuity from an investment or insurance firm, which will guarantee you a certain amount of income for life.
Congress does not “mandate poverty” by requiring minimum distributions, spending the money as soon as you receive it does. By managing the proceeds from minimum distributions wisely, the funds can be extended into very old age. Allowing investors to defer taxes indefinitely into the future only worsens the federal budget deficit, at a time when we are quickly nearing $10T in debt, and have over $45T in unfunded entitlement liabilities, mostly owed to the elderly.
It’s only fair that investors that have deferred taxes for decades be asked to pay them on schedule.
*Certain exceptions apply that are not germane to the discussion