Would raising the required minimum distribution age for retirement accounts enhance old-age security?

January 2021

The starting age for required minimum distributions from tax-qualified retirement plans was raised in 2019 from 70.5 to 72. How might this change affect household financial behavior?

Summary

The Required Minimum Distribution (RMD) rule requires retirees to withdraw a minimum amount from their retirement accounts each year, and, if the withdrawals are too small, retirees must pay a 50% excise tax. Until recently, the RMD was computed such that the sum of the retiree’s annual payouts starting at age 70.5 was expected to exhaust her account balance by the end of her lifetime. The SECURE Act, passed in 2019, raised the age for RMDs for tax-qualified plans to 72, and additional proposals would delay it further or even abolish it. This paper examines the potential impact of RMD rule changes.

Key Insights

Changing RMD rules would likely have a negligible impact on tax revenue, while increasing flexibility for retirement savers.

Raising (or eliminating) the RMD age has little effect on individuals’ financial behaviors while they are still working.

At retirement, the impact of raising the RMD age depends on whether the retiree wishes to bequeath wealth to someone else.

For households without a bequest motive, the chance that a retiree would elect to withdraw less than the RMD is relatively low (between 2% and 4% depending on educational level).

For households with a bequest motive, the probabilities are higher and vary between 6% and 12%.

Methodology

The authors use a calibrated lifecycle consumption and portfolio choice framework embodying realistic institutional considerations to model and measure the potential impact on household financial behavior resulting from delaying the age of RMD.

U.S. tax law has long required older Americans to withdraw a minimum amount from their tax-qualified retirement accounts each year, and then to pay tax on that income.