Back in the 1990s, I was making good money working for an investment bank, and I was putting the maximum amount allowed into my individual retirement account (IRA) and a 401(k) plan (that was later merged into my IRA).
So part of my retirement savings are now in these tax advantaged plans. The tax advantage is that I never paid any income taxes on all of that money I earned, so as I deposited money into these plans, the decrease in my take-home pay was far less than what I put into the plans.
Let’s say hypothetically that I am 62 years old, and I have $2 million in my IRA.
If I get a 6% annual return, I will have about $3.2 million when I am 71 years old.
Using the current IRS minimum distribution tables, assuming I live to be 84 I will have withdrawn around $2.5 million (and paid regular income taxes on all of those withdrawals), leaving my heirs with about $3.6 million. I will have to start withdrawing no matter what at age 72.
If the law is changed like it appears it’s about to be in the upcoming omnibus spending package, I would be allowed to not withdraw anything for three more years, until I am 75. I have enough money to get by without tapping into those savings, so I can take advantage of this change to keep my money in my account and have three more years of investment returns. This would leave my heirs with $4 million – $400 thousand dollars more – without lifting a finger, just because of this new law.
The whole idea of the retirement tax break is that people will eventually pay taxes on that money. With this change “eventually,” already a rather ethereal concept, is just moved even further from reality, giving rich people like me yet another tax break.
Ordinary working people, on the other hand, are unlikely to be able to take advantage of this change. Few will have enough saved up to avoid tapping into their retirement savings by age 72, much less age 75. An extra three years doesn’t make a difference for people who actually need that money for retirement. Rich people like me, on the other hand, don’t actually need our retirement savings as much. That’s what makes this change so ridiculous – it’s designed to help the people who least need help saving for retirement.