Required minimum distributions, or RMDs, are often viewed as a financial disaster. A ticking time bomb that should be avoided.
Rose’s transition, by contrast, is often seen as a decidedly shrewd move. Pay your taxes now, convert to a Roth IRA, and watch your money grow tax-free.
This is a concise but incomplete account.
A Roth conversion may be appropriate for many Americans saving for retirement, but for a significant minority, an RMD may make sense.
The difference is more about psychology and behavior than tax math.
Below we’ll take a closer look at why RMDs have such a bad rap, and why for some retirees, RMDs may be preferable.
At age 73, most investors are required to make minimum withdrawals from their pre-tax retirement accounts, such as 401(k) plans and traditional IRAs, according to IRS rules [1].
For control-oriented retirees, the idea of government dictating when and how much of your savings you can access is very unappealing.
That lack of flexibility was enough to prompt them to turn to Rose.
However, by age 73, most retirees are already halfway through retirement. At this age, they are eligible for Medicare and Social Security.
They’ve also depleted some of their savings and may have a better idea of how to manage their retirement budget in the most efficient way.
For some, the prospect of RMDs isn’t a financial disaster. In fact, under certain circumstances, it can provide some psychological relief.
For some retirees, RMDs force them to free up funds they would not otherwise use.
This is important.
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About half (46%) of retirees say spending their own money creates anxiety, according to the Lifetime Income Alliance 2024 Protected Retirement Income and Planning (PRIP) Study (2).
Nearly 41% said they don’t know how to withdraw funds from various retirement accounts. About 49% said they did not know how to manage RMD.
Deep-rooted spending and saving habits can be difficult to break at age 70. For these retirees, RMDs can serve as a forcing mechanism to finally enjoy the fruits of their labor.
