Required minimum distributions or RMDs are usually framed as a financial disaster. A ticking time bomb that should be avoided.
In contrast, Roth conversions tend to be presented as an unambiguously savvy move. Pay taxes today, convert to a Roth IRA and watch your money grow tax-free.
This is a tidy but incomplete narrative.
Roth conversions may be a good fit for many Americans saving for retirement, but for a sizable minority, RMDs might make some sense.
The difference is more about psychology and behavior than tax math.
Here’s a closer look at why RMDs get such a bad rap and why, for some retirees, it could be preferable.
At age 73, most investors are subject to minimum withdrawals from their pre-tax retirement accounts such as 401(k) plans and traditional IRAs, per Internal Revenue Service (IRS) rules [1].
For control-oriented retirees, the notion of the government dictating when and how much you can tap into your nest egg is deeply unappealing.
That lack of flexibility is enough to push them to Roth conversions instead.
However, by 73, most retirees are halfway through their retirement. At this age, they qualify for Medicare and Social Security.
They’ve also depleted some of their nest egg and likely have a better sense 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 specific circumstances, it could offer some psychological relief.
For some retirees, RMDs force them to unlock money they would otherwise have been reluctant to use.
This is important.
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Roughly half (46%) of all retirees said spending their own money creates a sense of anxiety, according to the Alliance for Lifetime Income’s 2024 Protected Retirement Income and Planning (PRIP) Study (2).
Nearly 41% said they don’t know how to stage withdrawals from their various retirement accounts. About 49% said they don’t know how to manage RMDs.
Deeply ingrained spending and saving habits can be difficult to break in your 70s. For these retirees, RMDs can be a forcing mechanism to finally enjoy the fruits of their labor.
