Silverman: It’s the Taxes, Not the Fees
In a recent Associated Press article, a Harvard law professor stated “it’s crazy” to let people keep their money in IRAs longer before it must be withdrawn (and taxed). It’s not that he has anything against investors. What bothers him is the financial services industry receiving more revenue in the form of fees. There is some truth in this, so let’s look at what is going on.
In the $1.7 trillion spending bill recently passed by Congress, there is a provision which will gradually raise the Required Minimum Distribution (RMD) age from 72 to 75. (Only a few years ago it was 70-1/2, so this is a trend.) The RMD applies to IRAs, 401(k)s, and similar pre-tax accounts where workers put away money that is not taxed until it is taken out. The idea is to save money while working (and possibly in a higher tax bracket), receive a tax break now, and pay the taxes upon retirement when you pull funds out (and are hopefully in a lower tax bracket).
Of course, some folks will not need the money, so they might never pull it out (and thus, pay the taxes, which Uncle Sam prefers). To prevent this from happening, the RMD requires a portion of the account be withdrawn each year so the government can tax it. With people working and living longer though, many folks don’t need the money as early as they once did. But they will need it for longer. Thus, the push to raise the RMD age.
So where does the evilness of the financial services industry come into play? It seems Wall Street thought this was a good idea, and the professor knows why: The more money that stays in an IRA or 401(k), the more fees the financial industry will receive for managing those accounts. For shame!
The professor seems to think taking unneeded money out of an IRA or 401(k) will somehow lead to the investor not using the financial services industry. I can’t speak for everybody, but when I have clients in these circumstances, we simply take out the RMD and put it into a non-IRA investment account. If they don’t need the money, they still want it invested. It’s still being managed, and I still charge a fee.
In fact, the only thing really changing is the amount of taxes that are currently paid. That goes to the government, is no longer the property of the investor, and thus we no longer get fees for managing it. So according to our professor, it’s better to have the government take the money from you than let you have the option of the financial services industry managing it.
I just hope the professor doesn’t start looking into the medical profession. Allowing people to live longer, after all, means they are likely to use doctors more (and pay medical bills). Shame on the medical community for thinking it’s a good idea to provide medical care until we die!
May Ukraine Have Peace
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.
This article originally appeared on Wichita Falls Times Record News: Silverman: It’s the Taxes, Not the Fees
