There are all kinds of theories associated with taking required minimum distributions, as is evidenced by the different approaches detailed by financial advisors interviewed by Income Planning.
Retirement savings products create a "psychological lock box," according to Gregory Aloia, a financial advisor with Abacus Wealth Partners, Philadelphia. The theory is that once the money is in hand, it is easier to spend it, he continues.
A solution to this temptation, Aloia offers, is to have it automatically put in a savings vehicle. He notes that most of his clients would rather not take a required minimum distribution but are required to under law.
Tom Davison, a certified financial planner with Summit Financial Strategies, Columbus, Ohio, concurs. "RMDs can be detrimental to retirement income spending if they don't need to spend the full amount. Some clients tend to spend whatever shows up in their checking account."
However, Davison says that a taxable brokerage account can be paired with an individual retirement account so that the IRA withdrawal can go directly into the brokerage account, and then be "metered out" to a checking account.
Frank Boucher, a financial advisor with Boucher Financial Planning Services, Reston, Va., says he has spent a large part of his career explaining to IRA and qualified plan participants why they have to take RMDs. People fall into 2 camps, he says: those who need the funds and those who do not and would rather not take them.
Boucher notes the alternative of converting a traditional IRA to a ROTH and paying taxes in the year of the conversion. Currently, there are some restrictions, such as a limit on this choice to those with an adjusted gross income of under $100,000. But the good news for those with AGIs over that amount is that in 2010, the $100,000 income limitation will be lifted and taxes can be paid over a 2-year period rather than a 1-year period, he says.
Jeremy Portnoff, a financial advisor with Portnoff Financial LLC, Westfield, N.J., says that a ROTH conversion makes sense for those who do not need to take RMDs but are forced to take distributions. The reason, he explains, is that one can lock into a tax rate before it goes up. The individual who converts also does not have to take an RMD and qualified distributions are not included in income and will not affect taxation of Social Security benefits, he says.
Mark Ferrell, director-advanced planning with McLean Asset Management Corp., McLean, Va., holds a viewpoint counter to most financial advisors and their clients. Ferrell says he "actually likes RMDs" because they are an actuarial assessment of how much should be withdrawn so that there is a $0 balance at death.
