Why Only taking Required Minimum Distributions can be Harmful.

We are fairly constantly approached by seniors who have significant tax deferred (401K and IRA etc) holdings and who have only been taking minimum required distributions.  The reasons why boil down to 2 factors in most cases: 1, they just do not need the money; and, 2, they feel “secure” as long as there is a large balance in the account.  Unfortunately, they are playing a very long game on a very short course and their strategies often overshoot the hole.

We have all been trained, by the financial services industry, to believe that a large bank balance equals financial security.  We were motivated by ads featuring long piers and large sailboats to think that saving for the future was the “end all and be all” in long term safety and comfort.  What they did not tell us, what we have had to learn on our own, is that the needs, and ability of a 50 year old person to spend money, are vastly in excess of the needs and ability to spend of an 80 year old.  The simple truth is that between Social Security, Pensions, low debt, paid off mortgages, property tax relief, and Medicare, older people just do not need the sailboat!

Often, we are confronted with the question, “but what if Social security fails, or Medicare gets repealed?”  While the complexities involved in this amorphous political discussion could occupy thousands of lines (if not millions or tweets), and there is no competent legal opinion to be rendered on the subject,  the simple reality is that with the intertwined nature of the national debt of the United States and the Social Security Trust Fund, cash deposits in financial institutions offer no assurance of security in a world where either Social Security has failed or Medicare has been repealed.

All tax deferred accounts are taxed at some time. No tax deferred account escapes tax completely.  You either pay tax on the earnings before they go in, or someone pays tax on them when they come out.  It is really that simple.  It is surprising how many people, who are otherwise solvent and, therefore, not afraid of losing creditor protection by withdrawing funds, leave funds sitting in deferred accounts when they could be making substantial withdrawals yearly without causing an upward shift in tax brackets and, therefore, reducing the total tax load that will ever be imposed on the funds.  Of course, what to do with the money once withdrawn is another vexing problem because giving it away has been effectively eliminated by Medicaid regulations, but that is another post entirely.

This article is written by an attorney at Attorney Donald Wyatt PC. Always consult an attorney before making any legal decisions. To make an appointment today, please click here to contact us.