Minimum Distribution Rules. Why?

[KIP KRAUS]

At the risk of sounding dumb could someone explain to me why we need minimum distribution rules in pension plan other than the fact that it is in the IRC?

[david rigby]

Because Congress wanted the money out of the plan, where it is tax-deferred, and into the hands of the participant, where it is taxable.

If "pro" is the opposite of "con", then what is the opposite of "progress"?

[Kristina]

In the really old days, before TEFRA let's say, Highly Compensated, Key employees never retired, never took distributions except for death benefits and with the estate taxes at that time it was passing to the spouse with no taxes, I believe. The political environment at the time was concerned that this was money that they had planned to receive taxes on, but it was not happening. If I remember correctly, some of Rosty's little helpers were also concerned that the rank and file employees were having to pay taxes on the amounts they received, while the evil owners were dodging taxes. Hence RMD's.

[KIP KRAUS]

Thanks folks.

It makes sense to me!!!!!! I take that back, it makes sense that the government came up with it. To get those evil HCEs everyone has to be subject to the minimum distribution rules. You think that helped to create the infamous federal deficit? You think they were wearing masks when they enacted this provision?

[Wessex]

Leaving aside whether or not HCEs are evil :-), it does make policy sense to have RMDs. (Preferably not as complicated as even in the new proposed regulations, although I believe the new regulations go far from the statute in lengthening the payment period to beneficiaries.) Qualified plans and IRAs are to provide retirement income and amounts accumulated under them are intended to be tax deferred, not tax exempt. The longer that huge sums of money (frequently not being used for retirement income) are held in tax-deferred status, the higher all our federal and state taxes have to be.

I'll get off my soap box now.

[david rigby]

Points by Wessex are quite good. IMHO, the primary reason that plan sponsors and administrators have such low regard for the minimum distribution rules is the complexity, not the policy. The micro-management of this issue is just one of many.