Americans are struggling to understand the ins and outs of required minimum distributions (RMDs) from 401(k) plans. The impact of RMDs on taxes, in particular, is making their heads spin most.
In a study of high net worth participants, Allianz Life discovered one in three respondents are confused.
The vast majority (88 percent) say they are familiar with basic RMD rules on 401(k)s and similar tax-deferred retirement plans. They’re obligated to withdraw a certain amount each year; they get it.
But eight in 10 of those surveyed say they won’t need the money and don’t know what to do with it.
“For some consumers, RMDs have long been thought of as a necessary evil,” Paul Kelash, vice president of Consumer Insights at Allianz Life, said in a statement. “The government mandates that people take them, even though many find they don’t need the money for everyday expenses. So, consumers face the challenge of managing the impact on their taxes while being unsure of how to use the leftover funds.”
Meanwhile, almost all respondents are aiming to reduce their taxes in retirement. One in three, however, can’t make sense of how RMDs should factor into their overall strategy.
Perhaps annoyed, perhaps overwhelmed, more than half of those surveyed don’t want to be bothered with it. “They want the disbursement and tax payment to occur ‘without getting involved,’” Allianz noted in its report.
Another seven in 10 would rather learn about using the mandatory payments to fund a financial product that could help offset the impact of RMDs on their taxes. Two-thirds would love to use RMDs to improve their financial situation, and around 80 percent wish they could use them to boost their portfolios.
“Different age groups within the study have different priorities for their RMDs,” said Kelash. “The 65-70 age group is most interested in tax-deferred growth of their RMD disbursements and may feel unsure about how to best use RMDs. In contrast, the 71-75 age cohort, who have already started taking their payments, is realizing they don’t need the additional money and are looking to leave a legacy—either to leave to family or another beneficiary like a charity.”
So, what’s the best way for participants to sort it all out?
Not exactly shocking, those seemingly navigating the RMD waters best are respondents with an advisor. Over three-quarters of participants working with financial professionals feel they have received good advice about managing their RMDs.
It’s a “key way to finding a solution to more efficiently handle the taxes on their RMDs and use them in a way that works with their larger financial strategy,” concluded Kelash.
Jessa Claeys is a writer, editor and graphic designer.
