If you don’t take distributions, or if the distributions are not large enough, you’re subject to a penalty equal to 50 percent of the amount that should have been withdrawn.
Thanks to the Secure Act, which stands for Setting Every Community Up for Retirement Enhancement, if your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach 72.
Many seniors won’t benefit from this break. They will have to take RMDs by the end of the year. Because the rules about RMDs were made to make people scream, an April 1 deadline approaching has some retirees fuming. Here’s why.
You have until April 1 of the following year after reaching the required RMD age to make your first RMD payment. This deadline applies only to the RMD for the first year. Every year thereafter, you have to take your distributions by Dec. 31.
Some folks who turned 70½ at the end of 2019 decided to delay their first payment until the upcoming April 1.
Here’s the problem. Because they carried over their required minimum distribution obligation from 2019 into 2020, they have to take two RMDs — one April 1 and the other by the end of this year.
Panicked at having to sell when the stock market is crashing many seniors are hoping Congress suspends their RMDs for 2020.
“Because of the precipitous drop in the stock market and the high 2019 end of year values that determines retirees’ 2020 RMD, taking a RMD in 2020 will be expensive,” wrote Catherine Dimino of Ashland, Ore. A stagnant end of the year market that continues to be stagnant isn’t the problem. The problem is an end of the year bull market followed by a precipitous drop in value. The government is currently providing relief for employees and businesses, but I haven’t seen any mention of retirees.”
Charlene Steinhauser of Florida wrote, “I am hoping that all RMDs will be suspended during the coronavirus pandemic.”
“I intend to write my congresswoman and senators requesting a waiver from RMD’s this year,” wrote Michael Grow from Richmond. “I don’t want to liquidate assets at distress prices.”
Suspending RMDs is not unprecedented. During the financial crisis when the stock market drastically dived, Congress suspended the RMDs for 2009. The waiver also applied to beneficiaries of an inherited retirement account.
Sen. Edward J. Markey (D-Mass.) introduced legislation that would waive the required minimum distribution rules for retirement plans in 2020. Markey is trying to get the waiver included in the next stimulus bill being negotiated in Congress.
“From increased vulnerability to the virus, to the economic vulnerabilities facing their retirement accounts because of a sinking stock market, we must protect our seniors during this incredible time of need,” Markey said in a statement. “All Americans will require time and support to recover from this crisis, but seniors should not face unfair tax burdens due to this emergency.”
Because the 2020 RMD calculation is based on an account balance of December 31, 2019, seniors will be forced to deplete a far larger percentage of their retirement accounts than anticipated, or face penalties, Markey noted.
The AARP has also recommended Congress delay RMDs.
“Delaying distributions will allow retirees the opportunity to regain value in retirement plans that have recently suffered very large losses,” AARP said in a letter to congressional members.
A suspension of RMDs also would reduce income taxes at a time when many people may be experiencing financial trouble because of covid-19.
Here are the retirement accounts that fall under the RMD rules:
— Employer-sponsored retirement plans, including profit-sharing plans and 401(k), 403(b) and 457(b) plans.
— The Thrift Savings Plan (TSP), the federal government’s version of a 401(k).
— Roth 401(k). Even though you don’t have to pay income tax on the withdrawal, you still have to take an RMD. A Roth IRA does not require withdrawals until after the death of the owner.
— Traditional IRA.
— Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE).
A delay in RMDs won’t benefit retirees who need to take a distribution because they require the income. But for those who can afford to put off a withdrawal, this relief would be a welcome move during a financially stressful time.
Reader Question of the Week
If you have a retirement question send it to email@example.com. In the subject line put “Question of the Week.”
Q: We were planning on buying a house this spring. We have saved a 20 percent down payment and have a credit score in the high 700’s. But now that everything is changing in the day-to-day markets, we don’t know what to do. We have to move in June, but should we keep renting until things stabilize a bit? This is a very difficult decision for us.
This week’s answer comes from Carolyn McClanahan a physician turned certified financial planner who founded the fee-only Life Planning Partners based in Jacksonville, Fla.
McClanahan: Just like it is hard to time the stock market, it is difficult to time the real estate market. If we go into a recession, the price of homes may drop, so it would be a good time to buy. Hopefully, you are buying to live in the home for many years — that way, if there is a recession and no market for home sales for a number of years, you don’t have to worry about selling the home in a bad housing market. A home should be thought of as a use asset, not as an investment, because you have to live somewhere.
Please join on Thursday, March 26 at noon (Eastern time) for a live discussion about your money.
My guest this week will be Eric Bronnenkant, head of tax at online financial adviser Betterment. He’ll answer your tax questions, especially in light of the April 15 deadline to file and pay your taxes being delayed.
Retirement Rants and Raves
I’m also interested in your experiences or concerns about retirement or aging. You can rant or rave. In the subject line put “Retirement Rants and Raves.”
I’d like to leave you with this note from Susan: “Can you pat me on the head in these crazy times and tell me I’ve done at least some of what I should have? We’re retired five years in, don’t have a fantastic amount in our portfolio (used to be about $300,000, but God knows now. I haven’t looked in a month or two), have savings left to shore up pension and Social Security for a year or two. I’ve been rebalancing as the stock market has risen and we are about equally invested in equities and bonds/cash equivalents. I was hoping to start dipping into the 401(k) in 2022, but if necessary we could manage (though not easily) on Social Security and pension alone for a good while. I know there’s no guarantee of anything but maybe there’s a chance we might live to see our savings recover.”
Susan, it’s always good to plan for the worse and hope for the best. You definitely get a pat on the head for doing all that you can to weather this storm — however long it may last.