Required Minimum Distributions from a Retirement Account in a Bear Market

[javero]

Posted: 3/24/20 at 12:24am

I have to admit that at first I didn't understand why so many retiree friends of mine were griping about RMDs from their IRAs.  But, Michelle Singletary of WaPo has illuminated me with an article available here.  I apologize in advance for the page wall.

(MrRoxy) please jump in if I get any of this wrong.  As I understand it, 401k holders and other participants in qualified retirement plans are required to draw down a marginal amount from their retirement accounts starting at age 70 and each year afterward.  That amount is denominated a required minimum distribution (RMD) and is currently taxed as regular income, not a capital gain which has favorable tax treatment.  The RMD is a small percentage of the account balance on Dec 31 of the preceding year. The rub is that some IRA accounts contain stocks that were either given to the retirees as bonuses by their former employees or sold to them at a discount. Those retirees could now be forced to sell off the stocks at a loss just to meet the imposed RMD percentage, yet be taxed on the proceeds.  It seems that the only things certain in life are taxes and death.

To me, this situation appears similar to margin account holders who were recently forced to sell off stock at considerable loss as a consequence of margin calls from their brokers.  I honestly don't give a shaite about the plight of folks who buy stocks on margin since I've always paid for what few I own out of a cash account, but I digress.  It does concern me however that many seniors could be forced to take a hit by disposing of some assets in their retirement accounts at a loss just to meet their RMD burden, and then getting a tax bill for the transaction.

Perhaps the RMD rules should be relaxed this year in light of covid-19 & the nation's economic downturn.  Does anyone here agree?

[Pauly3]

Posted: 3/24/20 at 5:18pm

I'm not a financial, tax or policy advisor and have no expertise in these fields.  But -

I would guess those retirees who are concerned with RMDs in the current situation are, by and large, at the higher end of the financial independence spectrum and also not under the illusion that RMDs can be taken only in a bull market if one so chooses.  Most of these types of retirees have a wish list to maximize profits, but most don't need relief from a government mandate.  Their financial security is not at risk because of this year's RMD requirement in the same way as those losing jobs and businesses are.  And (most) likely not remotely close.

Regardless of today's market situation, any RMD amount taken this year would be unchanged as it's based on account value at the end of last year.  That fixed amount is simply money that can't stay in the retirement account - and income tax must be paid on that fixed amount, which that tax burden would also be unchanged regardless of today's market value.  The only perceived loss is that the RMD funds are sold at a lower price today than otherwise might be the case if allowed to suspend the RMD requirement.

What's the saying: "it's not a profit or loss until you sell"?  In the grand scheme and overwhelming growth over the last dozen years, even in the mess that is now the current environment, an RMD today would likely be accounted for as profit (not an actualized loss).  Desiring to suspend RMDs until the market once again turns north is perfectly understandable (for those who don't need the distribution now), but the rules don't allow for that.  So, I'm not sure why an exception should be considered now.

[javero]

Posted: 3/24/20 at 8:12pm

@Pauly3

The RMD applies to retired Equity members with 401(k) accounts as well. Public info regarding Equity's 401(k) benefits is available here on the off chance you're unaffiliated like me.

ETA: Two quick points:

1. It appears that only cash contributions into an Equity 401(k) are permitted. See investment options here.

2. Why any senior 70 or above would still hold stocks in an IRA is beyond me, but it's the account holder's choice.

Updated On: 3/24/20 at 08:12 PM

[Pauly3]

Posted: 3/24/20 at 8:33pm

I am unaffiliated, but that RMDs apply to retired Equity members with 401(k) accounts is unsurprising to me.  I am unclear as to why you bring retired Equity members up?

[javero]

Posted: 3/24/20 at 8:53pm

I provided a reference to the Equity 401(k) so that the topic would be more relevant to this particular audience.  There are countless retired actors, playwrights, set designers, stage hands, public school teachers, firemen, and civil servants at all levels of government who hold 401(k) accounts, and who are of modest means.  Once they hit 70 1/2, the RDM applies to their accounts as well.  And if those accounts are loaded with stocks for whatever reason, they'll likely have to liquidate a portion of the assets at a loss this year to meet the RMD burden.  Considering that the current administration is about to provide relief to college students with student loan obligations, as well as the usual suspects like the airline and oil industries, it's doesn't seem unreasonable to me at least to show similar compassion for our seniors who are arguably the most vulnerable to covid-19 in terms of both their health and finances.

Updated On: 3/24/20 at 08:53 PM

[Pauly3]

Posted: 3/24/20 at 10:30pm

I too don't find it unreasonable to show similar compassion to seniors, be they Equity members, civil servants or otherwise.  I'm not wholly against the proposal.  What I haven't reconciled - and admittedly haven't really thought through - is the situation where a senior retiree who has the means to live without taking the RMD but somehow might need or warrant the government's assistance.

[javero]

Posted: 3/25/20 at 7:09am

Pauly3 said: "...What I haven't reconciled - and admittedly haven't really thought through - is the situation where a senior retiree who has the means to live without taking the RMD but somehow might need or warrant the government's assistance."

It's my understanding that a senior retiree who inadvertently fails or opts not to take the RMD is subject to a hefty penalty.  Many of those seniors tend to roll over their employer-managed retirement 401(k) fund assets to a personal IRA upon separation in order to consolidate their savings into one account for easier management.  It's not like most senior retirees have the means to avoid drawing down from their IRAs until reaching age 70 1/2.  For many, their only sources of income are what's available from the IRA, Social Security, and under-reported financial support from their adult children. 

Kiplinger presents an interesting article about the 50% RMD penalty here.

And NerdWallet provides an excellent breakdown of the median 401(k) balance by age here.

Finally, a more authoritative IRS set of FAQs is available here.  It seems that the law changed recently which bumped up the start age to 72 for the RMD.

 

Updated On: 3/25/20 at 07:09 AM

[Pauly3]

Posted: 3/25/20 at 3:41pm

So there are two different questions.  Should RMD rules be relaxed regarding penalties that might be assessed in 2020 or should RMDs be suspended altogether for 2020?  I had been addressing only the latter scenario.  If RMDs are not suspended, then I like a relaxed penalty guideline for 2020 for at least those who are required to take their first RMD April 1st.  Depending on the COVID-19 outcome and impact on the economy for the rest of the year, the relaxed rules could be extended for the December 31st RMD for all impacted.

[yankeefan7]

Posted: 4/8/20 at 11:07pm

" (MrRoxy) please jump in if I get any of this wrong.  As I understand it, 401k holders and other participants in qualified retirement plans are required to draw down a marginal amount from their retirement accounts starting at age 70 and each year afterward. "

My financial guy told me the starting age has been changed to 72, have not verified that yet.

[amaklo]

Posted: 4/9/20 at 9:36am

yankeefan7 said: "My financial guy told me the starting age has been changed to 72, have not verified that yet."

This is correct. Last year's SECURE Act changed the age for beginning RMD withdrawals from 70 1/2 to 72.  This applies to anyone born after June 30, 1949.  People born before that date are subject to the 70 1/2 age rules because they triggered the old RMD requirements before the SECURE Act went into effect.

[mar6411]

Posted: 4/9/20 at 10:10am

More on point, the requirement to take a minimum distribution in 2020 has been waived.

[javero]

Posted: 4/10/20 at 4:01pm

mar6411 said: "More on point, the requirement to take a minimum distribution in 2020 has been waived."

Yep, the Trump administration got this one right.

Skipping a mandatory distribution from your IRA? Everything you need to know