If you're a retiree with an investment account, you may be worried about recent volatility in the stock market. You're probably counting on your investments to help support you, so seeing their value fall can be very unsettling.
The good news: The Coronavirus Aid, Relief and Economic Security Act (the CARES Act for short) has suspended required minimum distributions (RMDs) for 2020. That means if you were going to be forced to take money out to avoid a big tax penalty, you no longer have to.
The suspension of the RMD requirement gives you the option to leave your money invested to ride out the bear market. While this may not be possible for all retirees for financial reasons, it's a big benefit for those with other sources of funds to live on.
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The RMD suspension means you don't have to make withdrawals
Required minimum distributions are normally mandated for retirees with 401(k)s, IRAs, and certain other tax-advantaged retirement plans.
Retirees must begin withdrawing funds after age 72 or after age 70 1/2 if they hit this age prior to Jan. 1, 2020. IRS tables specify the amount of required distributions, and a 50% tax penalty is imposed on any distributions that were required but weren't made.
For 2020, however, the passage of the CARES Act means you don't have to withdraw any money if you don't want to.
Why you may want to wait on withdrawals
You may not want to sell your investments if they have performed poorly in recent weeks due to the coronavirus crisis. If you have the right asset allocation for your age, you're confident in your investment strategy, and you've invested in quality companies or broad market indexes, it's very likely your investments will recover over time. In fact, historically, markets have always been cyclical, and recessions and depressions have been followed by periods of growth.
If you have time to wait out the market downturn without making withdrawals, you can avoid locking in losses, instead of selling amid the economic uncertainty resulting from COVID-19 and missing out on the recovery. You'll also avoid having to pay taxes on that distribution amount, saving yourself some money in the process.
How can you wait on withdrawing funds?
For some retirees, withdrawals from investment accounts aren't necessary because of required minimum distribution rules, but because of the need for essential income.
If you need money from your 401(k) or IRA to make ends meet, you'll have no choice but to take some out -- even if that means selling some investments that have declined. If that's your situation, try to cut spending as much as you can to minimize withdrawals.
You may have some other options to avoid making withdrawals. For example, you can use the government stimulus checks from the CARES Act to pay living expenses. They're worth up to $1,200 per person or $2,400 per couple for singles with income under $75,000 or married joint filers with income under $150,000 (the amount is reduced by $5 per $100 above these levels). Social Security recipients will automatically receive these checks even if they haven't filed tax returns.
If you haven't already claimed Social Security, filing for benefits could also be an option. But you'll reduce your benefit amount if you file prior to full retirement age. Or you could lose the chance to raise it through delayed retirement credits if you haven't reached age 70. Carefully consider whether you want to accept smaller lifetime checks if you claim Social Security earlier in order to give your investment balance more time to recover.
Another solution could be to claim Social Security to start benefits but rescind your filing within 12 months. You'd have to pay back the amount you received, but this essentially provides you with an interest-free loan (without affecting benefits) that you could use to avoid withdrawals during the heart of the coronavirus crisis. That's risky, though, because if you can't pay the money back, you'd be stuck with the smaller monthly payments for the rest of your life.
The suspension of RMDs provides much-needed flexibility for retirees
Not every retiree will be able to wait to take money out of retirement accounts until the coronavirus crisis passes. But the suspension of RMDs provides flexibility for those seniors who can afford to.
If you don't need the money and you're confident in your investment strategy, leaving your investments alone for now could help ensure your retirement nest egg continues to be able to support you for decades to come.
