As markets crash, Congress can help retirees by suspending RMDs

As markets crash, Congress can help retirees by suspending RMDs

Consider a 72-year-old retiree, with $100,000 invested in a retirement account at the end of last year, 50% largely invested in stocks and 50% in a Treasury bond portfolio.

As of October 27, the value of this model portfolio retirement account has fallen to $82,400, the worst annual performance of a 50/50 portfolio in the last 60 years by my calculations, including the years of horrible performance scholarships in 1973-1974 and 2008.

Adding insult to injury is an IRS mandatory minimum annual withdrawal requiring people age 72 or older (with some exceptions) to take Required Annual Minimum Distributions (RMDs) from their IRAs, 401(k) and other similar retirement accounts. This results in individuals having to pay income taxes on the amount.

The purpose of these distribution requirements is to ensure that income tax is ultimately paid out of the retirement accounts and that the money is used primarily to cover expenses during retirement and not as vehicles for passing on tax-free inheritances to future generations. Since this annual distribution is based on life expectancy, the amount of the withdrawal increases proportionally each year the account holder remains alive. It is also based on the value of the account at the end of the previous year. For the example described above, the RMD is approximately $3,650, or 4.4% of the current account value, and increases as the account holder ages.

It is clear, however, that forcing seniors during this bear market to sell part of their investment portfolio to pay their mandatory annual minimum distribution is a burden that will increase their risk of running out of money as they age, especially in this inflationary environment.

Congress can and should help by temporarily suspending required minimum distributions and working to broadly reform RMD policy while specifically looking for ways to correct it for market volatility in the future.

The suspension of required distribution is not unprecedented. Congress suspended RMDs at the end of 2008 for 2009 and 2020 when market values ​​fell suddenly and significantly. In 2008, the retirement account model described above fell to around $89,600 (less than the drop so far this year). Despite a scary start to the pandemic, the stock market rallied in 2020 and the Fed’s interest rate cut favored bonds (bond prices rise as interest rates fall and vice versa ), so Congress’s suspension of RMDs at the time was actually misplaced.

This 50/50 asset allocation, common among senior investors as encouraged by Labor Department regulations, is intended to reduce risk as it balances higher yielding stocks that typically rise but lose significant value during recessions and other negative market events, with low-yielding bonds generally performing particularly well when recessions hit and inflation and interest rates fall.

What about so far in 2022? It was a very bad year for stocks and bonds as the Federal Reserve, which kept rates low through 2021, encouraging a high stock market in December, suddenly changed its monetary policy by dramatically raising interest rates. interest and selling Treasury bonds from its own portfolio to fight inflation. As is well known, stock and bond markets have both fallen about 18% in value so far this year, and the prospect of a quick recovery, given continued Fed tightening and a possible recession, is not likely.

Although it’s late in the year for the IRS to issue new guidance, it’s not uncommon for Congress to change tax laws in December. Additionally, many account administrators are now sending RMD notices, and some retirees have already taken their 2022 distributions. to 2023 could resolve these. concerns.

Rep. Warren Davidson (R-Ohio) introduced HR 8331, which would suspend required minimum distribution rules for 2022. In my opinion, Congress should consider including this bill as part of any end-of-year tax package. year, especially since this year’s dramatic declines are no doubt caused by policy mistakes made by the Federal Reserve when it suddenly decided to raise interest rates late last year. This policy has hit at the worst possible time for RMDs, especially when it comes on top of other government mistakes such as an overly expansive fiscal policy (i.e. uncontrolled spending) causing l inflation, higher interest rates and falling asset prices.

Mark J. Warshawsky is a Senior Fellow and Searle Fellow at the American Enterprise Institute. Previously, he served as Assistant Secretary for Economic Policy at the United States Department of the Treasury, Deputy Commissioner for Retirement and Disability Policy at the Social Security Administration, and worked in the pension and benefits industry. investments.

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