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New retirement account rules ‘make complete sense’ amidst pandemic

The stimulus bill temporarily eliminated certain retirement account rules, including the required minimum distribution and early withdrawal fees.
The stimulus bill temporarily eliminated certain retirement account rules, including the required minimum distribution and early withdrawal fees.

Along with individual checks and changes to unemployment and business aid programs, the federal government’s coronavirus stimulus bill temporarily eliminated certain retirement account rules, including the required minimum distribution and early withdrawal fees.

Damon George, a certified financial planner and founder and owner of Retirement Strategies in Longview, says most of the measures “make complete sense” in the context of the global pandemic.

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Considering the deflated investing markets, for example, the bill extended the age at which people must withdraw money from their account. Usually those mandated withdrawals start at age 70.5 and call for retirees to take about 3% to 4% out of their account, whether they need it or not, George said.

Now those folks can wait until they are 72, he said.

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“That gives us time to get out of this market when everything is deflated,” George said. “You don’t want to take money out now (if you don’t have to) because you’ll have to sell the shares to create the required minimum distribution for that year at a lower price, which means you would have to sell more shares than you would before the coronavirus had its effect on the market.”

If retirees are forced to take the distributions now, they would ultimately lose money, George said. And the more shares they have to sell, the less they’ll have invested to grow when the market rebounds, as many experts believe it will.

“The (new) RDM rule is totally worth it. Anytime you don’t need the money and you don’t need to take it out, why would you? It’s a no-brainer,” George said.

The stimulus act also considers those who aren’t yet 59.5 — the age someone can withdraw money from their retirement accounts without any penalty.

A new “hardship distribution” rule waives the 10% federal penalty for people who need emergency funding for certain coronavirus-related circumstances, including the following:

  • You are diagnosed with COVID-19.
  • Your spouse or dependent is diagnosed with COVID-19.
  • You experienced an adverse financial consequence as a result of being quarantined, furloughed, laid off, having work hours reduced or being unable to work because of a lack of child care due to COVID-19.

“You shouldn’t have to worry about having to pay a 10% federal penalty in order for you to (use your retirement account) to pay your bills while you are sick in the hospital. That makes complete sense,” George said. “But it also makes sense because they didn’t do it for everybody.”

The stimulus plan also doubles the current retirement plan loan limits to $100,000 or 100% of the total account balance, whichever is less. Additionally, it delays repayments for outstanding retirement loans that would be due between March 27 and Dec. 31 for up to a year. (Note: Loans are not available with IRAs.)

Of course, withdrawing or taking a loan from a retirement account now has consequences for the future. While it’s a good emergency option to have, retirement accounts shouldn’t be the first place people go for financial help right now, George said.

“This is for your retirement. If you spend it down, there will be that much less when you get into retirement,” George said. “If there is any other way of surviving without tapping into those accounts, I would say explore all of those.”

But if the alternative is going into debt or taking a private loan, it is better to use money you’ve already earned.

“All of these things are designed to help you access assets you have that normally would cost you money to access,” George said. “They are trying to anticipate things that will make sense to help people survive.”

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