As of this writing, Congress is working on a massive relief package but we don’t yet know who the beneficiaries will be. While every major industry has its hand out, there’s not much talk about aiding those with retirement accounts.
These funds represent people’s life savings and have often taken them decades to accumulate, one paycheck at a time, but this group has no lobby in Washington. Many industries are rightfully claiming that their losses are no fault of their own, but those who are saving for retirement or already retired can make that same claim.
Congress has proposed the “usual suspects” of retirement relief in a hasty copy-and-paste approach, taking relief provisions from previous disaster bills and repurposing them for the coronavirus crisis. Those include penalty-free retirement distributions and plan-loan repayment relief. Those proposals will probably pass, but they are not nearly enough. It seems clear no effort was made to protect retirement accounts.
Here are some additional ideas that Congress should consider.
Undoing 2020 Roth conversions
In the 2017 Tax Cuts and Jobs Act, Congress eliminated recharacterizations of Roth conversions because they didn’t like the idea of profiting from hindsight. But now we are way beyond hindsight. This is a market decline that no one could have predicted.
Now it’s about Congress being able to help people who saw chunks of their converted funds vanish if they converted even a few weeks ago. Market swings are baked into the Roth conversion decision, but nothing like this carnage. At a minimum, Congress should allow anyone who converted in 2020 to undo those conversions now, so they are not stuck with a tax bill on value that was wiped away almost instantly.
Increase IRA contribution and catch-up limits
Congress should retroactively (to cover 2019) increase the
limits on contributions and catch-up contributions to IRAs and Roth IRAs to match those of 401(k)s and other company plans. So much value has been lost in such a short time that this would give a boost to those nearing retirement who have the funds to contribute more when the market is down. This would cost the government nothing (except for the tax break) since the funds are coming from taxpayers.
For 2019, for example, this would raise the IRA contribution limit for those age 50 or over from $7,000 to $25,000. And given the new extension of the deadline for both
tax returns and
IRA contributions, until July 15, people would have more time to increase their 2019 IRA contributions.
Tax-free retirement withdrawals
Yes, tax-free. Providing relief from the 10% penalty is good, but not enough. On March 20, The Wall Street Journal floated this idea and I think it’s a good one. This is the retirement bailout people need. The Journal suggested a cap of $10,000, but it could be even more.
The article made sensible financial points, making the case that forgiving the tax (and penalty) would cost the government much less than sending out one-time checks to people, because providing this kind of real retirement relief would come from people’s own retirement money, not from the government. The only cost to the government here would be to relieve the tax and penalty.
Congress may consider this a giveaway, but it’s only the tax that’s the freebie, as opposed to the bailouts without almost no strings attached that Congress is considering for big business. This is a way to tap funds for emergencies, with people able to use 100% of the funds without worrying about owing tax later.
No RMDs – for life
Eliminate
required minimum distributions for 2020. This year's RMDs are based on the larger IRA balances that existed on Dec. 31. Fortunately, this change will likely be included in the final relief package. but I would go further and eliminate lifetime RMDs altogether.
Uncle Sam won’t have to wait long for the tax money anyway now that the SECURE Act has limited the payout period for most inherited IRA funds to 10 years after death because of
the elimination of the stretch IRA. There’s no need to force those funds out now during times of economic uncertainty. Eliminating lifetime RMDs would also remove the complexity of calculating and monitoring RMDs, relieving seniors of this unnecessary burden.
People with retirement accounts need a helping hand, just like big business, and they need action now!
[More: No stretch IRA? No problem]
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