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The federal government passed a financial relief bill this spring that included things like direct stimulus checks, student loan payment deferrals, and mortgage forbearance to those experiencing hardship due to COVID-19.
One of the lesser-known features of that law was its temporary loosening of 401(k) regulations. For one thing, young savers were given the ability to withdraw money from their retirement accounts early — without penalty. And for older Americans, the law dropped the regulation that they must take a required minimum distribution, or RMD, in 2020. This gives seniors more flexibility to manage their investments in a volatile market.
Here’s what that means.
What Is a Required Minimum Distribution?
Required minimum distributions are the minimum amounts you must withdraw from your retirement account every year beginning with the year you turn 72 (or 70½ if you turned 70½ before January 1, 2020).
Most people past the age of 72 are already taking money out of their 401(k) each year. The rule is meant to prevent people from sheltering too much cash in their retirement accounts, where it can’t be taxed by the federal government.
So following your qualifying birthday, you normally need to withdraw your RMD by April 1, regardless of whether you have retired from full-time work.
“If you don’t, the penalty is heavy,” says Dr. Rafeek Mikhail, a certified retirement financial advisor and president and CEO of CaMu Financial & Insurance Services, Inc.
The penalty is 50% of the required amount not withdrawn for the year. For example, if your RMD is $3,000, and you do not withdraw anything, the penalty fee would be $1,500.
Account Types Affected by the Rule
The law for RMDs applies to all employer-sponsored retirement plans, including 401(k)s, 403(b)s, 457(b)s, individual retirement accounts (IRAs), Roth 401(k)s, qualified pensions, and profit-sharing plans. It does not apply to Roth IRAs while the owner is still living. The temporary suspension applies to owner accounts and also beneficiary accounts that were inherited.
This year, you are no longer required to take an RMD.
If you already have, you can either keep the withdrawn funds or return them to the original account, as long as it’s within 60 days of withdrawal. You could also opt into a rollover distribution to another retirement account — without the standard tax penalty. Because 2020 is considered a grace period, you can wait until April 1 of next year to start or continue withdrawing the RMDs.
The goal of this rule, Mikhail says, was to offer more options to seniors while the stock market was volatile and unemployment rose. Taking your money out of the market during a downturn can lock in losses, but you can rebuild your balance if you’re able to leave the money invested while the market recovers.
Should You Still Take Out Your RMD?
If you don’t need to take funds out of your retirement account for 2020, then you don’t have to, Mikhail says. “Feel free not to take it, and you won’t be hit by a penalty.”