Can You Tell Me How Recent Law Changes Affect RMDs From My 401(k)?
Q: The value of my 401(k) fell in March of this year and still hasn’t fully recovered. I turned 70 in April. Will I be forced to sell investments at a loss in order to withdraw the required minimum amount?
A: You might be able to avoid doing so. Coronavirus stimulus legislation (CARES Act) that was signed into law in March waives required minimum distributions (RMDs) in 2020 for anyone who owns a 401(k), 403(b), or IRA. Instead of taking money from your retirement accounts this year, retirees can wait, or take less, to give investments time to recover. That’s helpful, because most RMDs are based on the value of your retirement accounts on December 31st of the previous year.
For example, RMDs for retirees who turned 70 ½ in 2019 would have been based on the value of their retirement accounts on December 31, 2019. At that time the Dow was 28,462 compared to 24,101 on April 1, 2020, when their RMD was due. However, the CARES Act waiver applies to this group as well as people like you who turn 70 ½ in 2020.
In addition, major changes to RMD rules were already underway prior to the CARES Act. The SECURE Act, which passed in 2019, extended the age requirement for starting RMDs. If you reach age 70 ½ in 2020 or thereafter, you may wait until April 1 of the year after you reach age 72 to take your first RMD. For you, that’s April 1, 2023. That gives your 401(k) more time to recover.
Your required minimum distribution (RMD) is the minimum amount that you must withdraw from retirement accounts each year. Failure to do so by your deadline can result in a penalty equal to 50% of the required amount not withdrawn.
Some financial advisors say that there may be some tax advantages to taking money out now while valuations are lower. This information is not intended as investment advice. We strongly recommend that you contact the custodian of your 401(k) or your financial advisor and discuss a plan for your income needs and to explore potential sources of funds.
The IRS has an FAQ about RMDs here: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions.
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