2020 Is Bringing Even More Changes to Your Retirement
2020 was already set to be an interesting year for investors, what with the increased likelihood of a slowing economy and an oncoming recession. The spread of coronavirus and the reaction to it have taken many by surprise, however, and have resulted in trillions of dollars worth of losses to investors.
To ease some of the burden, Congress has taken it upon itself to provide some new benefits to holders of retirement accounts which, coupled with existing changes that were set to take place this year, should help smooth many investors’ portfolio performances this year. Of course, not everything is rosy, and some of the things Congress and the Federal Reserve are doing will impact investors negatively in the future. Here are three good pieces of news for investors, and three pieces of bad news that they’ll have to watch out for.
The Good News
1. No RMDs in 2020
Investors in traditional 401(k), IRA, and similar retirement accounts know that they’re required to begin taking required minimum distributions (RMDs) at a certain age. Until recently, that was at age 70 ½. But Congress last year passed the SECURE Act as part of an omnibus spending bill, raising the RMD age to 72. That bought investors a little more time to grow their nest eggs before they were required to start taking RMDs and paying taxes on those distributions.
Because of the poor performance of stock markets to begin the year, and the hardships imposed by the coronavirus and accompanying government restrictions, Congress recently waived the RMD requirement for 2020 in its recent stimulus bill. That means that those who would have had to take RMDs this year no longer have to. Of course, if you still want to take a distribution from your retirement accounts, you can do so, you would just pay the normal taxes you would otherwise have to pay. And as with all tax matters, make sure to consult with your tax adviser to see how this new change impacts you.
2. Penalty-Free Distributions
Another aspect of retirement accounts is the fact that early withdrawals, i.e. those that take place before investors turn 59 ½, incur a 10% penalty on top of taxes owed. That’s to discourage investors from treating retirement accounts like ATMs.
The CARES Act stimulus bill allows investors affected by the coronavirus to take an early withdrawal of up to $100,000 from their IRA without having to pay the early withdrawal penalty. Investors will still have to pay taxes on those distributions, but they have up to three years to pay those taxes, and they can also put that money back into their IRAs within three years and avoid paying taxes on the distribution.
Just what constitutes being affected by coronavirus isn’t clear. Do you have to have been diagnosed with the virus? Have a family member with the virus? Lose your job due to the virus? Again, you’ll want to consult with your tax adviser before making a decision that could cost you taxes and penalties.
3. Higher 401(k) Borrowing Limits
Investors can now borrow up to $100,000 from a 401(k) account, double the amount they were able to borrow previously. As with IRAs, the 10% early withdrawal penalty has been waived. And again, this is supposed to be for people affected by coronavirus, so make sure to consult with both your tax adviser and your 401(k) plan administrator before borrowing from your 401(k) account.
The Bad News
Those were the benefits of the stimulus bill. Now it’s time to discuss the drawbacks.
1. More Inflation
Between adding $2 trillion to the national debt in the blink of an eye, and the massive increases to the Federal Reserve’s balance sheet as a result of its new quantitative easing (QE) and liquidity facilities, it’s almost guaranteed that there will be more inflation.
Some may think back to 2008 and saw that because there was no inflation then that there will be no inflation now. But back then the Fed’s QE was largely neutralized by showing up as excess bank reserves due to the Fed starting to pay interest on reserves. Today, very little of the increase in the Fed’s balance sheet is showing up as increased reserves, meaning that there’s more money out in the financial system ready to buy up assets and boost prices. High inflation in the future is a very real possibility.
2. More Bailouts
The CARES Act was just the first step that Congress took towards bailing out the country. Now there’s talk of a $2 trillion infrastructure bill, or even further bailout checks being sent to US workers. Now that the precedent has been set, there’s no reason for Congress not to continue spending money. After all, what’s another trillion dollars to a national debt that is already going to shoot up to over $25 trillion this year? As long as the Fed continues to monetize debt, the gravy train will keep rolling.
3. Anything Goes – What Next?
At this point, with no one knowing how long the coronavirus lockdowns will last, or how much economic damage they will do, Congress is apt to do anything. More stimulus checks? Sure, why not? Universal basic income? Good idea! Bailouts of every company that might declare bankruptcy? What could go wrong?
Congress is so scared that it is more than willing to write the checks now and pay the bills later. Or rather, you will pay the bills later, in the form of higher taxes and a greatly devalued dollar. We’ve entered a strange new world in which money can be conjured up out of thin air in amounts far greater than we’ve ever seen, injected into the economy without a care about the consequences, and no one seems to care about the day of reckoning. But that day will come, to the detriment of many investors.
There’s only so much that Congress can do to relieve the economic burden on investors and free them from tax and regulatory problems. At some point investors will have to come to the realization that they’re on their own when it comes to maintaining the value of their investments. And unless they’ve made sound choices to help protect their assets, like investing in gold, they’re at risk of losing huge portions of their portfolios as markets continue to deteriorate this year.