The coronavirus pandemic is worlds apart from the financial meltdown of 2008-09. Even so the government's response was identical in one telltale way. Congress once again gave a special dose of tender loving care to taxpayers who need it the least.
The 2008 bailout suspended annual required minimum distribution (RMDs) from retirement accounts. Surprise, surprise, the same tax break showed up in the $2.2 trillion stimulus signed by President Trump.
Waiving RMDs is welcome news for the well-heeled. They have plenty of income outside their IRAs and 401(k)s. They're fine with passing up a distribution, and seriously happy to avoid the taxes that come with it.
(A quick history: The first retirement accounts didn't need any waiver to avoid taxes. In addition to untaxed contributions and tax-free capital gains, there were no mandatory distributions either. The party ended when lawmakers finally laid down a time limit. A 1986 tax reform mandated minimum distributions starting at age 70 1/2. It's been reset at 72 effective this year.)
The new waiver lets retirees off the hook for 2020. The hook is still in, though, for the millions who actually rely on their accounts and can't get along without withdrawals.
They'll be forced to do what the affluent have been spared from doing. They'll have to liquidate holdings at prices battered by the fastest stock market crash in U.S. history (including three record drops in the Dow over just eight days). Wall Street has rallied since its late-March low but remains in the red for the year.
The stimulus bill did slightly better for younger workers. Account withdrawals prior to age 59 ½ normally incur a 10 percent penalty; taxpayers financially harmed by the pandemic won't have to pay that penalty. Income taxes can be spread out over three years, but the full amounts remain due. There's also an option to repay the distribution back into a retirement plan.
Withdrawing savings ahead of time, however, carries a penalty all its own. David Certner, the legislative counsel and policy director for the AARP, put it this way: "It's never a good idea. It's particularly not a good idea when the market is down. But for people who are in really bad shape, this may be their one emergency alternative."
Now for a look at the waiver from a fiscal perspective: the government will be losing billions at the worst possible time.
The stock market racked up giant gains last year. RMDs are based on account balances as of December 31, so the taxes on distributions were certain to hit new highs. Revenues have steadily trended up as millions of boomers reach minimum distribution age. Coupled with the market's 2019 performance, bumper RMD taxes should be flowing into the Treasury.
Now most of those dollars will likely be staying in the pockets of taxpayers whose pockets are already full. At the same time, Congress will be shoveling money out the door in the biggest national bailout ever.
Waiving RMDs is tax policy tilted toward the upper incomes. The timing makes it financially foolhardy as well. The waiver might last only a year, just as the first one did. Even so, a government already starving for revenue may never make up what it's now passing up.
Some have argued that now isn't the time to worry about who gets what, or for what reasons, or anything else. All that can come later; the only thing government should concern itself with at the moment is doing everything possible to help as many people as possible.
Point taken. We're all in this together. It's an extraordinary time demanding extraordinary measures. Nothing else matters.
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