AAII Survey: How the CARES Act Is Affecting Members’ Withdrawal Strategies

The Coronavirus Aid, Relief and Economic Security (CARES) Act, recently enacted in response to the coronavirus pandemic, includes a number of measures designed to stimulate the economy. One provision allows retirees to forgo taking required minimum distributions (RMDs) from IRAs or 401(k)-type plans this year. The CARES Act essentially suspended RMDs for 2020 across the board. It is important to remember that the CARES Act is a relief bill, and by suspending 2020 RMDs, the government is giving up short-term tax revenue to provide relief to retirees. Additionally, markets have been very volatile, and suspending RMDs gives many Americans the ability to leave their investment portfolios alone to recover over the next year. In addition to the relief these RMD provisions provide, it also opens up some planning opportunities. We wanted to hear how AAII members are taking the CARES Act into consideration when it comes to their withdrawal strategy.

We asked our members about their top issues with the following question:

The CARES Act suspends required minimum distributions (RMDs) for 2020. If you are retired, will this impact your withdrawal strategy?

Here are the results:

Over 2,800 members participated in this survey.

Of the 2,814 responses we received, a majority of respondents (54%) stated that the CARES Act provision will impact their withdrawal strategy in some way. This compares to 46% of respondents who stated that the provision would not impact their strategy.

Follow-Up Special Question

Before the CARES Act was passed, individuals over the age of 70½ (for those born prior to July 1, 1949) or 72 (for those born after July 1, 1949) were required to take a minimum distribution from their tax-deferred retirement accounts each year. In addition to retirees, most non-spousal heirs who inherited tax-deferred accounts, no matter their age, were also required to take an annual RMD. The changes to the rules governing tax-advantaged retirement accounts are an unusual response to an extraordinary situation. The rules have been altered and relaxed in order to give financial flexibility to people when they need it most; however, it’s still prudent to tread carefully. We aimed to explore in further detail how AAII members are adjusting their withdrawal strategy in response to the CARES Act.

We followed up our poll with:

If yes, how will your withdrawal strategy be impacted?

Of the 730 responses we received, a majority stated that they would be reducing or eliminating their distribution this year. However, the rationale among these respondents varied. Fifty-one percent of respondents said that they were reducing their distribution in response to the CARES Act because they wanted to lower their taxable income. Notably, many in this group cited lowering their Medicare premiums as the primary reason for lowering their 2020 distribution amount. This compares to the 32% percent of respondents who stated that they are planning to reduce their distribution in 2020 so that they can convert to a Roth IRA. Additionally, 17% of respondents stated that they were opting to reduce or eliminate their withdrawals because they want to give their retirement account more time to recover losses.

Here is a sampling of the responses we received to the follow-up special question:

• “By reducing (or even eliminating) my 2020 RMD, I will reduce my income tax bracket, eliminate Obamacare tax, and reduce Medicare costs in 2022. If one can afford the reduction in 2020 cash flow, this change is a wonderful opportunity. Everyone should review their own situation to determine if taking advantage of this change makes sense for them.”
  
• “Allows me to keep making money, not a mandate. This requirement should be removed on a permanent basis!”
• “My withdrawal strategy is normally to take the RMD and reinvest it, as it is not needed for current needs. Suspension is good since the amount of RMD is based on December 2019 balance, which was much higher than it is currently. Also, would have resulted in a larger income tax. I would hope that the balance will increase when the economy recovers.”
• “Rather than take quarterly withdrawals, I will wait until the end of the year. At that time, I will make a decision based on my tax situation.”
• “No withdrawal for 2020. Why pay ordinary income tax rates on withdrawals when assets in non-tax-advantaged accounts, which most likely have reduced unrealized gains, can be withdrawn if necessary? I have plenty of emergency cash set aside for situations such as this to avoid any asset sales.”