Pandemic Fallout Includes Handout to Rich Retirees
By Gerald E. Scorse, Progressive Charlestown guest columnist
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 Donald 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.
All the same, suspending RMDs has little to do with going
all out for America. It has everything to do with going all in for those at the
top.
Same old, same old. Here’s to a post-pandemic with fewer tax
favors for the haves.
This piece originally appeared at www.nydailynews.com
Gerald E. Scorse helped pass the bill requiring basis reporting for capital gains. He writes on taxes.His articles have appeared often in Progressive Charlestown.
© 2020 Gerald E. Scorse