AARP Answers: Your Retirement Savings and the Coronavirus
The latest on RMDs, contribution deadlines, emergency withdrawals, stocks and more
My retirement accounts have taken a big hit. Do I still need to take RMDs in 2020?
No. AARP worked hard to ensure suspension of required minimum distributions (RMDs) in 2020 in response to the coronavirus outbreak. “Delaying distributions will allow retirees the opportunity to regain value in retirement plans that have recently suffered very large losses,” Nancy LeaMond, AARP's executive vice president and chief advocacy and engagement officer, said in a letter to Congress.
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, account holders who would normally be forced to take distributions from retirement accounts for 2020 by Dec. 31 are no longer required to do so. The reprieve also applies to those who were required to take their very first RMDs in 2019 but who had yet to do so. First-time RMD takers have until April 1 of the following year to take their very first RMDs. The age to start taking RMDs is now 72. (Before 2020, the age was 701/2.) The waiver also applies to inherited IRAs.
I have an emergency. Can I take money from my retirement savings?
You can, but consider it a last resort — especially at a time when the stock market is down and you would be selling many investments at depressed prices compared with where they stood just weeks ago. But if your emergency fund is already exhausted and you have no other option, the CARES Act offers some breaks to those forced to tap retirement savings early.
For those younger than 591/2, the 10 percent early withdrawal penalty for tapping defined contribution plans such as 401(k)s is being waived. You need to be experiencing coronavirus-related financial hardship, such as a job loss or COVID-19 illness. The waiver applies to withdrawals of up to $100,000 since Jan. 1. Income taxes aren't waived, but you have three years to pay them, as well as three years to pay the plan back. Also, the limit on loans from retirement accounts has been increased to $100,000, from $50,000, and payments on both new and existing loans can be deferred for a year.
Do I have extra time to make 2019 retirement contributions due to the coronavirus outbreak?
Yes. The deadline to make prior-year contributions to individual retirement accounts (IRAs) and health savings accounts (HSAs) is Tax Day, which is typically April 15. However, the IRS has moved Tax Day to July 15, so retirement savers have an extra three months to make contributions to IRAs and HSAs. Note that the deadline to make 2019 contributions to 401(k)s has passed; it was Dec. 31.
Should I continue to contribute to my retirement plan?
Absolutely. A big factor in how much your retirement plan is worth is how much you contribute to it over time. And by continuing to invest after prices have fallen, you are essentially buying investments when they are on sale. (It's the buy-low half of the old investing adage, “Buy low, sell high.") In addition, if you have a 401(k) retirement plan and your employer matches some of your contribution, you're getting free money. You're also investing on a regular basis — every pay period — which takes the emotion out of investing.
How badly have the financial markets been affected by the coronavirus?
It depends on which financial markets you're talking about. The S&P 500 stock index — a good measure of the overall U.S. stock market — fell 20 percent in the three months ending March 31, one of the fastest declines on record. The overall U.S. bond market, however, has returned a little over 3.25 percent so far this year.
If you don't have all your retirement money in stocks, your losses aren't as bad. For example, a mix of 40 percent bonds and 60 percent stocks fell by around 10.7 percent during the first three months of the year, putting it about where it was in early 2019. And if you have money in a money market mutual fund or a bank certificate of deposit, you have had no losses.
One last thing: While there's no way to predict where the market will go from here, it offers some comfort to recall that after stocks bottomed out in 2009 during the Great Recession, they had more than quadrupled in value 10 years later.
Should I sell my stocks?
Only you can make that decision, but experienced investors point out that panic selling is nearly always a bad idea. Dumping stocks (or stock mutual funds) after a big market decline typically just locks in your losses, eliminating your chances of recovering what you've lost when and if the market moves up. Believing that you can time the market — that you can either get out before a downturn or know when to jump back in to catch a market rebound — is usually wishful thinking.
If you have already planned to have a certain amount of your investments in stocks and a certain amount in bonds — and you feel that the ratio still suits your risk tolerance — then you can see how far it has strayed from your plan. For example, if you had wanted to have 60 percent in stocks and 40 percent in bonds, the decline in stock prices may have shifted your portfolio to a 50-50 split. Most planners would recommend that you rebalance — sell some of your bond funds and invest that money in your stock funds so you can get back to your 60-40 mix. Some funds or 401(k) plans will automatically do that for you. It may take some willpower to buy stocks after this decline, but you'd be selling higher and buying lower.
Of course, if you have a financial adviser, this is the time to talk to him or her about what to do. That's what you're paying an adviser for.
I take withdrawals from my investment accounts to supplement my living expenses. Should I sell stocks?
Again, the ultimate decision is up to you. But taking a withdrawal from a stock mutual fund that has fallen adds to your losses. If your fund has fallen 10 percent and you withdraw 5 percent, then your account is around 15 percent lower.
Can I deduct my losses from my 2020 income taxes?
If you have investments in a taxable account that you sell at a loss, then yes. But you can't deduct any losses in a tax-favored retirement plan, such as an IRA or a workplace savings plan like a 401(k).
If you sell an investment in a taxable account at a loss, you can use that loss to reduce taxes on your capital gains. Here's how that might work: Let's say you sold 100 shares of Company X for a $1,000 profit on Jan. 1, 2020, and then sold 100 shares of Company Y for a $400 loss on March 1. (For simplicity's sake, assume you have no other transactions for the year and that you bought both stocks two years ago.) You could use your capital loss on Company Y to offset your gain on Company X, so you'd end up paying taxes on $600 in capital gains for the year, not the $1,000 profit you made on Company X.
If you have more losses than gains, you can deduct up to $3,000 of those losses from your income on your 2020 tax return. And if you still have losses, you can carry them forward to the 2021 tax year. For more information, see IRS Topic 409, which covers capital gains and losses. (irs.gov/taxtopics/tc409)
Where can I get extra income from my investments without any risk?
It's tough, since a higher return without accompanying risk is usually a pipe dream. You can pick up a little yield, however, by shopping around. As of late March, an ultrasafe one-year Treasury bill yielded 0.89 percent, and you could find FDIC-insured bank CDs, with terms ranging from one to two years, that yielded close to 2 percent. If you're looking for higher yields, you'll have to take more risks. For example, you could buy a stock that has a 3 percent dividend yield, but there's no guarantee that the company will continue to pay its current dividend or that its price won't decline.