By Andy Ives, CFP®, AIF®
With all the recent changes to IRAs under the SECURE Act [i.e., required minimum distribution (RMD) age raised to 72, new rules for beneficiaries, etc.], combined with the CARES Act waiver of RMDs last year, it comes as no surprise that we are hearing rumors and conspiracy theories about what will happen next. Here are a couple of the more popular speculations:
Will RMDs be waived again in 2021?
I highly doubt it. Any definitive claim that they will be waived again is unjustified speculation. It makes no sense. Why? RMDs have only been waived twice in the past – 2009 and 2020. In both instances we were experiencing total market meltdown.
For example, last year the Dow Jones Industrial Average (DJIA) was over 29,000 in early February. By mid-March, as news and effects of the pandemic swept across the world, the DJIA had tumbled to just over 19,000. IRA and 401(k) balances plummeted. Businesses were shuttered. Unemployment skyrocketed. Forcing account owners to withdraw retirement dollars in such a chaotic atmosphere would have been unconscionable. Hence, the CARES Act RMD waiver at the end of March 2020 and subsequent guidance for returning unwanted RMDs.
Where are we today? The DJIA has surged and is currently over 33,000. IRA and 401(k) account balances have rebounded. We have vaccines for the virus and are administering millions of shots per day. Businesses and states are reopening. Air travel is up. Despite the dire news on television, the future is far brighter than the past 12 months. Why would RMDs be waived in such an atmosphere? It makes little sense.
Will Roth IRA earnings become taxable?
Once again, highly doubtful. Of course, the CPA mantra is that “tax laws are written in pencil.” However, while anything is possible, there are a few reasons why I do not think Roth IRA earnings will be taxed.
Politically, it would be an extremely risky move. If government were to go back on its promise of a tax-free retirement savings account, it could be detrimental to political careers. Congress is already somewhat paralyzed as is, so a big reversal decision like this does not appear to be in the cards.
Second, Roth IRAs are funded with after-tax dollars. Therefore, the federal government collects taxes on the front end. If taxes are also imposed on Roth IRA earnings (the back end), there would be no reason to fund them, so the government would lose current tax revenues. Additionally, the trend in recent proposed legislation is more “Rothification,” not less.
Can we trust the federal government to keep its word about certain tax laws? No. Look at what the SECURE Act did to most IRA beneficiaries and their ability to stretch payments. However, the rumors about RMDs being waived again in 2021 and Roth IRA earnings getting taxed appear to be nothing more than unfounded conspiracy theories.