Working the Rules

Peter Mallouk

IT’S YEARS LIKE THIS that can greatly improve our chances of a comfortable retirement—if we play our cards right. Indeed, thanks to recent rule changes enacted in Washington, there’s a slew of ways to bolster our finances.

What steps should you be taking? Here are seven things to do—and not do—with your retirement accounts right now:

1. Don’t take your RMD. As part of this year’s CARES Act relief package, individuals don’t have to take required minimum distributions (RMDs) from their IRAs or employer-sponsored retirement plans. This includes folks who were waiting until April 1 of this year to take their 2019 RMD. This not only means you don’t have to pay the income taxes normally associated with that distribution, but also the dollars can remain invested and continue growing tax-deferred.

2. Pay it back. If you’ve already taken your RMD for this year, there’s good news. The IRS recently announced that any distribution taken from a qualified plan between Feb. 1 and May 15, 2020, can be returned to the plan. This effectively makes it as if the distribution never happened, so you avoid taxes on the distribution and the money can be put back in the market.

The not-so-good news: This counts as a 60-day rollover, so you can’t do this if you’ve already done an indirect rollover in the last 365 days. (You also can’t return a distribution if it was taken from an inherited retirement account.) In addition, if you have taken multiple distributions during this timeframe, only the last distribution can be repaid.

3. Consider a Roth conversion. Let’s say that, at the market peak, your traditional IRA was worth $100,000, and you were thinking about doing a $25,000 Roth conversion, which would have moved a quarter of your traditional IRA into a Roth IRA. Now, let’s say the account is only worth $50,000 because of the market pullback. That same $25,000 Roth conversion now gets half of your traditional IRA money into your Roth IRA—but the tax bill is no larger.

4. Avoid 401(k) loans. Another recent government relief measure: doubling the amount of money that 401(k) participants can borrow from their plan, so that 100% of the vested balance can be borrowed in 2020, up to a maximum of $100,000.

While this might seem tempting, you only want to exercise this option if it’s your last resort. Whatever you borrow isn’t invested in the market. As stocks recover, you run the risk of missing out on a major portion of the gains, which could deal a major blow to your retirement savings plan.

5. Keep funding your accounts. Instead of taking money out of your 401(k), you should be looking to put more into your plan. If your job situation is stable, now is a great time to consider increasing your contributions to your employer-sponsored plan.

6. Frontload your contributions. Don’t just increase retirement account contributions. Also consider frontloading your contributions, so you increase the amount of time the money spends invested and you put money to work while the stock market’s depressed. One caveat: If your employer provides a match, you’ll want to confirm with your human resources department that altering your contribution schedule won’t prevent you from getting part of the match.

7. Tip the scales. If you don’t anticipate making withdrawals from your retirement assets in the next five years, now is a great time to buy stocks. Most employer-sponsored retirement plans are comprised of mutual funds that invest in various areas of the market, such as U.S. stocks, international stocks, bonds, real estate and so on. Consider rebalancing by selling bonds and using the proceeds to buy more stocks. “Buy low, sell high”? This is pretty much the definition of that.

Peter Mallouk is president and chief investment officer of Creative Planning in Overland Park, Kansas. His previous articles were Don’t Fall for ItThank Uncle Sam and An Ill Wind. Peter and HumbleDollar’s editor, Jonathan Clements, together host a monthly podcast. Follow Peter on Twitter @PeterMallouk.

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