Outside the Beltway

Rich Old People Got a Tax Break

An unintended consequence of the Cares Act.

James Joyner · Saturday, July 25, 2020 · 5 comments

WaPo business columnist Allan Sloan is annoyed that “Wealthy retirees got a tax break from the coronavirus relief bill,” even though it was seemingly unintentional. And only incidentally a tax break.

Here’s something to keep in mind when you watch the House, the Senate and the White House negotiate another proposed 13-digit coronavirus relief bill. It involves one of the Cares Act’s tax breaks, which ended up going largely to older people like me who didn’t need it — but who, like me, aren’t about to give it back.

Let’s hope the legislation that emerges this time around is more careful with our tax money and makes sure that help is going to people who need it. And not to people who don’t.

That’s unlikely! But I agree that should be the goal of the package.

Let me explain the Cares Act giveaway, which involves the rules that govern “defined contribution” retirement accounts.

If you’re 72 or older and have a 401(k), 403(b) or any other kind of defined contribution account, you have to take “required minimum distributions” from your accounts each year. These distributions, determined by your age and your accounts’ year-end balances, are federally taxable and are taxable in some states as well. (People who inherit accounts are required to take RMDs, regardless of their age.)

The Cares Act eliminated the distribution requirements for this year. That’s a nice break for older people like me — I’m 75 — who are fortunate enough to not need distributions from their retirement accounts to pay their bills.

This tax break became part of the Cares Act because Congress didn’t want to penalize people of retirement age by forcing them to sell stock during a market crash. Such a crash seemed to be well underway in late March, when the Cares Act was being discussed.

For instance, if someone age 75, who has a 4.37 percent required distribution for this year, had all her money in an Standard & Poor’s 500 index fund, she would have had to withdraw 8.74 percent of her fund’s balance to meet that requirement if the market were down 50 percent.

Someone age 80, with a 5.35 percent required distribution, would have had to withdraw 10.7 percent

So . . . that seems like a reasonable and decent gesture. Old people were going to be forced to eat up a substantial amount of their retirement funds during what looked to be an epic stock market crash. Why would we want them to do that?

Considering that the S&P was down 30.8 percent on March 23 and was seemingly headed lower, fear of a 50 percent drop was rational.

But rather than doing something intelligent and reasonably fair — such as allowing people to take, say, $15,000 less than their normal required minimum distributions — Congress and President Trump agreed to eliminate RMDs entirely this year.

Obviously, that was worth a lot more to people with big account balances and significant RMDs than to people with smaller balances and smaller RMDs. And it was worth nothing to people who need to take their full minimum distributions to pay their bills.

And guess what? When last I looked, the S&P 500, thanks in part to the Cares Act, was almost 45 percent above its March low — and was actually up slightly for the year.

So if your retirement account consists of S&P 500 index funds, getting to skip your required distributions this year is a terrific deal. Not only do you avoid having to pay federal (and possibly state and local) income tax on your distributions, but if current prices hold, you’ll also end up with growth in the RMD money that you got to leave in your account.

Sweet for financially fortunate older people. Pretty sour for everyone else.

That the stock market didn’t crash—or, at least, stay crashed—would seem to be an unalloyed good. That people who owned more stock benefitted from that than those who owned less—or none—is obvious but not inherently problematic.

Nor is it obvious that the outcome was “sour” for the rest of us. I’m young enough not to be eligible to withdraw from my retirement accounts without substantial penalty and quite a ways off from getting into RMD territory. And I can’t imagine that I’ll be well-off enough at 80 not to need to withdraw from my funds; hell, I’ll be lucky to make it to 80.

Still, some number of rich older folks didn’t get forced to sell off stocks and pay taxes. How does that hurt me? Sure, they paid less tax this year but they’ll have a higher basis next year and at least partly make up for it.

Beyond that, there’s no real sense in which “our tax money” went to these individuals. An unintentional tax break (again, the point wasn’t to give them tax relief but rather to protect them from what looked to be a stock crash) isn’t the equivalent of a check from the Treasury.