The National Active and Retired Federal Employees Association, which advocates on behalf of the civil service, sent a letter to Congress asking it to bring back a pandemic-era provision for retirement plans.
Federal retirees, like civilians, must withdraw portions of their savings each year. These withdrawals are called required minimum distributions. Under the Coronavirus Aid, Relief and Economic Security Act, Congress waived distribution requirements for 2020 in response to the market crash at the height of the COVID-19 pandemic. NARFE is now asking lawmakers to once again suspend these distributions amid soaring inflation.
“Our nation’s retirees are facing the brunt of the economic downturn and suspending RMDs would provide real relief for those living on fixed incomes,” the letter said.
One third of the federal workforce will be eligible to retire by 2025, creating a pool of employees who are now planning for retirement. Meanwhile, those currently drawing benefits are seeing their dollars work overtime to account for consumer prices increasing 9.1% in the last year.
That’s why it’s a critical time for seniors to hold onto their retirement investments for longer and delay paying taxes on them, said John Hatton, NARFE’s staff vice president for policy and programs.
“These required withdrawals will force seniors to sell assets at stock values that have been depressed by the Federal Reserve’s tightening monetary policy in response to surging inflation,” NARFE said in the July 8 letter.
Why are retirees forced to use savings?
When a federal employee invests in a tax-deferred account like a traditional Thrift Savings Plan or IRA, the government is willing to hold off on taxing it. Eventually, though, the IRS will collect its due.
Income tax is paid on the distributions when they are withdrawn to prevent people from stocking money in these accounts indefinitely.
“That’s the whole reason RMDs exist,” said Chris Kowalik, a retirement expert for FedImpact.com and the founder of ProFeds, a contractor providing retirement training to federal employees nationwide.
Thus, for the more than 6 million Thrift Savings Plan account holders in the U.S., federal law requires them to take money out of their account after reaching a certain age. How much depends on your age and life expectancy.
That calculation is updated periodically. For the first time in about a decade, the IRS adjusted the rate for this year, though not because of inflation, said IRS spokesman Eric Smith. The new rates merely reflect an increase in life expectancies.
Longer life spans may result in lower annual RMDs, which means they take a smaller “bite” out of your retirement account, according to financial services firm Edward Jones.
Former President Donald Trump issued an executive order in 2018 asking the government to review its life expectancy tables for the purpose of calculating RMDs.
How RMDs affect retirement planning
In setting aside money in these traditional accounts, Kowalik said account holders sign a sort of “blank check” to withdraw a set percentage of their account regardless of taxes, inflation or how their money is performing.
Kowalik said forcing seniors to take money out of these accounts, especially if they don’t need to, means they might be selling when the value is low.
“The IRS’ concern is not ‘Is this in this person’s financial best interest to take this money?’” Kowalik said. “It is, ‘This is the time that the tax bill is due. And the way we’re going to make you pay the tax on the money is to take a distribution.’”
Retirees do retain some choice, she said. They can elect to take out their RMDs monthly in smaller chunks, which can help average out market fluctuation. Those who take out their RMD in one lump sum at the end of the year are beholden to whatever the market looks like at that point.
For federal retirees, there are other rules that apply.
First, there are five core funds within the TSP, and each behaves differently under market conditions. When TSP account holders take distributions, they are unable to specify where money is withdrawn from. Retirees cannot choose to withdraw distributions from the fund that is over performing, for example.
Second, in the private sector, RMDs are based solely on the traditional IRA value and don’t touch other accounts, such as Roth IRAs, Kowalik said. Not so for federal beneficiaries. Their RMD calculation is based on their entire account balance, including Roth TSP. Thus federal retirees thus pull out a larger sum.
Finally, the IRS generally issues a penalty if an account holder fails to take out RMDs. For federal employees, that never happens because the TSP will automatically write a check to satisfy the RMD.
Having a diverse financial plan with money spread out in various “buckets” can help minimize the effect of RMDs, Kowalik said.
For RMDs to be once again temporarily suspended, it would take an act of Congress.
Rep. John Katko, a Republican for New York, led an effort to extend the suspension of RMDs for the remainder of 2021. However, the hold expired last March, and NARFE’s Hatton said Congress is less likely to again pause collection of RMDs.
Last year, a bipartisan bill — the Retirement Security and Savings Act — was introduced in the Senate that includes a provision suspending RMDs if an individual’s retirement account balance is less than $100,000.
Molly Weisner is a staff reporter for Federal Times where she covers labor, policy and contracting pertaining to the government workforce. She made previous stops at USA Today and McClatchy as a digital producer, and worked at The New York Times as a copy editor. Molly majored in journalism at the University of North Carolina at Chapel Hill.