The CARES Act modified RMD rules for 2020. But for those who withdrew in the first few months of the year only because they thought they had to, you might be able to reverse that action.
Editor’s note: This article may not reflect how the CARES Act will impact PERA – please refer to PERA’s webpage for further information.
Political reporters discuss what they expect to see in the weeks ahead as the 2020 legislative session resumes. From big policy decisions to basic logistical questions like where members will sit, questions abound.
In early February, the unemployment rate in Colorado was as low as 2.5%. The rate has more than quadrupled since then. The prior record was 8.9%, set in 2010. Still, Colorado’s rate remains one of the lowest in the nation.
In this video, the head of the central banking system discusses his thoughts on peak unemployment, what the Fed can do to aid the recovery, and other topics that everyone is thinking about.
Nearly 40 million Americans have filed for unemployment since March. Those losing an income stream who need access to cash often look to assets they’ve stored away. After using funds stored in checking and savings accounts, some then tap their emergency fund (a standard recommendation is keep three to six months of expenses in such an account).
For those without additional cash savings, accessing retirement funds can be a last resort. It’s a last resort for good reason. Dollars in a 401(k) or 457 typically aren’t stored as cash; they’re invested. An investor who withdraws funds before retirement loses not just the amount taken out, but years of tax-free potential gains.
For example, a 40-year-old who takes out $5,000 could have had $27,137 at age 65 if that $5,000 was left alone and earned a 7-percent return. On top of that, the IRS imposes a 10-percent penalty for those who withdraw before the allowable age. In other words, the true cost of a $5,000 withdrawal is much higher than $5,000.
Of course, some people are left with no option. It’s not cheap, but in a true emergency, access to these reserves is necessary, regardless of penalties, taxes, or lost compounding.
In recognition of the millions who might be facing just such an emergency, the federal government, with the passage of the CARES Act, temporarily waived the 10-percent penalty for withdrawals from qualified retirement plans.
Are People Using This Option?
A recent survey conducted by MagnifyMoney shows that the pandemic has had a significant effect on 401(k) activity. The survey showed that:
Nearly half of the respondents reported lowering or stopping their contributions.
Half of those with a retirement account have withdrawn funds within the last two months or say they plan to do so.
Half of those taking withdrawals were doing so to cover expenses.
Young savers are taking withdrawals at a higher rate than older savers—40-percent of Gen Xers and nearly as many Millennials compared to 7-percent of Baby Boomers.
PERA members have access to retirement savings via PERAPlus. The following chart shows the behavior of 401(k) participants under 70 in the first four months of 2020:
Month
Number of accounts with a balance
Number of people making withdrawals
Percentage of participants withdrawing from their account
January
61,120
651
1.07%
February
61,058
527
0.86%
March
60,970
559
0.92%
April
60,867
371
0.61%
PERA does not track the reasons people take withdrawals. Reasons might include standard withdrawals in retirement, required minimum distributions, leaving a job and rolling the balance over to a new 401(k) or IRA, emergencies, and more. However, even if every person making a withdrawal from a PERA 401(k) account in 2020 did so as the result of an emergency, the rate falls far below that of the national survey.
Considering Other Options
For those who are in need of emergency income replacement, Tyler Barondeau, an Investment Compliance and Performance Analyst at Colorado PERA, suggests looking into all relief options, some of which have been created since this crisis began. “For those with a federally-backed mortgage, you may be able to defer payments for up to six months with the option to extend deferment for an additional six months if needed,” he said. “And, if you have federal student loans, payments and interest accrual have been paused through September 30th. These payments are often the largest monthly financial obligations a family faces and these deferral options may allow many families to keep their retirement savings protected and on course to provide for retirement.”
Barondeau said that lenders, including credit card companies, banks, credit unions, and even landlords may be willing to work with you to setup a flexible payment arrangement if you reach out to them. “We’re all working our way through this together, and you may be surprised at the flexibility being offered to help you weather this event.”
Retirees play a vital role in the economy. They purchase goods and services, serve in important volunteer and part-time roles, and pay taxes. Retirees who receive a pension provide a level of stability and support to their communities. A recent PERA On the Issues story highlighted the impact retirees with a pension have in rural areas of Colorado.
A new report published by the National Conference on Public Employee Retirement Systems examines the economic impact of pensions in a new way. It includes the economic impact retiree spending has while adding the economic impact pension dollars have before reaching retirees, in the form of investment dollars at work.
Here are the numbers, which use 2018 data from public pensions systems across the country:
The investment of pension fund assets contributed $872 billion to the US economy
These investments led to $178 billion in state and local revenues ($647 million in Colorado)
Retirees received $335 billion in benefit checks ($5.6 billion in Colorado)
Retiree spending added $836 billion to the economy ($14 billion in Colorado)
The benefit to state and local revenues from retiree spending equaled $162 billion ($2.4 billion in Colorado)
Researchers then compared contributions employees and employers make to pension funds to the economic output of pension investments and retiree spending. They state: “Pension funds generated $179.4 billion more in revenues than taxpayers contributed to the pension funds.” In Colorado, the net state and local revenue attributable to public pensions was $1.3 billion.
The stock market has settled down since the dramatic volatility experienced during the first few weeks after COVID-19 appeared in the United States. But that doesn’t mean questions have gone away. Most major indexes, like the S&P 500, are down for the year. However, stocks mounted a vigorous comeback at the end of April despite a historic rise in unemployment and reports of serious economic consequences for states and local governments. What’s an investor to do? This story unpacks a few of the variables to consider.
The Center for Retirement Research has updated this list throughout the 2020 Presidential campaign. PERA On The Issues shared the document when there were still a number of candidates. Now that the race is down to two, see which Social Security policies each candidate has backed.
Understanding your income in retirement requires understanding your tax situation. Your tax bracket might change, you might have multiple sources of income, and you might face Required Minimum Distributions at some point. This overview can help get you started.
During these days of isolation, we remember that so many of the places we long for and the services we rely on are made possible by the daily efforts of thousands of individuals who have devoted their career, or even a part of it, to working for their fellow citizens.
This makes recognizing the contributions Coloradans make during Public Service Recognition Week (May 3-9) especially poignant this year. More than 200,000 PERA members work for the benefit of their communities, and 122,000 others are retired from public employment in Colorado.
The work that public employees do is exceptionally varied. Most people are familiar with the work done by our teachers, troopers, and judges. But that’s just the beginning of the ways in which public employees keep the state running.
The following is a sample of the kinds of work PERA members do that you might be less familiar with.
Colorado Parks and Wildlife operates 19 fish hatcheries across the state, stocking Colorado’s waters with more than 90 million fish per year.
PERA members operate a library in Pueblo that has won awards for its distinctive architecture and for the services it provides to the community.
The Brand Inspection Division of the Department of Agriculture has been recording, administering, and inspecting livestock brands since 1865.
The Northeast Colorado Health Department keeps Logan, Morgan, Phillips, Sedgwick, Washington and Yuma counties healthy—that’s 40 people working hard across 9,200 miles!
You probably knew that the Department of Transportation oversees state roadways. Did you also know it oversees the skyways?
Being stuck inside, apart from one another, has provided the occasion for many to think about what happens outside, when we’re together. To all those who do the work mentioned above, and for the thousands of others who weren’t—we’re thinking of you, and we’re thankful for you.
On May 20, the Joint Budget Committee (JBC) moved forward draft legislation that would suspend the State’s $225 million direct distribution to PERA for one year. The direct distribution is not related to retiree benefit payments, including those made using direct deposit. (Learn more about what the direct distribution is here.)
The bill was introduced as the General Assembly reconvened on May 26. To become law, it needs approval from the House, Senate, and the Governor.
The State’s Budget Situation: A Recap
A few weeks ago, PERA On The Issuesoutlined the budget challenges Colorado’s legislature faces. Billions of dollars they had planned on receiving in tax revenue is now suddenly off the table as the economy slammed on its brakes.
The JBC, a six-person bipartisan committee made up of members of both the House of Representatives and the Senate, is charged with leading the State’s initial response.
PERA and the State Budget: Important Distinctions
PERA has a unique position in the state budgeting process. Retiree benefits, for example, are not paid via the state budget and are not affected by this bill. These payments are made from the investment funds PERA manages. Recent market volatility has affected investors around the world, including PERA. The Fund had $45 billion in assets at the end of 2018, however, and is designed to withstand the ups and down of the market.
In addition to investment returns, the Fund receives contributions from employees, employers, and the State. These various elements work together to maintain the health of the fund for the long term.
JBC Deliberation and Introduction in the House
On May 11, PERA Executive Director Ron Baker, Chief Investment Officer Amy McGarrity, and Board of Trustees’ Chairman Tim O’Brien presented to the JBC. They gave a brief presentation that outlined the costs of the proposals the JBC was considering and answered questions from committee members.
In the following days, the JBC decided to pursue one of the JBC staff proposals: withholding the direct distribution to PERA for one year. This $225 million payment was first implemented upon the passage of SB 18-200. It is scheduled to resume in 2021.
The bill was introduced in the House on May 26.
The Impact to PERA
The suspension of the direct distribution has a negative impact on reducing PERA’s unfunded liabilities. PERA projects that the long-term cost of suspending the direct distribution to be nearly $1 billion over the time frame to reach 100% funding in all divisions.
This does not mean that PERA is cutting a check for $1 billion today. Instead, that figure is calculated by determining what the value of that $225 million would be if PERA invested it and realized its assumed rate of return.
The PERA Board, as fiduciaries and pursuant to their funding policy, opposes reductions in contributions to PERA while PERA has unfunded liabilities. The Board has also acknowledged the unprecedented nature of the budget deficit.
PERA On The Issues will continue posting updates on this, and all PERA-related legislation, as it moves through the legislative process.
Editor’s note: This story was edited on 5/29 for clarity.
