Market Review and Outlook

These are not the opinions or recommendations of Texas Retirement Solutions or Sound Income Strategies LLC, but rather of third party contributors.

3 Social Security Changes Retirees Need to Know About in 2025

3 Social Security Changes Retirees Need to Know About in 2025

Key Points

  • A modest cost-of-living adjustment (COLA) will make benefit checks bigger.
  • Note that higher earners will pay a bit more in Social Security taxes.
  • Retirees still earning income may have some of their benefits temporarily withheld.
  • The $22,924 Social Security bonus most retirees completely overlook

    Without Social Security, millions of Americans would be living below the poverty line. With it, many don’t — even though the average monthly retirement benefit of $1,975 (as of December) is not all that huge. It works out to about $23,700 annually.

    Fortunately, Social Security does undergo some changes from year to year, including nearly annual increases in benefits. There are also some things you can do to make your future benefits bigger. Let’s dive in.

    1. The COLA for 2025 is making benefit checks bigger

    The cost-of-living adjustment (COLA) for 2025 is indeed a most notable change in Social Security for 2025, but it’s not an Earth-shattering one. The COLA, effective in December 2024, is just 2.5%. So if you were collecting, say, $2,000 per month, you’d now be getting $2,050.

    But remember that the nearly annual COLAs are meant to help retirees keep up with inflation, so a low increase reflects relatively low inflation. Here are some recent years’ COLAs, some of which arrived after much higher inflationary periods:

    YearCOLA
    20201.6%
    20211.3%
    20225.9%
    20238.7%
    20243.2%
    20252.5% 

     

    Still, a 2.5% increase will certainly disappoint a lot of people. In fact, a recent Motley Fool survey found 54% of retirees view the COLA as inadequate.

    2. Higher earners will have to fork over more to Social Security

    Here’s something many people don’t realize. You’re probably taxed on all your wages for Social Security — there’s a 6.2% deduction on your paystub and it’s matched by another 6.2% coming from your employer. (Self-employed people have to pay the full 12.4%.) But high earners are only taxed on part of their wages. The threshold was $168,600 last year and for 2025 it’s $176,100.

    So someone earning, say, $3,176,100 will only be taxed on $176,100 of earnings for Social Security and not at all on the other $3 million in earnings. If you think this is unfair, you’re not alone. With Social Security due to face a funding shortfall within a decade or so, it’s been suggested that this earnings cap be raised a lot — or just eliminated. That’s one effective way to strengthen Social Security.

    3. The retirement earnings test has higher thresholds

    Here’s a quick refresher: You can claim your benefits as early as age 62, or at your “full retirement age” (FRA), which is 66 or 67 for most people today. Claiming early results in more, but smaller checks. Those delaying starting to collect checks will see them increase by about 8% for each year beyond their full retirement, until age 70. For most people, waiting until age 70 will be the best move — if you can swing it. Many people simply can’t, as they need that income as soon as possible.

    If you claim your benefits early and you keep working to some degree, you’ll want to know about the retirement earnings test. Earn more than a certain threshold, and your benefits will be reduced. It’s not as bad as it seems, though, because any money withheld is factored into your benefits once you reach your FRA and your future benefits will increase accordingly. So you don’t really lose out on any Social Security benefits — you just receive some later.

    Here are the details:

    FRA StatusIncome Limit 2024Income Limit 2025Benefit Reductions
    If you’re below your FRA

    $22,320

    $23,400

    $1 for every $2 over the limit

    If you’ll reach your FRA this year

    $59,520

    $62,160

    $1 for every $3 over the limit

    Data source: Social Security Administration.

    These are three of the most important Social Security changes for 2025. It’s smart to keep up with Social Security developments, as it may help you in your retirement planning. Also, the new administration in Washington hasn’t committed to not touching or changing Social Security. So do keep an eye on things and let your representatives know your feelings, too.

    The $22,924 Social Security bonus most retirees completely overlook

    If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.

    https://www.fool.com/retirement/2025/02/05/3-social-security-changes-retirees-need-to-know/

Why You Should Take Your 2025 RMD Now

 

By Sarah Brenner, JD
Director of Retirement Education

 

The deadline for most retirement account owners to take their 2025 required minimum distribution (RMD) is December 31, 2025. However, there are good reasons why you should take your RMD now instead of waiting.

You are doing a rollover. Maybe you are retiring this year, and you are now moving your employer plan funds to an IRA, or maybe you are tapping your IRA with the intent of doing a 60-day rollover after receiving the funds. In both of these situations, the first-money-out rule says that the first money that is distributed from your retirement account is your 2025 RMD. There is no choice in the matter. The rules also say that your RMD is not rollover eligible. You must take it prior to the rollover.

If you are in either of these situations, you must take your 2025 RMD now, before doing the rollover. You cannot wait to take your RMD later in the year.

You are doing a conversion. A Roth conversion can be a smart move. However, if you are age 73 or older this year and doing a conversion now, you will need to take your 2025 RMD from your IRA prior to the conversion. Why? The IRS says the first money out of your IRA is your RMD. A conversion is subject to the rollover rules, so your RMD cannot be converted.

Your IRAs are all seen as one IRA by the IRS. To make things even more complicated, the final RMD regulations confirm that when it comes to RMDs, your IRAs are aggregated. That means that if you have multiple IRAs (including SEP and SIMPLE IRAs), you must take your 2025 RMDs from all of them before doing any rollovers or conversions.

Avoid Last Minute Mistakes. Even if you aren’t required to take your 2025 RMD now, there are still good reasons why you should go ahead and do so. Waiting until late in the year is a recipe for trouble. The holiday season is busy and your RMD can get lost in the shuffle. Or, maybe you are charitably inclined and looking to satisfy your RMD by doing a qualified charitable distribution (QCD). This will require the custodian to send funds directly to charity and the charity must cash the check. These steps require some time and coordination. Taking care of these transactions now is a good move because you have plenty of time to check and be sure that everything is done properly.

Now Instead of Later

For many, taking an RMD is a year-end ritual. Maybe it’s time to change that mind set. The rules may require you to address your RMD sooner. Even if you can wait, it can be smart planning to take your 2025 RMD now instead of later.

https://irahelp.com/slottreport/why-you-should-take-your-2025-rmd-now/

Inherited IRAs – Bankruptcy Protection?

By Andy Ives, CFP®, AIF®
IRA Analyst

Just over 10 years ago, in June 2014, the U.S. Supreme Court ruled unanimously, 9-0, that inherited IRAs are NOT protected in bankruptcy under federal law. The primary issue before the Court was whether an inherited IRA is a “retirement account.” Considering the fact that “inherited IRA” is short for “inherited individual retirement arrangement,” this would seem like an odd question to debate. The word “retirement” is right there in the name. Nevertheless, the Supreme Court felt that three primary characteristics of inherited IRAs were not features of a “retirement” account. Those three characteristics were:

Beneficiaries cannot add money to inherited IRAs like IRA owners can to their own accounts. This is true. If a person inherits an IRA from any other person, that beneficiary cannot make any contributions to the inherited IRA. The beneficiary cannot roll over any of their own IRA dollars into that inherited IRA, and they cannot do any Roth conversions with the inherited IRA. Of course, a spouse beneficiary has the option of doing a spousal rollover of the inherited account into her own IRA. The surviving spouse can then make contributions to the account, but this account is no longer considered “inherited.” After a spousal rollover, the account is deemed to have been owned by the surviving spouse since Day 1 and is hers to do with as she pleases.

Beneficiaries of inherited IRAs must generally begin to take required minimum distributions (RMDs) in the year after they inherit the account, regardless of how far away they are from retirement. Remember, this Supreme Court ruling came down in 2014, well before the SECURE Act. Back in the day, under the old rules, any living, breathing beneficiary could set up an inherited IRA and start taking annual RMDs in the year after the year of death. (Now we have the 10-year rule for certain beneficiaries, and annual RMDs do not always apply within the 10-year period.) These annual “stretch” RMDs are based on the beneficiary’s single life expectancy. Annual RMDs do not apply to the original IRA owner until he reaches RMD age (currently age 73). Since annual RMDs applied to beneficiaries at any age (again, under the old rules), then inherited IRAs are NOT retirement accounts.

Beneficiaries can take a total distribution of their inherited IRA at any time and use the funds for any purpose without a penalty. IRA owners under age 59½ cannot take lifetime, penalty-free distributions from their own IRA unless an exception to the 10% early withdrawal penalty applies. The 10% penalty does not apply to distributions from an inherited IRA. A beneficiary at any age can completely drain the inherited account without penalty (although taxes may apply). Therefore, inherited IRAs are NOT retirement accounts in the eyes of the Supreme Court.

A handful of states disagree. For example, Idaho does offer bankruptcy protection to inherited IRAs. But for most inherited IRA owners, it is important to recognize that the favorable bankruptcy protection afforded to such funds under the Federal Bankruptcy Code does NOT extend to them. Based on the Supreme Court’s reasoning on the three items above, this seems like a sensible conclusion.

https://irahelp.com/slottreport/inherited-iras-bankruptcy-protection/

Weekly Market Commentary

Weekly Market Commentary

Darren Leavitt, CFA

US financial markets were extremely busy last week as a rush to download a Chinese AI platform called Deep Seek from Apple’s App Store seemingly changed the narrative around artificial intelligence in a heartbeat and on multiple fronts.  Capital expenditures and the return on investment questions were front and center on Wall Street and tested current earnings estimates and valuations for these AI-related companies. NVidia, an AI darling, saw its shares tumble 17%, the largest one-day loss of market capitalization in history.  Investors also digested 4th quarter earnings from almost 40% of the S&P 500, including Tesla, Microsoft, Apple, and Meta.  Earnings results were met with mixed responses.  For instance, Microsoft’s quarter appeared solid, but inline cloud results induced a steep sell-off in shares.  The Federal Reserve’s Open Market Committee meeting yielded no change to its policy rate.  Fed Chairman Powell acknowledged that inflation continues to be elevated, and the labor market appears solid.  The Fed is in wait-and-see mode, and at this point, it’s possible the markets will not get a rate cut in 2025.  Tariff policy also came into play toward the end of the week, agitating markets as Trump levied 25% tariffs on Canada and Mexico while putting an additional 10% tariff on China.  The President also said tariffs would be imposed on Europe.

The S&P 500 shed 1% but closed the month higher by 2.7%.  The Dow managed a gain of 0.3% and closed the month up 4.7%.  The NASDAQ fell by 1.6% and posted a 1.6% gain for January.  The Russell 2000 lost 0.9% and added 2.6% for the month.  US Treasuries advanced this week in volatile trade and ended the month flat.  The 2-year yield fell by three basis points to 4.24%, while the 10-year yield declined by six to 4.57%.  Oil prices fell by 2.8% or $2.14 to close the week at $72.46.  Oil prices rallied late in the week on the idea that Trump would impose tariffs on energy.  Gold prices traded to new all-time highs in a safe-haven bid.  Prices rose by $55.60 to close the week at 2834.10 an Oz.  Copper prices fell by five cents to $4.27 per Lb.  Bitcoin prices fell by 2.36%, closing the week at $102,240.  The US Dollar index rallied on the idea of tariffs and closed the week higher by 0.80 to close the week at 108.38.  Notably, the Mexican Peso and Canadian Dollar sold off hard on Trump’s tariff announcement but ended the month flat relative to the US Dollar.  It’s also worth mentioning that Trump’s strong rhetoric on the US Dollar maintaining its reserve currency status was aimed directly at the BRICS nations (Brazil, Russia, India, China, and South Africa).  For some time, these countries have floated the notion of moving away from utilizing the US Dollar.

The economic calendar was also quite busy.  The Fed’s preferred measure of inflation, the PCE, showed an increase of 0.3% on the headline number and an increase of 0.2% on the Core reading.  These results were in line with the street’s expectations.  On a year-over-year basis, the headline number rose by 2.6%, up from 2.4% in November, while the Core measure rose for the third consecutive month by 2.8%.  Personal income rose by 0.4%, in line with the consensus estimate, while personal spending increased by 0.7%, above the estimated 0.5%.  4th Quarter GDP showed growth of 2.3%, down from 3.1% in the 3rd quarter.  The Atlanta Fed GDPNOW 1st quarter 2025 estimates growth of 2.9%.  Initial Jobless Claims fell by 16k to 207k, while Continuing Claims fell by 42k to 1.858M, showing the labor market continues to be solid.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

RMDS FOR ANNUITIES AND SPOUSAL BENEFICIARY RULES: TODAY’S SLOTT REPORT MAILBAG

By Ian Berger, JD
IRA Analyst

 

Question:

I have an IRA holding an immediate annuity as well as other IRAs. With the passage of the SECURE 2.0 Act, l understand that I may be able to apply my monthly annuity payments against my RMD requirement for all of my IRAs. The only valuation I can get on my annuity is the year-end fair market value. Can you provide any update to any IRS ruling on this?

Tom

Answer:

Hi Tom,

Your understanding of the SECURE 2.0 provision is correct. The IRS confirmed this in regulations issued last July. Since you have a year-end valuation of the annuity from the insurance company, you can take advantage of this rule. For 2025, first calculate the total RMD of all of your IRAs (using 12/31/24 values divided by your life expectancy under the IRS Uniform Lifetime Table). Then, you will only need to take RMDs from your non-annuity IRAs equal to that total RMD minus the sum of your monthly annuity payments.

Question:

In a previous answer to a question submitted to the Slott Report Mailbag, you said section 327 of the SECURE 2.0 Act applies to an IRA inherited by a spouse beneficiary. I thought that these new rules for spouse beneficiaries only apply to spouse beneficiaries of employer plans and not  IRAs. Is this true?

Answer:

No, the IRS has made clear that the section 327 rules apply to spouse beneficiaries of both employer plans and IRAs.

https://irahelp.com/slottreport/rmds-for-annuities-and-spousal-beneficiary-rules-todays-slott-report-mailbag/

If you’re nearing retirement, these 2025 changes could affect your finances. Here’s what to know

If you’re nearing retirement, these 2025 changes could affect your finances. Here’s what to know

Key Points
  • If you’re nearing retirement, key changes for 2025 could affect your finances, according to advisors.
  • Starting in 2025, there’s a higher 401(k) plan catch-up contribution for workers ages 60 to 63.
  • Plus, there are new rules for inherited individual retirement accounts and boosted Social Security benefits for certain public workers.

As President Donald Trump kicks off a second term, many older investors are focused on how shifting policy could affect their wallets.

But some key changes for near-retirees were already enacted for 2025. These updates could have a big impact on your finances — and may easily be missed, financial experts say.

Nearly half of Americans ages 55 to 64 don’t feel prepared to retire by their target date, according to a survey from the American Savings Education Council, which polled more than 2,000 U.S. adults in early 2024.

More from Personal Finance:
Vanguard’s $106 million target-date fund settlement offers tax lesson
There’s a ‘big change’ for inherited IRAs in 2025, advisor says
Investors may be able to file taxes for free this season. Here’s who qualifies

But planning around these 2025 changes could boost retirement security, experts say. Here’s what older workers need to know.

Leverage the 401(k) ‘super catch-up’

For 2025, investors can save more with higher 401(k) plan limits. Employees can defer $23,500 into 401(k) plans, up from $23,000 in 2024. The catch-up contribution limit is $7,500 for workers ages 50 and older.

But thanks to Secure 2.0, there’s a “super catch-up” for investors ages 60 to 63, said certified financial planner Michael Espinosa, president of TrueNorth Retirement Services in Salt Lake City.

The catch-up contribution for employees ages 60 to 63 jumps to $11,250 for 2025. That brings the total deferral limit to $34,750 for these workers.

“This could be huge” for deferring taxes in 2025, Espinosa said.

Some 15% of eligible participants made catch-up contributions in 2023, according to Vanguard’s 2024 How America Saves report, based on data from 1,500 qualified plans and nearly 5 million participants.

Avoid a penalty for inherited IRAs

An inherited individual retirement account could boost your nest egg. However, some heirs may face an IRS penalty for missed required withdrawals in 2025, experts say.

With more focus on shifting economic policy, “it’s easy to see how this one could get buried,” said CFP Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.

Since 2020, certain inherited accounts must follow the “10-year rule,” meaning heirs must empty inherited IRAs by the 10th year after the original owner’s death. This applies to heirs who are not a spouse, minor child, disabled, or chronically ill, and certain trusts.

Starting in 2025, the IRS will enforce the penalty on heirs for missed required minimum distributions, or RMDs. The penalty is 25% of the amount that should have been withdrawn. But it’s possible to reduce that penalty if your RMD is “timely corrected” within two years, according to the IRS.

Heirs must take yearly withdrawals if the original IRA owner had reached their RMD age before death.

Social Security benefit change is ‘significant’

If you or your spouse work in public service and expect to receive a pension, new legislation could mean higher Social Security benefits in retirement.

Enacted by former President Joe Biden in January, the Social Security Fairness Act ended two provisions — the Windfall Elimination Provision and Government Pension Offset — that lowered benefits for certain government employees and their spouses.

“This change is significant for many retirees who had their benefits eliminated or reduced,” said CFP Scott Bishop, partner and managing director of Presidio Wealth Partners, based in Houston.

The Social Security Administration is working on the timeline for the new legislation and will update its website when more details are available.

https://www.cnbc.com/2025/01/25/retirement-changes-for-2025.html

What Are My Contribution Limits If I Participate in Two Company Savings Plans?

By Ian Berger, JD
IRA Analyst

 

You probably know there’s a limit on the amount of pre-tax and Roth contributions you can make to your company savings plan each year. The 2025 elective deferral limit is $23,500 for 401(k), 403(b) and 457(b) plans and is either $16,500 or $17,600 for SIMPLE plans (depending on the size of your employer). If you’re age 50 or older, you can make additional catch-up contributions beyond these limits, and if you’re age 60, 61, 62 or 63, you may qualify for even higher catch-ups.

But what if you’re in two different plans at the same time or in two different plans during the same year after changing jobs? Do you get a separate elective deferral limit for your pre-tax and Roth contributions to each plan? The answer is generally no. The cap for pre-tax and Roth employee contributions is usually a “per-person” limit – not a “per-plan” limit. So, your contributions to all plans are normally aggregated when the limit is applied. It doesn’t matter if the plans are sponsored by companies that are totally unrelated under the tax rules.

Example 1: Samar, age 49, has a 401(k) through his regular job with Crypto Solutions and a solo 401(k) through a computer repair side gig. The most that Samar can defer between the two plans for 2025 is $23,500. It doesn’t matter that Crypto and his computer repair company are unrelated businesses.

Why do we say “generally,” “usually,” and “normally?” Well, like most tax rules, it’s just not that simple. There are two exceptions to the rule that requires aggregation of contributions to multiple plans. First, traditional (non-Roth) after-tax contributions, if allowed by the plan, don’t count towards the $23,500 elective deferral limit (although they do count towards the overall contribution limit, discussed in the next paragraph). Second, 457(b) plans have their own separate limit.

Besides the elective deferral limit, there’s another annual cap to worry about – the overall contribution limit (sometimes referred to as the “415 limit”). This limit is the maximum amount of ALL contributions that can be made to a plan in any year. Both your own contributions – pre-tax, Roth or after-tax (non-Roth) – and your employer’s contributions (matching or profit sharing) are counted. For 2025, the overall contribution limit is $70,000 (higher if catch-up contributions are made).

Generally, contributions made to two plans sponsored by businesses considered related under IRS rules are combined for the overall limit. But if you’re in two plans maintained by separate unrelated companies, contributions generally aren’t combined, and you get the benefit of a separate overall cap for each plan.

Example 2: Crypto Solutions and Samar’s computer business (from Example 1) are considered unrelated businesses. So, for 2025, Samar has a separate overall limit for each 401(k) plan and could theoretically have a total of $140,000 ($70,000 x 2) in combined contributions. However, to achieve that result, he would have to make a large amount of after-tax employee contributions and/or receive a large amount of employer contributions. In any case, Samar’s combined pre-tax and Roth contributions between the two plans would still be limited to $23,500.

https://irahelp.com/slottreport/what-are-my-contribution-limits-if-i-participate-in-two-company-savings-plans/

 

Are HSAs Going Roth?

By Sarah Brenner, JD
Director of Retirement Education

Many of the provisions of the Tax Cuts and Jobs Act are scheduled to expire at the end of 2025. There are currently a number of proposals in the works in Congress to extend these tax cuts. A serious hurdle is how to pay for them. One interesting legislative proposal that has surfaced to cover the cost is the possibility of requiring Health Savings Accounts (HSAs) to be made on a Roth basis.

How HSAs Work

Under current law, an HSA is a tax-free account that is used to pay for qualified medical expenses that aren’t covered by insurance. It is similar to an IRA in that it’s a custodial or trust account set up with a financial institution that is owned and controlled by the individual, not by the employer.

In order to contribute to an HSA, an individual must be:

1. Covered by a high deductible health plan (HDHP),

2. Not enrolled in Medicare, and

3. Not eligible to be claimed as a dependent on someone else’s tax return

Everyone gets a full federal income tax deduction for the HSA contributions they make. There is no income limit or phase-out. It is an above-the-line deduction rather than an itemized deduction, so it’s available even if the standard deduction is taken on the tax return.

HSA withdrawals are tax-free when used to pay for qualified medical expenses of the account owner, his spouse, or dependents. Also, the HSA can be used to reimburse the account owner for qualified medical expenses he already paid for. Generally, qualified medical expenses are those that would be eligible for the medical expense tax deduction if someone was itemizing expenses on their tax return. They usually include all medical and dental expenses and prescription drugs (but not over-the counter medicines). IRS Publication 502, Medical and Dental Expenses, has comprehensive lists of what expenses are, and are not, qualified medical expenses.

If the HSA is not used for qualified medical expenses, then the distribution is not tax-free but instead is taxed as ordinary income and is also subject to a 20% penalty. If the individual is age 65 or older or has died or become disabled, then the 20% penalty won’t apply, but the distribution is still taxable if it wasn’t used for qualified expenses.

HSAs are an extremely tax-efficient way to pay for medical expenses. HSAs can be used to pay for current medical expenses on a tax-free basis – just like qualified Roth IRA distributions. Plus, regular HSA contributions made by a client are tax-deductible – just like most traditional IRA contributions.  It’s like getting the best of both worlds, at least when it comes to medical expenses.

Roth HSAs – A Bad Bargain for Savers

Any Roth account is funded with after-tax revenue. Requiring a contribution to an HSA to be made as a Roth contribution would be a win for Congress because they would generate immediate revenue. However, for taxpayers that would be a loss. While savers could still enjoy the benefit of tax-free distributions if HSAs become Roth accounts, they would lose the ability to deduct their contributions. That seems like a bad bargain for savers. At The Slott Report, we will be following this potentially detrimental legislative proposal closely as we watch Congress debate tax code changes.

Stay tuned!

https://irahelp.com/slottreport/are-hsas-going-roth/

 

Weekly Market Commentary

Weekly Market Commentary

Darren Leavitt, CFA
Wow, what a week! US markets were closed on Monday for Martin Luther King Jr. Day, and Donald Trump was inaugurated as the 47th President of the United States. It was a historic day indeed. The global markets were poised for a barrage of executive orders on Trump’s first day back in office, and he did, in fact, execute 26 orders on his first day back.  The President declared a national emergency at the southern border and said the government should take all appropriate action to stop and remove illegal immigrants.  Trump also issued an order to restrict birthright citizenship.  Trump announced a national energy emergency while also calling out OPEC and Saudi Arabia to lower oil prices.   Tariff policy has been top of mind for Wall Street, and Trump surprised with the announcement of 25% tariffs on Mexico and Canada that may be levied as soon as February 1st.  The President did not announce additional tariff policies on China and Europe.  The announcement of a $500 billion AI infrastructure project called Stargate fueled optimism in AI.  Later in the week, Meta announced it would likely spend $60-$65 billion in Capex aimed at their AI initiatives.   According to the Economist, The World Economic Forum in Davos, Switzerland, had three distinct narratives: trade policy, Artificial intelligence, and European competitiveness.  Interestingly, climate change discussions were on the back burner as Trump announced several moves away from subsidized clean energy.  Trump announced that the US would no longer participate in the Paris Accord on climate change and that it would depart the World Health Organization.  At Davos, Trump also called on European NATO members to earmark 5% of their GDP to NATO.  President Trump saw his nominees, Marco Rubio (Secretary of State) and Pete Hegseth (Secretary of Defense), confirmed by Congress.

Fourth-quarter earnings results also encouraged markets. Netflix, MMM, Proctor and Gamble, Travelers, and United Healthcare stood out as winners.  Texas Instruments and Boeing shares fell after their results.  Apple shares were also under pressure after a Bloomberg report suggested that iPhone sales in China have fallen by 18%.  In the coming week, we will get a look at Q4 earnings from Apple, Meta, Microsoft, Amazon, and Tesla.

The S&P 500 gained 1.7% and forged an all-time high Thursday.  The Dow rose 2.2%, the NASDAQ climbed 1.7%, and the Russell 2000 notched a 1.4% gain.  The US Treasuries markets were quiet, which also allied the move in equities.  The 2-year yield was unchanged on the week, closing at 4.27%.  The 10-year yield increased by two basis points to 4.63%.  The Federal Reserve meets in the coming week, and they are widely expected to keep rates at the current level.  That said, Trump’s demand that all Global Central Banks cut rates will add an interesting twist to the Q&A session for Fed Chairman J. Powell post-meeting.

Oil prices fell 3.5% following Trump’s call for lower oil prices.  Last week, the energy sector was the lone loser among the S&P 500’s 11 sectors.  Gold prices increased by $30 to $2778.50 an Oz.  Copper prices fell by four cents to $4.32 per Lb.  Bitcoin’s price fell by 1.25% over the week to $104,740.  The Dollar index tumbled 1.8% to 107.58.  Notably, the Japanese Yen rallied on the Bank of Japan’s decision to raise its policy rate by 25 basis points to 0.50% while indicating the bias for another hike in the future.

The economic calendar was pretty quiet.  Initial Jobless Claims ticked higher by 5k to 223k, while Continuing Claims increased by 46k to 1.899M.  S&P Global Manufacturing came in better than expected at 50.1, but the Services figure surprised to the downside, coming in at 52.8, down from 56.8 in the prior reading.  The final look at the University of Michigan’s January Consumer sentiment index showed a decline to 71.1 from 74 in December.  Concerns regarding employment and inflation were evident in the report.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

A Checklist for Retiring in 2025

A Checklist for Retiring in 2025

Our checklist for retiring next year includes everything you need to do before the retirement party.

Only you can know if you’re ready for a checklist for retiring in 2025. If you’re 60 or getting there, retirement is no longer a hazy concept in the distance. It’s a real deadline. In five or six years, or maybe just a year. Or six months. Or even six weeks. You are going to leave your full-time job, not for a new phase in a working career, but for a largely unknown future.

Ideally, you’ve prepared financially and otherwise ahead of this looming date to ensure a calm, rather than chaotic, transition. If you’re hyper-organized, you may have already ticked off most of the 10-year checklist for retirement planning tasks. But the lead-up to the last day requires a sharpened focus. What do you need to know about your finances? Your health insurance? When do you tell your boss and colleagues? And how do you leave your job looking forward to a new phase, rather than looking back and longing?

Money and health 

Line ’em up. Presumably, you’ve been accruing money in some combination of retirement accounts, pensions, money markets and brokerage accounts to fund a fairly comfortable retirement. It’s time to decide the best way to use those accounts before the last paycheck stops.

Only you can know if you’re ready for a checklist for retiring in 2025. If you’re 60 or getting there, retirement is no longer a hazy concept in the distance. It’s a real deadline. In five or six years, or maybe just a year. Or six months. Or even six weeks. You are going to leave your full-time job, not for a new phase in a working career, but for a largely unknown future.

Ideally, you’ve prepared financially and otherwise ahead of this looming date to ensure a calm, rather than chaotic, transition. If you’re hyper-organized, you may have already ticked off most of the 10-year checklist for retirement planning tasks. But the lead-up to the last day requires a sharpened focus. What do you need to know about your finances? Your health insurance? When do you tell your boss and colleagues? And how do you leave your job looking forward to a new phase, rather than looking back and longing?

Money and health 

Line ’em up. Presumably, you’ve been accruing money in some combination of retirement accounts, pensions, money markets and brokerage accounts to fund a fairly comfortable retirement. It’s time to decide the best way to use those accounts before the last paycheck stops.

Only you can know if you’re ready for a checklist for retiring in 2025. If you’re 60 or getting there, retirement is no longer a hazy concept in the distance. It’s a real deadline. In five or six years, or maybe just a year. Or six months. Or even six weeks. You are going to leave your full-time job, not for a new phase in a working career, but for a largely unknown future.

Ideally, you’ve prepared financially and otherwise ahead of this looming date to ensure a calm, rather than chaotic, transition. If you’re hyper-organized, you may have already ticked off most of the 10-year checklist for retirement planning tasks. But the lead-up to the last day requires a sharpened focus. What do you need to know about your finances? Your health insurance? When do you tell your boss and colleagues? And how do you leave your job looking forward to a new phase, rather than looking back and longing?

Money and health 

Line ’em up. Presumably, you’ve been accruing money in some combination of retirement accounts, pensions, money markets and brokerage accounts to fund a fairly comfortable retirement. It’s time to decide the best way to use those accounts before the last paycheck stops.

account is just as much of a safety net as your IRA. Decide what’s going to be the most tax-efficient way to pull it out so your money lasts as long as possible. Never let low tax brackets go to waste in creating your income in early retirement.”

Pay those debts. It’s a great idea to go into retirement debt-free — if you can manage it and still have some liquidity. It’s critical to have a healthy savings account that can be drawn on in an emergency, McClanhan says. And you don’t want to pay off the mortgage and then be living on your IRA, with the taxes that will accrue.

“If you are one of those lucky people that has an old mortgage at 2.5% interest, it’s crazy to pay off the mortgage,” she adds. “But if your mortgage interest rate is higher than what you can earn in a savings account, you probably should pay it off.”

Unused vacation? If your company has a policy of paying for unused vacation days, consider delaying any vacations until after retirement and collecting the money.

Health insurance maze. Retirement at 65 years or older makes things much easier in the health insurance arena since Medicare will be available.

If you retire before 65, that’s another matter. The federal law known as COBRA allows someone leaving a company to stay on the company’s health care plan for up to 18 months — but it is expensive, McClanhan warns

Other options are joining a spouse or partner’s health insurance if available or buying it through the Affordable Care Act on the open market; there’s a limited sign-up period after retirement, so there’s no need to wait until the special enrollment period.

Life, disability insurance? If your employer offers life insurance and disability insurance, decide whether it makes sense to replace it out of your own pocket. Life insurance often isn’t necessary if both you and a partner are retired with enough savings and don’t have dependents, experts say. And since disability insurance only covers lost income, it’s unnecessary once retired.

Visit your doctors. Don’t delay doctors’ appointments until after retirement, even if it seems to make sense because you’ll have more time. Rather, catch up on all your doctors’ visits and routine screenings before leaving your job.

That’s what Carolyn Bodkin, 61, of Branford, Conn., decided to do when she retired in August after working at a major publishing house for 39 years — because she wasn’t sure exactly what her health insurance would look like after leaving work.

That’s especially true with vision and dental care because traditional Medicare and many plans offered under the ACA don’t offer such coverage. However, most Medicare Advantage plans include them as extras. If your plan doesn’t have dental and vision coverage, you might want to buy it separately, but McClanahan says

this coverage is generally “not worth it because it’s expensive and barely covers anything.”

Another reason to make sure you’re up-to-date with all your health needs: the administrative work related to COBRA can take a while to kick in, and during that period, you will have to pay for everything out of pocket, although COBRA does retroactively cover medical costs from the day your company insurance expires, she adds. Also, make sure you have extra medication on hand in case it takes longer than expected to move to a new plan.

Social and emotional preparation

Anticipate the future. If there’s a universal piece of advice from retirement experts, it’s this: don’t put off thinking about what your retirement will look like until the day you’ve left work. That can be a recipe for some unhappy months or years.

There’s a reason that a TED Talk by Riley Moynes, a former financial adviser, has been viewed more than 3 million times online. It’s about struggling with retirement.

“I thought I had a pretty good idea of what success looked like in a working career, but when it came to retirement, it was fuzzier for me,” he says in his presentation. After interviewing dozens of retirees, he says he discovered that most people move through in retirement in four phases — a concept he turned into a book, The Four Phases of Retirement: What to Expect When You’re Retiring.

The first is the vacation phase — sleeping in, lounging, taking those long-delayed trips. This, he says, lasts for about a year.

Then, in phase two, boredom can set in, and people can feel “loss and lost,” Moynes says in his talk. They might face fear, anxiety and depression.

Many people struggle in phase two, but find a way out by entering phase three, he says: Figuring out what you like to do and what you do well by trial and error.

Moynes speaks about how he investigated becoming a paralegal, which didn’t go anywhere. He also started a program on writing memoirs that he says “met with limited success.”

Not everyone gets to phase four, which is finding a meaningful purpose in life, perhaps by volunteering, starting a nonprofit or caring for family or friends. Those who do, however, “are some of the happiest people I’ve met,” he says.

Game plan. One way to minimize phase two can be to think seriously about how you will replace some of the more intangible benefits of the workplace before you’re out the door.

Once you know you’ve got the money you need to retire, “instead of rehashing the numbers, focus on the non-financial benefits that you’re getting at work, which a lot of people don’t even recognize,” said Fritz Gilbert, founder of the website The Retirement Manifesto.

Gilbert has identified five benefits that many people get from their jobs and may miss deeply when they retire:

  • A sense of identity. “No one cares if you’re vice-president of operations now,” Gilbert says. “Now you’re just another retired person.”
  • A sense of accomplishment by starting and finishing projects, for example.
  • A structured day.
  • Social interactions. Even if you didn’t hang out with colleagues outside of work hours, there’s usually ongoing interactions during the day that help you avoid loneliness. That can feel like a real loss when it disappears, Gilbert adds.
  • A sense of purpose. That is bigger than simply finishing a project and is more about contributing to something larger than yourself.

“In the work I do, I see a big difference between people who go all in the last year of work versus those who say, ‘Well, I’m going to really take maybe 10% to 20% of my time and shift it toward things I can do to get a head start on,’” says Joe Casey, an executive and retirement coach and host of the podcast Retirement Wisdom.

Use the last year to develop a game plan, he says; one way to start thinking about it is like managing a portfolio. But instead of it being financial, it’s a time portfolio with the same principles of diversification and rebalancing.

That could involve participating in a new activity or with groups that might broaden social connections, he says. “I see people who look back and regret they didn’t do that” before retirement.

Change the narrative. How we think about retirement is often connected to how we think about age, says Mary Jo Saavedra, a gerontologist who helps people plan for retirement.

“What the broader culture has trained us to think about retirement is decline,” she says. “It’s really important that we change the narrative that the media, movies and that culture would have us believe — that you become invisible as you age.” Saavedra is the author of Eldercare 101: A Practical Guide to Later Life Planning, Care and Wellbeing.

A research study of 14,000 adults over 50 found that feeling better about one’s own aging is associated with fewer physical and mental health problems.

You do you

Be yourself. With all that said, the most important thing is to know there are many variations of retirement.

Howard Mizrachi, 68, of Larchmont, N.Y., who worked as a surgical pathologist for almost 35 years, prepared intensively for retiring and understood that the social and emotional part was as important as the financial side.

But he decided he didn’t have to figure it all out at once. “I gave myself permission not to know what I was going to do.”

His two years of retirement so far have been wonderful. Gardening, running, taking walks with his wife, playing bridge, helping take care of his grandchild, reading and doing projects around the house have been very fulfilling. He hasn’t felt the need to create more of a schedule or line up activities.

“I’m very fortunate,” he says. “I had a real sense of purpose and fulfillment with my career. I’m thankful to have been able to do that and in this part of retirement I’m not focused so much on that. I spent my whole life being structured.”

Alicia Munnell, who founded the Center for Retirement Research at Boston College in 1998, may know more than just about anyone about retirement. So, when the college recently announced her retirement at age 82, she was more than ready.

“People look at me very earnestly and ask, ‘What are you going to do?’” she says. “I plan to take goofing off very seriously. I’m not worried about being bored at all. If I am, maybe I’ll become a ballerina.”

The last few months and weeks

Tell the boss. You’ve got everything lined up and now you need to tell the boss. How much notice should you give? Teresa Amabile, a professor emerita at Harvard Business School, and her co-authors interviewed 120 people — 83 of them 55 years and older — for their book, Retiring: Creating a Life That Works for You. They were all knowledge workers relatively high up on the career ladder, leaving successful companies.

One employee gave five years’ notice. Another, a weekend.

Those were the extremes, Amabile says, and many had contracts that specified how much notice one had to give. But the average, she says, seemed to be about two months.

Much depends on the type of job and expectations. The rule of thumb tends to be the more senior position, the more notice is given; in all jobs, at least two-weeks’ notice is considered common courtesy even if not mandated, writes Jamie Birt, a career counselor.

Those who have been at their jobs for many years often want to give more than the required minimum. That was the case with Mizrachi.

“My contract said I had to give three months, but I thought I had better give six months to give them more time to replace me,” he says.

‘Please stay.’ Also, be prepared to respond to common questions, such as whether you’re willing to stay longer or work part-time. Bodkin, who worked in publishing, agreed to stay a few more months past her chosen retirement date. Mizrachi, who was asked if he’d continue part-time, declined. He was ready to move on.

Goodbye, office mates. When should you tell your colleagues and clients? People often worry co-workers will treat them differently once they say they’re leaving; Amabile says that one person interviewed for her book waited until the last minute “because he didn’t want to be yesterday’s news.”

There is no set time frame for letting coworkers know. It depends, she says, “on whether a person has sufficient trust that their colleagues will not ignore them or completely sideline them once they know about retirement.” If you have faith that particularly close colleagues can keep it to themselves, experts say, you might want to tell them earlier than others so they don’t feel blindsided.

Also, be sure to let your professional network know of your retirement and, if you want, include a personal email where you can be reached.

Transfer the personal stuff. While there’s the big picture in disentangling from work life, there are also the little details. You may not have access to your work computer and files once you walk out the door, so be sure to take anything you (legally) can and want. Don’t forget your list of professional contacts you may want to reach out to in the future.

If you use a work email for your personal contacts, set up a separate email at least several weeks before leaving and move your non-work contacts into it. This part proved particularly important for Bodkin, who solely used her work email and cell phone for her personal life. “I had to contact everyone I know and change the email and phone numbers — our doctors, stockbroker, the local club where I play tennis. It was very time-consuming.”

Just chill. Tell your family and friends what your plans are in the immediate weeks before retiring — before they make them for you.

“I made it really clear to my husband that I was going to decompress for the first couple of months,” says Bodkin, who worked full-time while raising four children. “And I didn’t want him to ask, ‘What did you do today?’ I play a lot of tennis, read and love going to the library. I’m meeting new people and getting to know old friends better. “

There are bound to be a number of issues that come up as you’re winding down a major portion of your life. But with the proper preparation, by the time the last day at work arrives, the only remaining question is what type of wine to serve for your retirement toast.

https://www.kiplinger.com/retirement/retirement-planning/a-checklist-for-retiring-in-2025

Rollovers and Inherited IRAs: Today’s Slott Report Mailbag

By Sarah Brenner, JD
Director of Retirement Education

 

Question:

I have a large non-qualified 457 deferred compensation plan and I am required to take distributions. I am looking to minimize taxes. Can I roll over these funds to an IRA?

Answer:

Unfortunately, this will not work. A non-qualified deferred compensation plan is not eligible for rollover to an IRA.

Question:

Hello,

I had a question concerning inherited Roth IRAs. I know that in the past you have said that no required minimum distribution (RMD) is required for these accounts. Does this include inherited Roth IRAs that were created prior to the SECURE ACT changes? There is so much confusion on Roth IRA RMDs, so I wanted to be sure.

Thank you!

Kade

Answer:

Hi Kade,

This is an area of great confusion! Non-eligible designated Roth IRA beneficiaries (NEDBs) are not required to take annual RMDs during the 10-year period. However, there are other situations where annual RMDs are required for Roth beneficiaries. Roth IRA beneficiaries who inherited prior to 2020 (when the SECURE Act became effective) must still take these annual RMDs. Eligible designated beneficiaries (EDBs) who inherited after SECURE and are using the “stretch” must also take annual RMDs from an inherited Roth IRA.

https://irahelp.com/slottreport/rollovers-and-inherited-iras-todays-slott-report-mailbag-2/

529-to-Roth IRA: False Alarm

By Andy Ives, CFP®, AIF®
IRA Analyst

 

When the “check engine” light comes on in a vehicle, most people are rightfully concerned that something is wrong. When a fire alarm blares through a building, it is wise to take stock of your surroundings. And when a member of Ed Slott’s Elite IRA Advisor Group calls and says a red alert popped up on his monitor as he attempted to do a 529-to-Roth rollover, we must assess the situation. In the end, it is our opinion that the warning notification on the advisor’s computer was incorrect. A false alarm. What was the computer worried about?

Yes, there are a number of restrictions when it comes to moving money from a 529 plan to a Roth IRA. For example:

  • The Roth IRA must be in the name of the 529 beneficiary.
  • The maximum amount that can be rolled over in a lifetime is $35,000.
  • The 529 plan must have been open for more than 15 years.
  • Rollovers are subject to the annual Roth IRA contribution limit.
  • Etc., etc.

In this case, it appeared that all the proper boxes were checked, and the coast was clear for the advisor to proceed. He completed a successful 529-to-Roth transaction in December 2024, and was now trying to execute another 529-to-Roth rollover for the same client in January 2025. Yet the computer was flashing a red alert. The message said that, when processing a 529-to-Roth rollover, the one-rollover-per-year rule must be considered. It is our interpretation that this is UNTRUE (although definitive guidance is needed). The SECURE Act explicitly states that, to qualify as a 529-to-Roth rollover, the transaction must be “paid in a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of such designated beneficiary.”

So, if the transaction must be completed as a direct trustee-to-trustee transfer, then the rollover rules are irrelevant. You cannot do a 529-to-Roth transaction as a 60-day rollover. As such, the one-rollover-per-year rule does not apply to 529-to-Roth IRA transfers. In hindsight, it’s easy to see where the confusion comes from. It’s all about terminology, and when a transaction is broadly referred to as a 529-to-Roth “rollover,” it is no surprise red flags go up.

Further proof (in our opinion) that the rollover rules do not apply to these transactions is that 529-to-Roth IRA transfers are considered Roth IRA contributions. The normal contribution limits apply. Any amount transferred from a 529 plan to a Roth IRA reduces the amount of a “regular” Roth IRA contribution the 529 beneficiary can make for that same year. Therefore, since these dollars are contributions, the rollover rules appear to be again rendered moot.

Alarms exist to keep people safe, and they should be heeded. However, sometimes a check engine light goes on for no ascertainable reason. Sometimes a jerk pulls a fire alarm as a bad joke, and sometimes computer software is incorrect. In this case, the advisor played his cards well. Assess the situation, contact the Ed Slott team, and proceed with confidence.

https://irahelp.com/slottreport/529-to-roth-ira-false-alarm/

 

One Roth IRA Rule Congress Should Do Away with Now

By Sarah Brenner, JD
Director of Retirement Education

Today is Inauguration Day. A new administration has arrived. We also have a new Congress. With the arrival of newly elected officials, many will have hopes of legislative change. When it comes to retirement accounts, one rule that the new Congress should consider changing immediately is the income limit rule that applies to Roth IRA contributions. This pointless rule should be eliminated.

The Roth IRA Income Limits

The Roth IRA tax year contribution limit for 2024 and 2025 is $7,000. Those who are age 50 or older by the end of the year can contribute $8,000. However, not everyone is eligible to contribute to a Roth IRA. Congress has placed income restrictions on Roth contributions. Here are the limits on modified adjusted gross income for Roth tax year contributions:

                                                                           Single or Head
Year             Married/Joint                     of Household
2023         $218,000 – $228,000                   $138,000 – $153,000
2024         $230,000 – $240,000                   $146,000 – $161,000
2025         $236,000 – $246,000                   $150,000 – $165,000

Why Congress Should Do Away with Roth IRA Income Limits

There are several reasons why the new Congress should make the Roth IRA contribution income limits history.

The backdoor is wide open. The Roth IRA contribution limits are not stopping high income savers. There is an easy workaround. You can simply make a nondeductible traditional IRA contribution (no income limits apply) and then convert it to a Roth IRA (no income limits apply).

While there may have been concerns about this strategy years ago, there has been no evidence that either Congress or the IRS is doing anything to prevent these transactions. In fact, Congress indirectly “blessed” the backdoor Roth IRA conversion in the committee report to the Tax Cuts and Jobs Act.

The only people not rushing through the backdoor are those individuals with existing taxable traditional, SEP or SIMPLE funds. They will get stuck with a tax bill on the conversion due to the complicated pro-rata formula rules that apply to conversions. Even these unlucky individuals can still do a backdoor Roth IRA as long as they are willing to pay the taxes on the conversion.

Unnecessary complications. While the backdoor may be a way to fund a Roth IRA, it does complicate things unnecessarily. You must make a contribution to a traditional IRA. If you do not have one, it must be established. Then, when the contribution is made, it must be reported as nondeductible on Form 8606. Then, a conversion must be done and reported by both you and your IRA custodian. This must happen each year a backdoor Roth IRA conversion is done. That’s a lot of work and potential for mistakes. If the new Congress is serious about doing away with red tape and simplifying unnecessary rules, getting rid of the income limits on Roth contributions would certainly seem to be a good place to start. Imagine how much easier it would be to just contribute directly to a Roth IRA.

No other Roth saving strategies have income limits. Over the years since the Roth IRA became a reality back in 1998, we have seen Congress establish a long list of other Roth options. None of them have income limits like tax-year Roth IRA contributions do. Congress did away with the income limits for Roth IRA conversions in 2010. Roth 401(k) and Roth SEP and SIMPLE IRA contributions are available to all regardless of income level. In fact, next year some high earners will be forced to make their catch-up plan contributions on a Roth basis instead of as a pre-tax salary deferral. With all these Roth options available to high income savers, it makes no sense to keep the Roth IRA contribution limits.

Roth accounts raise revenue. Congress loves Roth accounts because they bring in immediate revenue since they are funded with after-tax dollars. So, why not allow high income individuals to save for retirement by making direct Roth IRA contributions? This will generate more current revenue and allow more savers to work more easily towards a secure retirement.

The income limits don’t work. If the goal of the income limits on Roth contributions is to keep high income individuals from taking advantage of the Roth IRA strategy, it has not worked. A few years ago, the story of one tech billionaire’s large Roth IRA made headlines. According to reports, his Roth IRA was started with a tax year contribution. Twenty-two years later, it was worth five billion dollars. The income limits did not prevent one of the richest men in the world from amassing a fortune in a Roth IRA. They serve no purpose and Congress should do away with them now!

https://irahelp.com/slottreport/one-roth-ira-rule-congress-should-do-away-with-now/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA
Financial markets advanced this week as a solid start to the fourth-quarter earnings season, and some better-than-feared inflation data gave investors a reason to buy the most recent dip.  The financial sector gained 6.1% on the week as bank earnings rolled in with solid results.  JP Morgan, Goldman Sachs, Morgan Stanley, Blackrock, and Citibank were some of the top performers in the group.  The Producer Price Index (PPI) and the Consumer Price Index (CPI) showed sticky inflation. Still, the numbers were not as robust as some expected, which gave investors some relief on the inflation front. US Treasuries advanced significantly across the curve on the benign data. However, this sense of relief may be short-lived as the world awaits Trump 2.0 and the agenda that is poised to unfold next week after Trump is inaugurated on Monday as the 47th President of the United States.   We expect Trump to announce tariffs shortly after taking office, although we did expect these tariffs to be titrated higher over time, as several reports have suggested.  We also expect that the current immigration policy will materially change in the first days in office.  A cease-fire has been agreed upon by Israel and Hamas, which is a situation that is also likely to be addressed by the President on his first day in office.

The S&P 500 gained 2.9% and retook its 50-day moving average.  The Dow rose 3.7%, the NASDAQ climbed by 2.4%, and the Russell 2000 advanced 4%.  US Treasuries rallied across the curve, with the 2-year yield decreasing by thirteen basis points to 4.27% and the 10-year yield falling by seventeen basis points to 4.61%.  As yields fall, bond prices increase.  Oil prices continued to trend higher, adding $0.69 to close at $77.52 a barrel.  Gold price rose by 1.2% or $34.80 to $2748.50 an Oz.  Copper prices increased by six cents to $4.36 per Lb.  Bitcoin soared by nearly $10,000 to close above $105,000.  The US Dollar index gave up 0.3% to 109.34.

The PPI and CPI headlined the Economic calendar. The Producer Price Index (PPI) increased by 0.2% in December, lower than the consensus estimate of 0.3%. The reading was up 3.3% on a year-over-year basis, up from 3% in November.  The core reading that excludes food and energy was flat in December versus an expected uptick of 0.3%.  The core reading rose 3.5% annually, which was in line with the November figure.  The Consumer Price Index (CPI) increased by 0.4%, slightly higher than the anticipated 0.3%.  On a year-over-year basis, the figure increased by 2.9%, above the 2.7% reported in November.  Core CPI was flat versus an expected increase of 0.3%.  The Core reading on an annual basis came in at 3.2% in December, down from 3.3% in November.  December Retail Sales increased by 0.4% versus the consensus estimate of 0.6%.  The Ex-Auto metric also came in at 0.4%.  Initial Jobless Claims increased by 14k to 217k, while Continuing Claims fell by 18k to 1.859M.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Social Security’s full retirement age is increasing in 2025. Here’s what to know.

Social Security’s full retirement age is increasing in 2025. Here’s what to know.

Most Americans may consider the standard retirement age to be 65, but the so-called “full retirement age” for Social Security is already older than that — and it’s about to hit an even higher age in 2025.

Social Security’s full retirement age (FRA) refers to when workers can start claiming their full benefits, which is based on the number of years they’ve worked as well as their income during their working years. The longer someone works and the higher their income, the more they can receive from Social Security when they finally claim their benefits.

While the FRA used to be 65 years old, Congress overhauled the program in 1983 to raise the retirement age threshold in order to account for longer life expectancies.

As part of that revamp, the FRA has been inching higher by two months at a time, based on a person’s birth year. For instance, people who were born in 1957 reached their FRA when they turned 66 years and 6 months old, or starting in 2023; but people born in 1958 must turn 66 years and 8 months old to qualify for their full benefits, or starting in September 2024.

The full retirement age is set to increase again by two months, to 66 years and 10 months old, for people born in 1959. That means the higher FRA for that cohort will go into effect in 2025, with people born in 1959 starting to qualify for their full benefits in November 2025. (You can calculate when you could get your full benefits on this Social Security Administration page.)

To be sure, there is flexibility about when to claim Social Security benefits. People can claim as soon as they turn 62 years old, but the trade-off is a reduced benefit that’s locked in for the rest of their retirement.

For instance, claiming at 62 will result in a benefit that’s about 30% less than your full benefit — a sacrifice that many older Americans opt for, given that many are forced into retirement earlier than they expected or because they believe it makes more sense to claim more years of guaranteed retirement income, even if it’s at a lower amount.

While the increase in the retirement age isn’t new, it might catch some older workers by surprise, because even claiming a month earlier than your FRA will reduce your benefits, although at a lower rate than at age 62. And the difference in waiting until FRA versus 62 years old can be financially significant, with the Social Security Administration noting that someone retiring at FRA in 2024 could get a maximum monthly benefit of $3,822, while someone claiming at 62 would receive a max of $2,710.

Each year, Social Security benefits are adjusted to account for inflation so beneficiaries’ purchasing power doesn’t erode over time. In 2025, the annual cost-of-living adjustment will be 2.5%, the smallest annual COLA hike since 2021 due to cooling inflation.

For most Social Security beneficiaries, the new COLA goes into effect with their January payment.

Young boomers and Gen Xers

The increase in the FRA for people born in 1959 marks the penultimate age change, with the final jump occurring for workers born in or after 1960. Those Americans won’t be able to claim their FRA until they hit 67 years old, which means that someone born in January 1960 must hold off until January 2027 to get their full retirement benefits.

That will mostly impact the youngest baby boomers and Gen Xers, with the latter generation spanning 1965 to 1980.

These workers, however, are among the least prepared for retirement, according to recent research. The youngest boomers — those born between 1959 and 1965 — started to hit 65 this year, but many of them lack adequate savings to support themselves in old age, the ALI Retirement Income Institute found earlier this year.

About 1 in 3 of these younger boomers will rely on Social Security benefits for at least 90% of their retirement income when they are 70, the study found. But Social Security benefits are designed to replace about 40% of a person’s working income.

Gen X, meanwhile, is also shaping up to hit retirement without enough saved for their golden years. The average retirement savings of Gen X households is about $150,000 — far below the roughly $1.5 million that Americans say they need to retire comfortably. Another study found that about 40% of Gen Xers don’t have a penny saved for retirement.

Meanwhile, older Americans can also maximize their Social Security benefits by delaying claiming until they turn 70 years old. At that point, one’s benefits are boosted about 25% higher than their full benefits. But only about 4% of Americans wait until they’re 70 to claim the maximum Social Security benefit, according to a recent study from the Transamerica Center for Retirement Studies.

https://www.cbsnews.com/news/social-security-full-retirement-age-2025-what-to-know/

 

The Pro-Rata Rule and Roth Conversions: Today’s Slott Report Mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

My wife has two after-tax traditional IRAs at two separate institutions. We are hoping to consolidate them, then convert to a Roth in the next 18 months. She is already retired. She also has an inherited IRA (from her father). Does the calculation for taxation on the conversion to Roth need to include the assets in the inherited IRA? Do assets in my IRA have any impact on the calculation?

ANSWER:

The calculation you are speaking of is the pro-rata rule. When an IRA containing after-tax (non-deductible) dollars is totally or partially converted, we must determine the ratio of how much of the conversion is taxable and how much is tax-free. (You cannot target just the after-tax dollars and only convert those.) There is no problem with your wife consolidating her “after-tax IRAs.” Subsequently, when she does a conversion, her inherited IRA is disregarded for the pro-rata calculation as are any IRAs you (as her spouse) have.

QUESTION:

There seems to be some confusion about a 5-year rule as it applies to Roth IRA conversions. I am under the strong impression that if you are over age 59½ and you convert $100,000 and pay the taxes due on that conversion, then that money is now available for use or withdrawal from the Roth IRA with no taxes. For example, if I am age 65 and find that I need $25,000 next summer after doing a $100,000 conversion less than 5 years ago, do I have to pay taxes on this withdrawal? I already paid the taxes on the converted amount, I don’t think so, but I can’t find anything on the IRS website, or even any articles online, that prove I am correct.

Robert

ANSWER:

Robert,

You are correct. In the scenario you outlined, there would be no taxes due on that $25,000 withdrawal from your Roth IRA. Roth IRA distributions follow strict ordering rules. Contributions come out first, then converted dollars, then earnings. Assuming there were no contributions in your Roth IRA, if you did a $100,000 Roth conversion and then took a $25,000 distribution, that distribution would be comprised entirely of converted dollars. Converted dollars are always available TAX-free, regardless of age, because as you said, you already paid the taxes due on those dollars when you did the conversion. (And, since you are over age 59½, the converted amounts come out PENALTY-free as well.)

https://irahelp.com/slottreport/the-pro-rata-rule-and-roth-conversions-todays-slott-report-mailbag/

IRS Issues Mandatory Roth Catch-Up Regulations

By Ian Berger, JD
IRA Analyst

One of the more controversial rules in the 2022 SECURE 2.0 Act is the requirement that plan catch-up contributions by certain highly-paid employees be made on a Roth basis. Last Friday, (January 10, 2025) the IRS issued proposed regulations on the new rule.

Congress intended for the Roth catch-up mandate to be effective on January 1, 2024. However, in response to a flood of complaints, the IRS in Notice 2023-62 delayed the effective date until January 1, 2026. The delay means that until next year, plans can continue to accept pre-tax catch-up contributions from all employees (including high-paid).

The proposed regulations are not technically effective until after the IRS issues final regulations. But plans are allowed to follow them in the interim. Since the regulations are mostly taxpayer-friendly, most plans will want to do that.

The regulations confirm several unanswered questions about the new mandatory Roth catch-up contribution, most of which were originally addressed in Notice 2023-62:

  • The Roth mandate applies to 401(k), 403(b) and governmental 457(b) plans – but not to SIMPLE IRA plans.
  • The requirement only applies to employees with “wages” from the employer in the preceding year that exceeds a dollar threshold. The IRS confirmed that “wages” means wages subject to FICA; that is, amounts reported on Box 3 (not Box 1) of W-2. The dollar threshold would have been $145,000 in 2023 wages for 2024 and would have remained $145,000 in 2024 wages for 2025. But it will go up in future years based on inflation. The threshold on 2025 wages for determining required Roth catch-up contributions for 2026 (when the rule becomes effective) will not be available until the end of this year.
  • Self-employed individuals have self-employment income, not wages. If a self-employed person’s income exceeds the dollar limit in the prior year, is she required to make catch-ups on a Roth basis?  The IRS says no. Only high-paid workers with actual “wages” are subject to the Roth rule.
  • The look-back wage rule means that new employees — no matter how well paid — will get a free pass in their first year of employment (because they have no wages the previous year from the new company). And, because the IRS says the dollar threshold is not pro-rated for the first year of employment, some highly-paid employees also will not be affected in their second year of employment.
  • One important issue the IRS punted on in 2023 was addressed in the new regulations: What if a plan doesn’t already offer Roth contributions (since they are optional)? The IRS says it will not force an employer to put in a Roth option. But if a plan does not have a Roth option, pre-tax catch-ups could only be made available to lower-paid employees (i.e., those who would not have been subject to the mandatory Roth rule). Higher-paid employees could not make any catch-ups – pre-tax or Roth. Of course, most employers would be uncomfortable with this arrangement because it would alienate its highest-earning employees. So, the practical impact is that plans without a Roth contribution option will likely have to introduce one for 2026.

This is the only mandatory Roth rule in SECURE 2.0. Many affected employees may be better off making catch-up contributions on a Roth basis anyhow, but starting next year they will have no choice.

 

Beneficiary Form Resolutions

We are two weeks into 2025. Have you been following through on your New Year’s resolutions? As our readers already know, for an IRA owner not to follow through on his or her annual check up of beneficiary forms could have dire consequences.
Repeat after me: In 2025, I will…

  • Obtain a copy of the beneficiary form for each IRA I own.
  • Ensure I have named a primary beneficiary and a secondary (contingent) beneficiary for each IRA I own.
  • If there are multiple beneficiaries, make sure that each beneficiary’s share is clearly identified with a fraction, a percentage or the word “equally” if applicable.
  • Ensure that the financial institution has my beneficiary selections on file and that their records agree with my choices.
  • Keep a copy of all my IRA beneficiary forms and give copies to my financial advisor and attorney.
  • Let my beneficiaries know where to locate my beneficiary forms.
  • Review my beneficiary forms at least once per year to make sure they are correct and reflect any changes during the year due to new tax laws or major life events, such as death, birth, adoption, marriage, re-marriage or divorce.
  • Check the IRA custodial document for every financial institution that holds my IRA funds. I will make sure that the financial institution allows the provisions that are important to me and my IRA beneficiaries.
  • Do all of the above for any company retirement plan accounts I have, like 401(k)s, 403(b)s, or 457 plans.

https://irahelp.com/slottreport/beneficiary-form-resolutions/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA
US equity markets fell in the first full week of 2025 as investors recalibrated their Federal Reserve monetary policy expectations. Stronger labor data, a robust ISM Services print, and a weaker Consumer Sentiment report showing increased inflation expectations fueled losses across the US yield curve, where the 30-year yield eclipsed 5%.  Swaps markets now have only one twenty-five basis point cut priced in for 2025.  Trump’s suggestion that he would utilize an Economic Emergency declaration to impose tariffs stoked the inflation narrative.  Trump also suggested strong sanction enforcement on Russian oil and those entities that ship the crude oil, which sent oil prices higher by 3%. The Fed’s December meeting minutes reinforced the idea that the Fed was in wait-and-see mode, with the next cut now expected to come in the second half of the year.  The yield on the US 10-year has increased by over 100 basis points since the Federal Reserve started cutting rates in September, which is unusual in a rate-cutting cycle and has brought in concerns about where equity markets are headed.

The S&P 500 and Dow fell by 1.9%, the NASDAQ lost 2.3%, and the Russell 2000 sank 3,5%. Notably, the S&P 500 could not hold above its 50-day moving average, which has now become a level of technical resistance.  The yield on the 2-year climbed twelve basis points to 4.40%, while the 10-year yield increased by eighteen basis points to close at 4.78%.  West Texas Intermediate Crude prices increased by $2.48, closing at $76.63 a barrel.  Gold prices rose by 2.2% or $58.60 to $2713.70 an Oz.  Copper prices increased by $0.23 to $4.30 per Lb.  Bitcoin’s price fell by 3.54% to close at $94,287.  The US dollar index gained 0.7% to close the week at 109.65.

The Employment Situation report headlined the economic calendar.  Non-farm payrolls increased by 256k, well above the consensus estimate of 154k. Private payrolls came in at 223k versus an estimated 140k.  The unemployment rate fell from 4.1% to 4.2%.  Average hourly earnings came in as expected at 0.3%, as did the Average work week at 34.3 hours.  Earlier in the week, JOLTS data showed that job openings increased to 8.098m from the prior reading of 7.839m.  ADP payrolls increased by 122k versus the consensus estimate of 134k.  Initial Jobless Claims fell by 10k to 201k, while Continuing Claims increased by 23k to 1.867m.  ISM Services showed the service sector expanding by 54.1%, up from the prior reading of 52.1%.  The Prices Paid Index within the data increased to 64.4% from 58.2% and again catalyzed concerns on the inflation front.  A preliminary look at the University of Michigan’s Consumer Sentiment fell from 74 in December to 73.2, attributed to increased inflation expectations.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

RMD Rollover and Aggregation Rules: Today’s Slott Report Mailbag

By Ian Berger, JD
IRA Analyst

Question:

I am planning for a required minimum distribution (RMD) from both my IRA and 403(b) plan for 2026, my first RMD year. I am in the third year of a 10-year period in which I am rolling over 10% of my 403(b) funds each year to my IRA as a way to consolidate. This is per my 403(b) contract. The funds get rolled over in September each year.

In 2026, do I need to take my RMD before the 10% rollover on the balance of my 403(b)? Are there regulations or just preference as to when I should take the RMD?

Claudia

Answer:

Hi Claudia,

Yes, starting in 2026, you will need to take your RMD from the 403(b) plan before doing the rollover to the IRA. That’s because the first dollars paid out of the 403(b) in any RMD year are considered the RMD, and RMDs cannot be rolled over. There is no rule requiring you to take the RMD at any particular time during the year, as long as it is taken before your rollover in September.

Question:

I believe that my RMD can be taken from any account to satisfy the total RMD, but does that apply to different types as accounts such as an IRA and a 401(k)? A related question: Can I use a qualified charitable distribution (QCD) from an IRA to satisfy the RMD for both my IRA and 401(k)?

Thanks for any insights you can provide.

John

Answer:

Hi John,

You can satisfy the total RMDs of all of your IRAs (and any SEP or SIMPLE IRA) from any IRA (or SEP or SIMPLE). But RMDs from IRAs and retirement plans, like 401(k)s, must be taken separately. Meanwhile, a QCD can only be used to satisfy an IRA RMD.

https://irahelp.com/slottreport/rmd-rollover-and-aggregation-rules-todays-slott-report-mailbag/

5 Key Changes to 401(k)s in 2025 and What They Mean for You

5 Key Changes to 401(k)s in 2025 and What They Mean for You

These new rules could make it easier for you to save more money for retirement

Participating in a 401(k) plan where you work is a smart way to invest for retirement. Plus, your employer may match some or all of the money you contribute. In 2025 the rules for 401(k)s will undergo several significant changes as a result of the federal SECURE 2.0 Act of 2022.1

Here’s the lowdown on five big changes to 401(k) plans in 2025 and how you can take full advantage of them.

Key Takeaways

  • Maximum contribution limits for 401(k) plans are rising by $500 for many workers in 2025.2
  • Workers age 50 and older can make additional catch-up contributions, with those in the 60 to 63 age group eligible for even higher limits.12
  • Many employers will now be required to enroll their workers automatically in their 401(k) plan, although workers can still opt out.1
  • More part-time workers will be eligible for 401(k)s, with the work requirement as either one year with at least 1000 hours of service or two consecutive years with at least 500 hours of service. (The latter requirement dropped from three years to two years.)1
  • The government has also clarified the 10-year rule for non-spouse beneficiaries who inherit a 401(k).3

1. Higher Contribution Limits

The maximum amount that workers can contribute to their 401(k) plans tends to rise each year, as it’s adjusted for inflation. (For 2025, however, the contribution limit for IRAs didn’t increase. It’s still $7,000, or $8,000 if you’re 50 or older.2) For 2025, the most you can contribute to a 401(k) if you’re under 50 is $23,500. That’s up from $23,000 in 2024.2

Workers must earn at least that much to contribute that much money, because contributions each year are limited to 100% of employee compensation.4

Workers can have both a traditional 401(k) account and a designated Roth 401(k) account if their employer offers a Roth option. However, the limit applies to both accounts combined.5

2. Higher Catch-Up Contributions for Some Older Workers

Workers age 50 and older can make additional catch-up contributions. For both 2024 and 2025, the maximum catch-up contribution is $7,500 for most workers age 50 and older. In other words, a worker who is age 50 or older who earns at least $31,000 in 2025 is eligible to contribute that much to their 401(k) plan ($23,500 + $7,500).2

What’s New for 2025

By Ian Berger, JD
IRA Analyst

When the ball dropped in Times Square on New Year’s Eve, a number of new retirement account provisions became effective. We’ve previously written about each of these new rules in The Slott Report. This article will serve as a checklist, with links to the prior articles.

  • As happens frequently, many retirement account dollar amounts increased in 2025 as a result of indexing for inflation. For example, the 2025 regular (non-catch-up) elective deferral limit for 401(k), 403(b) and 457(b) plans went up from $23,000 to $23,500. In addition, the SEP contribution limit increased to 25% of up to $350,000 in pay, but no more than $70,000. Here’s a link to our November 6, 2024, Slott Report article with more details: irahelp.com/slottreport/401k-contribution-limits-increase-for-2025/.
  • A big change to the required minimum distribution (RMD) rules made by the 2019 SECURE Act requires most non-spouse retirement account beneficiaries to empty the inherited account by the end of the 10th year following the year of death. IRS regulations also mandate that any beneficiary subject to the 10-year rule who inherited from someone who had started RMDs must continue them during years 1-9 of the 10-year period. However, because of confusion over this rule, the IRS did not require annual RMDs for beneficiaries in this category for years 2021-2024. Starting this year, yearly RMDs become due. See the following Slott Report post from November 11, 2024, for more information: irahelp.com/slottreport/annual-rmds-for-certain-beneficiaries-kick-in-soon/.
  • Several new rules for retirement plans have kicked in. Many new 401(k) and 403(b) plans will be required to include an automatic enrollment feature. This means that eligible employees will be required to make elective deferrals unless they opt out. In addition, it’s now harder for plans to keep out part-time employees. Any employee who has worked at least 500 hours in two consecutive 12-month periods (but excluding periods before 2023), and who is age 21 or older, must be allowed to participate. Both of those provisions are discussed in more detail in the December 2, 2024, post on the Slott Reportirahelp.com/slottreport/new-401k-provisions-that-become-effective-in-2025/.
  • Last but not least, Congress has increased catch-up contribution opportunities for certain older employees in 401(k), 403(b) and governmental 457(b) plans starting this year. This “super catch-up” is higher than the current age-50-or-older catch-up — for 2025, it is $11,250. The super catch-up is available only to those who are age 60, 61, 62 or 63 on the last day of the year.

    A super catch-up ($5,250 for 2025) also applies to age 60-63 SIMPLE IRA participants. This means that employees in SIMPLE plans will be subject to one of three different catch-up limits, depending on their age and the size of their employer. These two Slott Report articles from October 21, 2024, and November 20, 2024, attempt to clear up this confusing topic: https://irahelp.com/slottreport/nothing-simple-about-it-3-different-catch-up-limits-for-2025/.

  • https://irahelp.com/slottreport/whats-new-for-2025/

5 Things We Are Talking About at the Slott Report in 2025

By Sarah Brenner, JD
Director of Retirement Education

 

The year 2025 is upon us! There is no doubt that this will be an eventful time for retirement accounts. As the new year kicks off, here is what we are talking about now at the Slott Report.

1. Increased contribution opportunities. New catch-up contribution options for certain older individuals are here!

For 2025, those who are age 50 or older can contribute an additional $7,500 as salary deferrals to their employer plan. However, those who are aged 60, 61, 62 or 63 at year’s end can contribute even more. They can contribute an additional $11,250 — instead of $7,500.

For SIMPLE IRA plans, those who are age 50 or older can contribute an additional $3,500. The SECURE 2.0 Act also increased the SIMPLE IRA catch-up contribution limit for certain individuals. For 2024 and 2025, the catch-up contribution limit for a business with 25 or fewer employees is automatically increased to $3,850. Businesses with 26 – 100 employees can allow this higher contribution limit, but only if they provide a 4% (instead of 3%) matching contribution, or a 3% (instead of 2%) across-the-board contribution.

Additionally, for 2025, those SIMPLE IRA plan participants who are aged 60, 61, 62 or 63 at year’s end can contribute an additional $5,250 — instead of $3,500 or $3,850.

At the Slott Report, we are getting many questions on how these new complicated rules work, so expect to see some deep dives into the all the details in upcoming posts.

2. Potential tax law changes. Whenever a new administration takes over, the chances for big legislative changes go up.This year, the odds increase even more with one-party control of both the Presidency and Congress. When you add to the mix the fact that the individual tax provisions from the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025, the possibility of significant tax law changes is real.

There is no doubt that retirement savings will be impacted as Congress takes on the tax code. We will be following it all here at the Slott Report.

3. More Roth opportunities. With new tax legislation and breaks, inevitably comes discussion of how to pay for it all. Roth accounts often are part of the answer. Congress loves Roth accounts because they bring in immediate revenue. Roth accounts have proliferated. We now have Roth SEP and SIMPLE IRAs, and mandatory Roth catch-up contributions are scheduled to begin in 2026 for some high-income earners. The lead-up to TCJA back in 2017 even brought discussions of all 401(k) contributions being required to be Roth.

We at the Slott Report expect to see many more Roth opportunities in 2025 and future years.

4. Recent and upcoming regulations. The year 2024 brought us both long-awaited final SECURE Act regulations and proposed SECURE 2.0 regulations.In 2025, we know that annual required minimum distributions (RMDs) will be mandatory during the 10-year rule for many beneficiaries, and we know how the new rules for spouse beneficiaries will work.

At the Slott Report, we will be watching how these new rules are put into practice as well as monitoring any new guidance from the IRS. We are still eagerly awaiting guidance on more issues such as rollovers from 529 plans to Roth IRAs. Stay tuned for future updates.

5. Distribution planning. There has always been a focus on the importance of accumulating retirement savings. However, as the baby boomer generation reaches retirement age, it has become increasingly apparent that, as important as saving for retirement is, when it comes to tax advantage retirement accounts, it is equally important to focus on distribution planning. Doing so allows savers to keep more of their hard-earned money, instead of giving it over to Uncle Sam.

Here at the Slott Report, we expect to focus more on this part of the retirement savings process in 2025.

Stay tuned! The year ahead promises to be an exciting one. We hope you continue to follow the Slott Report for all the latest retirement account news, analysis and discussion!

https://irahelp.com/slottreport/5-things-we-are-talking-about-at-the-slott-report-in-2025/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

The final trading sessions for 2024 extended losses from the prior week, but the S&P 500 and NASDAQ still posted impressive gains for the year, 23.3% and 28.6%, respectively.  The so-called Santa Clause Rally did not appear for the second year, as the final seven trading sessions produced a 1.6% loss in the S&P 500.  The holiday-shortened week saw increased volatility as trading volume skewed to the light side.  Friday’s session saw investors come in and buy the dip, with mega-cap issues outperforming.  As we move into 2025, there are several variables Wall Street is considering.  What exactly will the Trump 2.0 policy look like ( think taxes, tariffs, deregulation, geopolitical relations), and will these policies foster inflation?  What will global central bank policy look like, and where will the most significant policy divergences materialize?  Will the US consumer continue to show up, providing a tailwind to corporate earnings and the economy?  What will corporate earnings be, and will they broaden out from the mega-cap technology names?  Will artificial intelligence capital expenditures continue, and will past expenditures start to show a return on investment?  Will US exceptionalism continue, or will other global economies begin to outperform?  There will be a lot to unpack over the next several months, and we expect increased volatility as the answers to these questions are found out.

2024 was an excellent year for the equity markets, with the S&P 500 gaining 23.3%, the Dow added 12.9%, the NASDAQ rose 28.6%, and the Russell 2000 increased 10%.  It was a more challenging market for US Treasuries as the 2-year yield decreased by just one basis point over the year to 4.24%, while the 10-year yield increased by sixty-nine basis points to 4.57%.  However, the absolute moves across the curve really does not tell the whole story, as investors witnessed extreme volatility in the rates market with several material movers throughout the year.

Internationally, I was a bit surprised to see some of the year end numbers.  The German DAX was up 18.8% despite a very weak economic backdrop.  The China Shanghai Composite was up 12.6% despite lackluster economic policy.  Weakness in South Korea was evident given the recent political fallout- the Kospi fell 9.6% for the year.  Similarly, political uncertainty in France weighed on the CAC 40, which shed 2.4%.

Gold prices rallied 27.4% or $568.80 to close 2024 at $2641.10 an Oz.  The price of Oil closed the year where it started, gaining $0.01 to close at $71.85 per barrel.  Copper prices increased by $0.13 to $4.02 per Lb.  The price of Bitcoin over the last year has surged by ~121%, rising by $54,700 to $97,944.  The US Dollar index increased by 7.1% to 108.49.  The currency markets were also riddled with volatility as the Yen carry trade unwound in early July.  The Euro closed the year on its lows trading at 103.53 to the US Dollar, and looks poised to break parity in the coming weeks.

The Economic calendar featured some better-than-expected manufacturing data.  The ISM Manufacturing Index increased to 49.3% versus the prior reading of 48.4% and topped the consensus estimate of 48.7%.  The S&P Global Manufacturing PMI came in at 49.4%.  Initial Jobless Claims fell by 9k to 211k, while Continuing Claims fell by 52k to 1844k.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

What’s Changing for Retirement in 2025?

What’s Changing for Retirement in 2025?

How Secure 2.0 and inflation adjustments will affect retirement savers and spenders.

For retirement savers, the ringing in of the new year will bring more than the usual inflation adjustments to retirement contributions. The retirement legislation known as Secure 2.0 will also continue to phase in, bringing implications for retirement savers and retirees alike.

Here’s a roundup of some of the key retirement-related changes to watch out for in 2025, as well as any planning-related moves to consider.

Higher Tax Brackets

Thanks to higher inflation, the income limits for tax brackets will be increasing next year. These changes affect the income thresholds for both income and capital gains taxes. The top marginal income tax rate is 37%, for example, but it applies to single filers with incomes of $626,350 or more and married couples filing jointly with $751,600 or more in income. (In 2024, those thresholds were $609,350 and $731,200, respectively.)

Potential Action Items

Realizing capital gains in the 0% range: Higher-income thresholds may enhance the opportunity to sell appreciated securities without any capital gains taxes. For 2025, the 0% capital gains tax rate applies to single filers earning less than $48,350 and married couples filing jointly with incomes less than $96,700.

Assessing the appropriateness of Roth conversions: You’ll owe ordinary income tax when you convert traditional IRA and 401(k) balances to Roth, but higher-income thresholds provide additional headroom to convert without pushing yourself into a higher tax bracket. A series of smaller conversions can often make sense, especially in the postretirement, prerequired minimum distribution phase.

Higher Contribution Limits for Savers

Here’s another set of changes that relate to inflation: Contribution limits to retirement accounts are increasing slightly for 2025. Company retirement plan contributions—whether 401(k), 403(b), or 457—are going up to $23,500 for people under age 50 and $31,000 for savers who are 50-plus. People who will be between the ages of 60 and 63 in 2025 can contribute up to $34,750, thanks to new “super catch-up contributions” that are going to be effected as part of Secure 2.0. The total 401(k) contribution limit—of particular interest to people contributing to aftertax 401(k)s—is $70,000, plus an additional $7,500 for savers over 50.

Meanwhile, IRA contribution limits will stay the same as in 2024: $7,000 for people under 50 and $8,000 for people who are 50-plus. Contributions to health savings accounts, or HSAs, which can be employed as stealth retirement accounts, are increasing as well, to $4,300 for people covered by an individual high-deductible health plan, or HDHP, and $8,550 for people with family HDHP coverage. HSA savers who are 55 and older can contribute an additional $1,000. Note that the income limits that determine eligibility to make Roth IRA or deductible traditional IRA contributions have also increased to account for inflation.

Potential Action Item

If you haven’t revisited your company retirement plan and/or HSA contributions for a while, now is a good time to do so, especially if you’re in a position to make the maximum allowable contributions to your account(s). While you’re at it, make sure you’re maximizing any employer-matching contributions that you’re eligible to receive. And if you’ll turn 50 in 2025, remember that you don’t need to wait until your birthday to make catch-up contributions. I’m a big fan of putting IRA contributions on autopilot with your investment provider, making automatic monthly contributions, just as you do with your 401(k). To make the maximum allowable IRA contribution in 2025, you’d need to contribute $583 monthly if you’re under 50 and $666 a month if you’re 50 and over.

Higher Qualified Charitable Distribution Limit

People over age 70.5 can contribute $108,000 to charity via the qualified charitable distribution, or QCD, in 2025. That’s up from $105,000 in 2024.

Potential Action Item

Given that nearly 90% of taxpayers aren’t itemizing their deductions, the QCD is a gimme for charitably inclined people 70.5 and older who have IRAs. Contributed amounts skirt income taxes and also satisfy required minimum distributions for those who are age 73 or above. The QCD will tend to be a better deal, from a tax standpoint, than writing a check to charity and deducting it on your tax return.

Higher Estate, Gift Tax Thresholds

The amount of an estate that’s exempt from estate tax will increase to $13.99 million per person in 2025. This means that married couples can effectively shield nearly $28 million from the federal estate tax. Meanwhile, the gift tax exclusion is increasing to $19,000 ($38,000 for couples) in 2025. This means individuals can gift up to $19,000 to each recipient next year without having that amount count toward their gift-tax exclusion.

Potential Action Item

The estate tax exclusion is at its highest level ever, but key provisions of the Tax Cuts and Jobs Act, including the currently high levels of assets that are exempt from federal estate tax, are set to expire at the end of this year. A Republican presidential administration and Congress may well extend them, but a qualified estate planner can help you determine the best strategies to reduce taxation on your estate (not to mention help with other crucial matters such as drafting powers of attorney).

Prescription Drug Costs

Mark Miller outlined some of the key changes to prescription drug costs for seniors who are covered by Medicare. Specifically, people who are covered by a Medicare Part D plan will now have their out-of-pocket drug costs capped at $2,000 per year starting next year. Moreover, seniors who are enrolled in Part D can opt into a new payment program that enables them to spread their prescription-related costs throughout the year.

Long-Term-Care Premium Deductibility

Long-term-care insurance has declined in popularity, but there are still millions of policies in force. The amount of long-term-care insurance premiums that one can deduct is going up a bit in 2025. People who are age 40 or under can deduct $480 in long-term-care premiums in 2024; those aged 41 to 50 can deduct $900; people aged 51 to 60 can deduct $1,800; those aged 61 to 70 can deduct $4,810; and those 71 and older can deduct $6,020.

https://www.morningstar.com/retirement/whats-changing-retirement-2025

Spousal Beneficiaries and the 10-Year Rule: Today’s Slott Report Mailbag

 

By Sarah Brenner, JD
Director of Retirement Education

 

Question:

Hello,

Our daughter (age 50) is the sole beneficiary of her husband’s (age 52) IRA due to his death in April 2024. Is there a time limit for when she must either take ownership or roll it over into her own IRA or other qualified plan?

Thank you,

Marylou Pagano

Answer:

Hi MaryLou,

Our condolences on the death of your son-in-law.

Your daughter as a spouse beneficiary has some options. She may consider keeping the IRA as an inherited IRA. If she does a spousal rollover into her own IRA and then needs to take a distribution, she will be subject to the 10% early distribution penalty because she is under age 59½. By delaying a spousal rollover and keeping the account as an inherited IRA, she would avoid this penalty because it does not apply to inherited accounts.

No distributions would be required from the inherited IRA until the year that the deceased IRA owner would have been age 73. She can still do a spousal rollover into her own IRA at any time. There is no time limit or deadline for this.

Question:

I have an 87-year-old mother who passed away after her required beginning date with three children as beneficiaries. They are each subject to the 10-year rule. Are the annual required minimum distributions (RMDs) based on the beneficiaries’ life expectancies or are they based on the original owner (87-year-old mother’s) life expectancy?

Thank you,

Janine

Answer:

Hi Janine,

You are correct that the beneficiaries in this case would be subject to the 10-year rule and would have to take annual RMDs during the 10-year period. Those annual RMDs would be based on the beneficiaries’ single life expectancies.

https://irahelp.com/slottreport/spousal-beneficiaries-and-the-10-year-rule-todays-slott-report-mailbag/

Jelly-of-the-Month Club

By Andy Ives, CFP®, AIF®
IRA Analyst

 

I counted them. This year the Slott Report published 101 blog articles. While other sites add “pay-for-content” firewalls, we continue to pump out incredibly valuable and important information, week after week, totally free of charge. One would be hard-pressed to find an IRA or retirement plan topic we did not touch in 2024. Yes, the Slott Report is the gift that keeps on giving: the IRA version of the Jelly-of-the-Month Club.

In the Q&A Mailbag, we answered 200 retirement-related questions. Hopefully our responses pointed readers in the right direction. This is a crazy, mixed-up industry we work in, and we understand the rules are complex. If our answers helped anyone avoid the IRS Grinch, then it was well worth the effort.

From Ed, Sarah, Ian and me: Thank you for reading! We wish you a wonderful holiday season and Happy New Year! (See you in 2025 for another 100+ new jelly flavors.)

https://irahelp.com/slottreport/jelly-of-the-month-club/

 

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

Market action was mixed in a holiday-shortened week of trade.  The Santa Clause rally, which runs for the last five trading sessions of the year through the first two trading sessions of the New Year, kicked off with gains from mega-cap technology.  Light trading volumes can exaggerate moves, and one should not take too much from a thinly traded market.  Tuesday’s abbreviated session and Thursday’s session ended flat, while Friday’s session saw a decent pullback in those same mega-cap technology issues.

The S&P 500 gained 0.7%, the Dow added 0.4%, the NASDAQ increased by 0.8%, and the Russell tacked on 0.1%.  US Treasuries sold off across the curve, with longer-tenured issues taking the brunt of the sell-off.  The 2-year yield increased by one basis point to 4.33%, while the 10-year yield increased by nine basis points to 4.62%.  Oil prices increased by 1.5% or $1.10 to close at $70.53 a barrel.  Gold prices fell by $11.20 to $2,633.20.  Copper prices inched higher by two cents to $4.13 per Lb.  Bitcoin traded lower by ~$2,800 to $94,400.  The US Dollar index advanced by 0.42 to close at 108.04.

The economic calendar was quiet. Consumer Confidence missed the mark, coming in at 104.7 versus the street’s estimate of 113.5. The report raised concerns about the outlook for business conditions and income. Initial Claims fell by 1k to 219k; however, Continuing Claims increased by 46k to 1.910M, a three-year high.  New Home sales in November came in at 664k versus the consensus estimate of 670k.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Most Americans Feel They’re Worse Off Now Than In 2020—Here’s What The Data Says

Most Americans Feel They’re Worse Off Now Than In 2020—Here’s What The Data Says

Key Takeaways

  • A recent Gallup poll showed most Americans feel they are worse off today than four years ago.
  • Data on household finances show that things have changed dramatically since September 2020, when the COVID-19 pandemic was affecting the economy.
  • Americans have a better job market and higher wages than they did four years ago, and rely less on government aid. However, they also face a higher cost of living, are saving less, and are falling behind on credit card payments.

Most Americans say they and their families are financially worse off today than four years ago. Economic data paint a mixed picture on whether it’s easier or harder to get by than it was back then.

Gallup recently released the results of a poll conducted in September, in which they asked U.S. adults, “Would you say you and your family are better off now than you were four years ago, or are you worse off now?” Only 39% said they were better off, while 52% said they were worse off. It was the most pessimistic result ever during a presidential election year for that question, which Gallup has asked regularly since 1984.1

Holiday Cheers and Wishes

By Ian Berger, JD
IRA Analyst

 

This is the time of year for good cheer and holiday wishes. In keeping with those traditions, here are some cheers and wishes for the IRS and Congress:

Cheers to the IRS: Yes, it did take the IRS 4½ years to issue final required minimum distribution (RMD) SECURE Act regulations in July 2024. But the IRS does deserve credit for addressing most of the unanswered questions raised by the SECURE Act and the 2022 proposed regulations. And, aside from the IRS’s stubborn interpretation of the at-least-as-rapidly rule, the final regulations were taxpayer-friendly. The same is true for the proposed SECURE 2.0 regulations issued at the same time.

Wish for the IRS: We cannot let theIRS off the hook completely. In SECURE Act 2.0, Congress added a much-appreciated provision that started in 2024; it allows owners of unused 529 accounts to transfer up to $35,000 of surplus funds tax-free to a Roth IRA for the benefit of the 529 beneficiary. The new law requires that the 529 account must have been held for at least 15 years but fails to address one basic question: If the 529 beneficiary changes, does the 15-year clock start over again or can you get credit for the period with the prior 529 beneficiary? The new law has now been in effect for a full year, but we still have zero guidance from the IRS on this crucial issue.

Cheers to Congress: This year, unlike in December 2019 and 2022, Congress did not hit us with a last-minute piece of legislation that would make massive changes to the IRA and employer plan tax rules. However, there is already talk that Congress may include provisions in the next tax bill that will require more mandatory Roth contributions. (SECURE 2.0 already requires that, starting in 2026, highly-paid employees who want to make 401(k) catch-up contributions must make them on a Roth basis.) The additional revenue from more “Rothification” would help pay for the renewal of the tax cuts in the 2017 Tax Cuts and Jobs Act, which are due to expire on December 31, 2025. So, next year we may not be so lucky!

Wish for Congress: It may be too big of an ask, but it is long overdue for Congress to start simplifying the retirement account tax rules instead of just piling new complicated rules on top of existing complicated rules. Need some examples? There are now 20 different exceptions to the 10% early distribution penalty (3 of which apply only to IRAs, 6 of which only apply to employer plans, and 11 of which apply to both); different beneficiary RMD rules, depending on when the account owner died and into what category the beneficiary fits; different ages for when RMDs are first due: ages 70½, 72, 73 (and eventually) 75; and 3 different catch-up contribution limits for SIMPLE (!!) plan participants. (And a partridge in a pear tree.)

Cheers and Wishes to You: We would be remiss if we did not give cheers to you, our loyal Slott Report readers, for checking in with us every Monday, Wednesday and Thursday, and for sending us such great questions. Best wishes for a Happy Holiday season!

https://irahelp.com/slottreport/holiday-cheers-and-wishes/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

Equity and fixed-income markets sold off for the second consecutive week as the Federal Reserve delivered an expected twenty-five basis-point rate cut but pivoted to a much more hawkish stance for 2025, where the committee now expects only two quarter-point rate cuts.  Several committee members cited concerns regarding the new administration’s policies on tariffs and immigration and the policy ramifications on inflation.  The pivot moved the Fed away from concerns about the labor market to worry more about their inflation mandate.  The summary of economic projections showed an uptick in inflation expectations from 2024 to 2025 and, as I mentioned, the SEP also reduced 2025 rate cuts from four to two quarter-point cuts.  Central bank policy elsewhere was pretty benign, with the Bank of England, Bank of Japan, and the Chinese Central Bank (PBOC) all keeping rates unchanged.  The Norges Bank and the Bank of Mexico did cut their policy rates.

The S&P 500 lost 2%, the Dow was down 2.3%, the NASDAQ fell 1.8%, and the Russell 2000 was slammed, falling 4.5%.  I should note that some of the market action witnessed this week was 100% related to a more hawkish Federal Reserve; however, some of this move is likely a natural consolidation of the tremendous move we have seen since the election.  This consolidation can be seen as constructive and likely sets up the market for another move higher.  Expect more market volatility as the Trump administration outlines its policies, but the backdrop for the US markets still appears constructive.  US Treasuries suffered a second week of losses.  The 2-year yield increased by seven basis points to 4.31%, while the 10-year yield increased by twelve basis points to 4.52%- the highest level since May.

Commodity prices were generally lower while the US Dollar continued to post gains.  Oil prices fell 2.6% or $1.86 on weak economic data out of China and the likelihood of weaker demand for crude from that region.  Gold prices fell by $32.30 to $2644.40.  Copper prices closed at $4.11 per Lb., down nine cents from the prior week.  Bitcoin touched $108,000 per coin before selling off to close at $97,200.  The Dollar index increased by 0.6% to 107.62.

The economic calendar was headlined by the Fed’s preferred measure of inflation, the PCE. The PCE showed an increase of 0.1%, slightly lower than the expected 0.2%. On a year-over-year basis, the PCE increased by 2.4% versus the prior reading of 2.3%.  The Core reading also came in at 0.1% month over month and was lower than the anticipated 0.2%.  The year-over-year figure came in line with the prior month’s reading of 2.8%.  The numbers showed no real improvement in inflation and provided some weight for the concerns articulated by the Fed earlier in the week.  Personal Income came in at 0.3% versus the expected 0.4%, while Personal Spending increased by 0.4%, just below the consensus estimate of 0.5%.  Retail Sales showed a robust market for autos.  The headline number increased by 0.7%, while the ex-auto figure was up just .02%.  Housing Starts increased by 1289k while building permits came in at 1505k- a mixed picture for the housing market.  The 3rd estimate of Q3 GDP increased to 3.1% from 2.8%, while the GDP Deflator remained at 1.9%. Initial Claims fell by 22k to 220k, as Continuing Claims decreased by 5k to 1874k.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Retirees’ Credit Card Debt Levels Are Climbing

Retirees’ Credit Card Debt Levels Are Climbing

Key Takeaways

  • An Employee Benefit Research Institute survey found that more than two-thirds of retirees had outstanding credit card debt in 2024, up from 40% in 2022.
  • Even though inflation has cooled, high prices weigh on retirees. Almost a third of retirees said they spent more than they could afford in 2024.
  • Most retirees said they retired earlier than they planned, and half said they didn’t have enough saved when they ultimately did retire.

Retirees are struggling with credit card debt as they deal with high prices.

A recent Employee Benefit Research Institute (EBRI) survey of over 3,600 retirees found that more than two-thirds had outstanding credit card debt in 2024.1 That’s up from 40% in 2022.

Although inflation has fallen from its peak two years ago, prices remain elevated, and inflation is still above the Federal Reserve’s 2% target. This year, almost one-third (31%) of retirees reported spending more than they could afford. By contrast, in 2022 only 17% of retirees said they were spending more than they could afford.

People Are Retiring Earlier Than Anticipated—Which Could Be Hurting Their Finances

In the survey, almost 60% of retirees said they retired earlier than expected. The most common reasons were a health problem or disability (38%) or their employer undergoing a change such as downsizing (23%). When respondents did retire, nearly half said they hadn’t saved enough for retirement.

Meanwhile, many retirees didn’t have access to or fully benefit from workplace plans like a 401(k) or investment accounts like individual retirement accounts (IRAs) and Roth IRAs. Responses to the EBRI survey indicated that few were relying on such savings to fund their retirements: Only 17% of retirees used 401(k) plans as a retirement income source while 20% used funds from their IRAs.

Many respondents said they relied on Social Security (80%) or a guaranteed income source (39%), like a pension or annuity.

Do you have a news tip for Investopedia reporters? Please email us at

tips@investopedia.com

Billionaires Wanted it; 65,000+ Investors Got it First

When incredibly valuable assets go for sale, it’s typically the wealthy who end up taking home an amazing investment. But now, Masterworks enables anyone to invest in shares of multimillion dollar works by artists like Banksy and Picasso. When Masterworks sells a painting–like the 23 it’s already sold–investors reap their portion of any profits. Offerings can sell quickly, but you can skip the waitlist here. Important disclosures at masterworks.com/cd.

https://www.investopedia.com/retirees-credit-card-debt-levels-are-climbing-8746057

Required Minimum Distributions and IRAs: Today’s Slott Report Mailbag

 

By Andy Ives, CFP®, AIF®
IRA Analyst

 

QUESTION:

If a client opens an IRA at age 75 and makes a contribution this year, this account would not have a required minimum distribution (RMD) for 2024, correct? Since the IRA did not exist last year, there is no 12/31/23 balance.

ANSWER:

You are correct, there would be no RMD in the scenario you outlined. RMDs are calculated using the prior year-end balance. With no 2023 year-end balance, there is no RMD to calculate. Just be sure the person has earned income and is eligible to make an IRA contribution.

QUESTION:

Can you distribute stock in-kind from an IRA account to a non-IRA brokerage account to satisfy an RMD?

Thank you,

Jessica

ANSWER:

Jessica,

Yes, an in-kind distribution of stock can be used to satisfy an RMD. The value of the shares on the date of distribution is used when determining the amount of the withdrawal, so be sure to distribute enough shares to cover the RMD.

4 Things to Know About Rollovers Between Calendar Years

By Sarah Brenner, JD
Director of Retirement Education

 

The IRA rollover rules are always tricky. However, if you are rolling over an IRA distribution when the calendar year changes, the rules can become especially challenging. Here are four things you need to know about rollovers as the year 2024 ends and the year 2025 arrives.

1. A distribution taken in one year can be rolled over in the next year.

Surprisingly, sometimes IRA owners have doubts as to whether a distribution taken in one calendar year can even be rolled over in the next. There is no problem with this! Nothing prevents you from taking an IRA distribution in December of 2024 and rolling it over in January of 2025. Just be sure that you follow all the rollover rules that always apply, such as the 60-day rollover deadline.

2. Report the rollover on your 2024 tax return.

Another concern you may have is how to handle a distribution from your IRA in 2024 that you roll over in 2025 on your tax return. Do you report this transaction on your 2024 tax return or wait for 2025? Here is how it works. The IRA custodian will report the distribution from your IRA on a 2024 Form 1099-R. The rollover will be reported by the IRA custodian on a 2025 Form 5498. You will report the distribution and the rollover on your 2024 federal income tax return.

3. Watch out for the once-per-year rollover rule.

Do not fall for a common misunderstanding of the one-rollover-per-year rule. The rule says that you may only roll over one distribution from all of your IRAs in a one-year period. The one rollover per year does not apply on a calendar year basis. It begins with the date you receive the distribution you later roll over. A new calendar year does not mean you have a clean slate. If you take an IRA distribution on December 15, 2024, and roll it over in January of 2025, you may not roll over another IRA distribution until December 16, 2025.

4. Be sure to calculate your 2025 RMD correctly.

A rollover that is outstanding at the end of the year can affect your 2025 RMD. If you take a distribution in 2024 and complete a rollover of those funds in 2025, you must include the amount rolled over in your December 31, 2024, fair market value when calculating your 2025 RMD. This rule prevents IRA owners from avoiding RMDs by having an IRA balance of zero on December 31. You cannot escape your RMD by emptying out your IRA in December and then rolling over the funds in January.

https://irahelp.com/slottreport/4-things-to-know-about-rollovers-between-calendar-years/

 

The QCD Dance

 

By Andy Ives, CFP®, AIF®
IRA Analyst

Tis the season for giving, and qualified charitable distributions (QCDs) are a popular way to donate to a favorite charity. However, rules must be followed. In a recent Slott Report entry (“QCD Timing,” December 4), I included the following closing line: “Some IRA accounts allow check-writing privileges. Checks written to a charity from a ‘checkbook IRA’ qualify as a valid QCD. However, the custodian may not recognize the distribution until the check is cashed! That could be in early 2025…and then we have problems.”

What are these “problems” alluded to? If a QCD check is not cashed by the charity until early 2025, it will not count for a 2024 QCD. It does not matter that the check was written or dated in late 2024. The distribution must leave the IRA (i.e., the check must be cashed) by December 31. The custodian cannot and will not police when the check was delivered to the charity. The custodian can only monitor and report when the check is cashed, thereby initiating the actual distribution from the account.

If the QCD check written in late 2024 results in a distribution not officially being executed until early 2025, there are additional potential pitfalls to dance around. For example, if the intent was to use the QCD to offset all or a portion of a 2024 required minimum distribution (RMD), then we have a missed RMD situation. A penalty of 25% could apply if proper corrective action is not taken, and that is a scenario no one wants to tango with.

Additionally, with the QCD intended for 2024 being pushed into 2025, that QCD amount eats into the 2025 QCD cap of $108,000. If the IRA owner wants to donate the full amount to charity in 2025, the late-cashed check (intended for 2024) will have the unintended consequence of cutting into the 2025 QCD cap.

Note that QCDs still cannot be done from work plans like a 401(k). The QCD must come from an IRA. This rule leaves some donors scrambling to find a partner, and makes wallflowers out of others with no options. For any retirees turning 73 in 2025 who still have dollars in their 401(k), those plan assets must be moved to an IRA before the end of 2024 if the goal is to offset future RMDs with a QCD. Why the urgency? For anyone (not still working) who turns 73 in 2025, the first RMD year will be 2025. Rolling the 401(k) to an IRA next year and THEN offsetting the plan RMD with a QCD from the IRA will not work. RMDs cannot be rolled over. If you wait until 2025, the 2025 plan RMD must be withdrawn prior to the rollover, thereby eliminating the ability to offset that RMD with a QCD.

For those retired 401(k) participants who are already age 73 or older, the 2024 music has already stopped. You must take your 2024 plan RMD before doing any rollovers to an IRA. As such, the 2024 RMD must be withdrawn from the plan and cannot be offset with a QCD.

Of course, going forward, all will be well. With all plan dollars rolled over to an IRA, future IRA RMDs can be sent to whatever qualifying charity you wish via QCD. But until the plan dollars are in that IRA, we must do this plan RMD/rollover timing/QCD dance.

https://irahelp.com/slottreport/the-qcd-dance/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

The Nasdaq eclipsed the 20,000 level for the first time this week as investors reengaged in buying the mega-cap technology names.  Amazon, Google, Tesla, and Meta hit new highs for the year as investors heard about more advances in AI and quantum computing.  Google showcased advances in its quantum computing chip, Willow, while Broadcom reported stellar 3rd quarter results and announced it would work on a new AI chip for Apple.  Market action was somewhat tempered by lackluster 3rd quarter results from Oracle and Adobe and by the announcement that Chinese authorities were investigating Nvidia for anti-competitive practices.

Sticky US inflation data and a softer print in initial claims did not change the market’s expectation that the Fed would cut by twenty-five basis points in next week’s FOMC meeting. The European Central Bank cut its policy rate by twenty-five basis points, while the Bank of Canada and the Swiss National Bank opted for a fifty-basis-point cut. Chinese officials announced more monetary easing and plans to boost domestic consumption, but investors were left with very few details.  We are expecting the Fed to cut by twenty-five basis points but will be more focused on the Fed’s Summary of Economic Projections that may show the Fed curtailing rate cuts in 2025.

The S&P 500 lost 0.6%, the Dow fell by 1.8%, the Nasdaq gained 0.3%, and the Russell 2000 lagged, losing 2.6%. Interestingly, market breadth has been skewed toward more stocks losing than gaining over the last nine market sessions.  This comes even as Wall Street Strategist projects more gains in 2025.  Oppenheimer expects the S&P 500 to be at 7100 by the end of 2025, while Citi’s strategist sees a base case for 6500.  US Treasuries had the worst week in a couple of months as yields moved higher across the curve.  The 2-year yield increased by fourteen basis points to 4.24%, while the 10-year yield rose by twenty-five basis points to 4.40%.  Oil was well-bid on the week, gaining over 6% or $4.12 to close at $71.29.  Crude rose on the idea of tighter sanctions and more enforcement from President-elect Trump on Iran and Russia’s oil exports.  Gold prices rose by $17.90 to $2676.70.  Copper prices were unchanged on the week at $4.20.  Bitcoin regained the $100,000 mark and closed at $101,200.  The US Dollar index closed the week higher by 1% at 107.02.  There was notable weakness in the Chinese Yuan after Chinese officials floated the idea of a weaker currency to address potential Trump tariffs.

The economic calendar showed little progress on inflation.  The Consumer Price Index (CPI) showed an increase of 0.3% in November, which was in line with the street’s expectations.  The headline print was up 2.7% on a year-over-year basis, up from 2.6% in October.  The Core reading, which excludes food and energy, was also up 0.3% and 3.3% year-over-year, unchanged from October.  Notably, shelter prices rose at the smallest level since April of 2021.  The Producer Price Index (PPI) increased by 0.4%, above the consensus estimate of 0.2%.  On a year-over-year basis, prices rose 3% versus 2.6% in October.  Core PPI rose 0.2%, in line with expectations, but rose 3.45% year-over-year, up from 3.37% in October.  Food prices were the most significant contributor to the PPI reading.  An uptick in Initial Claims caught investor’s eyes.  The print increased by 17k over the prior week to 242k.  Continuing Claims increased by 15k to 1.886M.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Key Takeaways

  • Some provisions related to the Secure 2.0, a federal retirement law, will go into effect in 2025.
  • Workers ages 60, 61, 62, or 63 will be able to make catch-up contributions of up to $11,250 in 2025.
  • Workplace retirement plans such as 401(k) and 403(b) plans must automatically enroll participants at a savings rate of 3% to 10%.
  • And some beneficiaries of inherited IRAs will start incurring penalties for not taking distributions from their retirement accounts.

With the new year will come new retirement savings rules.

On Jan. 1, some new provisions of Secure 2.0, a federal retirement law, will take effect. These new rules could help you save more for retirement or force you to start withdrawing funds.

Here’s how they will affect your retirement savings and inheritance.

Older Workers Can Contribute Even More To Their Retirement Plans

Some older workers may be eligible to make larger catch-up contributions to their workplace retirement plans like 401(k)s and 403(b) thanks to new Secure 2.0 provisions,1

Workers who are ages 60, 61, 62, or 63 will be able to make catch-up contributions of up to $11,250 in 2025, compared to $7,500 for all other workers age 50 and older.2

Michael Griffin, a CFP at Henssler Financial, recommends that older workers who still want to save and have extra income to invest take advantage of the new rule.

“If you have the capacity to save additional money, we certainly suggest you do that,” said Griffin. “If you already have quite a lot of money in your retirement account, perhaps the additional catch-up contribution is not that beneficial for you.”

Employers Must Automatically Enroll Workers In Retirement Plans

New rules will also require 401(k) and 403(b) plans to automatically enroll workers unless they choose to opt out.

Workers must be enrolled at initial rates of 3% to 10%. After that, the savings rate is increased by one percentage point each year until it reaches at least 10%, though it is capped at 15%.

“We certainly have a saving problem in the U.S., where younger employees don’t want to contribute to retirement accounts,” said Griffin. “You [might] start saving at 3% and look at that [account] five years down the road and say ‘Wow, this is benefiting me.’”

While the policy is meant to encourage people to save for retirement, some Vanguard research indicates that automatic enrollment and increases may not benefit workers who frequently switch jobs and don’t stay long enough to experience the benefits of the increased savings rate.

Inherited an IRA? You’ll Need To Take Required Minimum Distributions

In the past, people who inherited IRAs from their parents or grandparents could let the investments in that account grow over time, deferring taxes and taking distributions when they chose. The Secure Act eliminated these “stretch IRAs,” requiring people to take distributions over a 10-year period instead.

“If someone receives money from a parent, or really, anyone other than their spouse, that’s when these new rules come into effect,” said Brett Koeppel, CFP and founder of Eudaimonia Wealth. Spouses who inherit IRAs can still take advantage of the “stretch IRA,” though.

The rule only applies to those who inherited IRAs from people who passed away in 2020 or later.3 The IRS recently provided clarification on how these distributions will be taken out.

Starting in 2025, non-spouse beneficiaries of inherited IRAs must take distributions from their account every year until the end of the 10-year period, when the account must be completely emptied, explained Rob Williams, managing director of Financial Planning at Charles Schwab.

And if someone fails to take a distribution from their inherited IRA by the deadline, they could be on the hook for a penalty worth up to 25% of the undistributed amount.4

https://www.investopedia.com/3-big-retirement-rule-changes-coming-2025-how-they-could-affect-your-savings-8742265

IRA Rollovers and Roth Contributions: Today’s Slott Report Mailbag

By Sarah Brenner, JD
Director of Retirement Education

 

Question:

Can a person do a rollover from both his traditional AND Roth IRAs in the same twelve months?

Best regards,

Matthew

Answer:

Hi Matthew,

The once-per-year rollover rule restricts an individual from rolling over more than one IRA distribution during a 365-day period. For purposes of this rule, traditional and Roth IRAs are aggregated. If you have both types of IRAs, you can only do one rollover from either the traditional IRA or the Roth in a one-year period.

Question:

I have a 60-year-old client who has the opportunity to contribute to a Roth 401(k). Is he permitted to contribute to both his Roth 401(k) and his Roth IRA?  Are there limits?
Thanks for your help!

Linda

Answer:

Hi Linda,

To fully fund a Roth IRA, you must have earned income. Additionally, your modified adjusted gross income (MAGI) for 2024 must be under $230,000 if married filing jointly (or under $146,000 if filing single). If he meets these requirements, he can fund both the Roth 401(k) and the Roth IRA. Funding one does not affect the other.

https://irahelp.com/slottreport/ira-rollovers-and-roth-contributions-todays-slott-report-mailbag/

Who Must Take a 2024 RMD?

By Sarah Brenner, JD
Director of Retirement Education

 

The holidays are upon us. There is shopping to do, gifts to wrap, and parties to attend. Amidst the hustle and bustle of the season, you may be forgiven if your retirement account is not at the top of your mind. However, for some retirement account owners and beneficiaries, a very important deadline is looming. December 31 is the deadline to take 2024 required minimum distributions (RMDs) for many individuals.

Retirement Account Owners

Which IRA owners must take an RMD for 2024? If you have a traditional, SEP, or SIMPLE IRA and you are age 74 or older in 2024, you must take an RMD by the end of this year. Also, if you are age 74 or older and have funds in an employer plan such as a 401(k) and you are not eligible to take advantage of the “still-working” exception, you must take a 2024 RMD.

If you have reached age 73 in 2024, you catch a break. You do not need to take your 2024 RMD until April 1, 2025. However, if you wait until next year to take your 2024 RMD, you will need to take two RMDs in 2025 because you are required to take your 2025 RMD by December 31, 2025.

What if you have a Roth account? You are in luck! You are never required to take RMDs from your Roth account in your lifetime.

Retirement Account Beneficiaries

Many retirement account beneficiaries need to take their 2024 RMD by December 31. If you inherited a retirement account before 2020 and you are using the stretch provision under the old rules, you must take your 2024 RMD by the end of the year. Also, if you inherited an account in 2020 or later and you are an eligible designated beneficiary (EDB), you must take an RMD by the end of 2024.

Although Roth accounts are not subject to an RMD requirement while the owner is alive, annual RMDs do apply to Roth beneficiaries who inherited before 2020 and to Roth IRA EDBs who inherited in 2020 or later and chose the stretch option.

Beneficiaries who are subject to both the 10-year rule under the SECURE Act and the final RMD regulations requirement that annual RMDs must be taken during it do not have to take an RMD for 2024. Due to all the confusion over these rules, the IRS has again waived the RMD requirement within the 10-year period. This waiver only applies to this specific group of beneficiaries and only applies for 2024. Going forward, beginning next year, if you are in this situation, you must take those annual RMDs during the 10-year period.

Don’t Delay

You may be thinking it is still early in December, so I have plenty of time to take my 2024 RMD. Do not delay! Many financial organizations have cutoff dates for processing transactions for 2024 that are much earlier than December 31. Add in end of the year staff vacations and waiting until the last minute to take your 2024 RMD is a recipe for trouble. Failing to take your RMD will result in a 25% penalty. Get it done now and enjoy the holidays!

https://irahelp.com/slottreport/who-must-take-a-2024-rmd/

 

Weekly Market Commentary

Weekly Market Commentary

The S&P 500 forged another set of all-time highs as investors embraced the idea of an economy running at a pace appropriate for the Fed to consider further rate cuts. Leadership in the market toggled back to the mega-cap technology issues, with the communication services, information technology, and consumer discretionary sectors leading the way.  Salesforce.com’s 3rd quarter results reminded the street of the enormous opportunity in AI with an encouraging outlook from the software provider.  President-elect Trump continued to define his administration and policy with the nomination of Kash Patel as FBI director and warning BRIC nations of dismantling the US dollar as the world’s reserve currency.  Trump also insisted that the hostages in Gaza be released just as the ceasefire between Israel and Hezbollah appeared to be falling apart.

The S&P 500 gained 1% and is now up 27.7% for the year.  The Dow closed lower by 0.6%; the NASDAQ outperformed, returning 3.3% and the Russell 2000 fell by 1.1%.  US Treasuries ended the week higher across the curve as the 2-year yield fell by six basis points to 4.10%, and the 10-year yield fell by three basis points to 4.15%.  Oil prices fell by $1.28 or 1.9% to $67.17 as OPEC + stayed the course with their production outlook.  Gold prices fell fractionally to close at $2658.90.  Copper prices rose by $0.06 to $4.20 per Lb.  Bitcoin regained the $100k mark before closing at $99,400 on Friday.  The US dollar index gained 0.3% and closed at 106.09.  Notably, the VIX, a measure of market volatility, closed at 12.72, down 37% from just before the US Presidential election.

The Economic calendar showcased the November Employment Situation Report, which showed a bounce back in payrolls.  Non-farm payrolls increased by 227k versus the street consensus of 220k.  Private payrolls increased by 194k versus the consensus estimate of 190k.  The Unemployment rate ticked higher by 0.1% to 4.2%.  Average Hourly earnings came in at 0.4% above the previous print of 0.3%.  The data aligned with expectations and strengthened the argument that the Federal Reserve will cut their policy rate by twenty-five basis points at their December 18th meeting.  ADP employment figures, Initial Claims, and Continuing Claims continued to show a resilient labor market.  ISM Manufacturing came in at 48.4, above the prior reading of 46.5, but still showed that part of the economy was in contraction.  ISM Non-Manufacturing came in at 52.1, which was much weaker than the prior reading of 56.  Finally, a preliminary look at the University of Michigan’s Consumer Sentiment Index saw a nice uptick to 74 from the previous reading of 71.8.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Weekly Market Commentary

Weekly Market Commentary

The S&P 500 forged another set of all-time highs as investors embraced the idea of an economy running at a pace appropriate for the Fed to consider further rate cuts. Leadership in the market toggled back to the mega-cap technology issues, with the communication services, information technology, and consumer discretionary sectors leading the way.  Salesforce.com’s 3rd quarter results reminded the street of the enormous opportunity in AI with an encouraging outlook from the software provider.  President-elect Trump continued to define his administration and policy with the nomination of Kash Patel as FBI director and warning BRIC nations of dismantling the US dollar as the world’s reserve currency.  Trump also insisted that the hostages in Gaza be released just as the ceasefire between Israel and Hezbollah appeared to be falling apart.

The S&P 500 gained 1% and is now up 27.7% for the year.  The Dow closed lower by 0.6%; the NASDAQ outperformed, returning 3.3% and the Russell 2000 fell by 1.1%.  US Treasuries ended the week higher across the curve as the 2-year yield fell by six basis points to 4.10%, and the 10-year yield fell by three basis points to 4.15%.  Oil prices fell by $1.28 or 1.9% to $67.17 as OPEC + stayed the course with their production outlook.  Gold prices fell fractionally to close at $2658.90.  Copper prices rose by $0.06 to $4.20 per Lb.  Bitcoin regained the $100k mark before closing at $99,400 on Friday.  The US dollar index gained 0.3% and closed at 106.09.  Notably, the VIX, a measure of market volatility, closed at 12.72, down 37% from just before the US Presidential election.

The Economic calendar showcased the November Employment Situation Report, which showed a bounce back in payrolls.  Non-farm payrolls increased by 227k versus the street consensus of 220k.  Private payrolls increased by 194k versus the consensus estimate of 190k.  The Unemployment rate ticked higher by 0.1% to 4.2%.  Average Hourly earnings came in at 0.4% above the previous print of 0.3%.  The data aligned with expectations and strengthened the argument that the Federal Reserve will cut their policy rate by twenty-five basis points at their December 18th meeting.  ADP employment figures, Initial Claims, and Continuing Claims continued to show a resilient labor market.  ISM Manufacturing came in at 48.4, above the prior reading of 46.5, but still showed that part of the economy was in contraction.  ISM Non-Manufacturing came in at 52.1, which was much weaker than the prior reading of 56.  Finally, a preliminary look at the University of Michigan’s Consumer Sentiment Index saw a nice uptick to 74 from the previous reading of 71.8.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

The Still-Working Exception and Roth Conversions in an RMD Year: Today’s Slott Report Mailbag

By Ian Berger, JD
IRA Analyst

 

Question:

If you continue to work past age 73, are you exempt from required minimum distributions (RMDs)? My 73 year-old wife is still working and contributing to her company’s 401(k), and she doesn’t own more than 5% of the company. Is she required to take out any RMD?

Could you please clarify this rule for me? Thank you.

Answer:

Assuming your wife’s plan allows it (most do), she can defer RMDs until her retirement under the “still-working exception.” That exception is not available for anyone who owns more than 5% of the company maintaining the plan. Even though she can defer RMDs from her 401(k), your wife must still take RMDs from any IRA starting this year.

Question:

I have a question about the new rule that requires that all IRA required minimum distributions (RMDs) must be satisfied prior to doing a Roth IRA conversion.

If the only RMD I have to take is from an inherited IRA (I am only 65 years old), then does this rule come into play? I was planning on doing my Roth conversion early in January 2025, but the RMD from my inherited IRA can’t easily be taken until April 2025 (when my CDs mature). Does this rule apply to inherited IRA RMDs?

Thanks,

Brian

Answer:

Hi Brian,

Good question! No, the rule requiring that RMDs from all IRAs must be taken before a Roth conversion (or 60-day rollover) is done only applies to your own IRAs — not IRAs that you have inherited. So, you can do the Roth conversion before you take the RMD from your inherited IRA.

https://irahelp.com/slottreport/the-still-working-exception-and-roth-conversions-in-an-rmd-year-todays-slott-report-mailbag/

Retirement Vs. Resignation: Which Is Better?

Retirement Vs. Resignation: Which Is Better?

Retirement Vs. Resignation: Which Is Better?

There is a big difference between retirement and resignation. However, both involve leaving your place of work. If you choose to retire, you may be entitled to some social benefits such as pension and healthcare, which can typically vary significantly with organizations. In addition, you need to have attained a certain age or have served for a specific duration to retire. On the other hand, to resign means you voluntarily quit your job, and as a result, you’re not entitled to the same benefits as a retiree.

What is Retirement

If you choose to retire, it means you are leaving your job and will no longer be a full-time employee of your former employer. Typically, your age and the time you’ve worked in the organization may dictate your retirement. Companies have a retirement age for their employees; when you’ve attained this age, you are free to retire. However, if, for instance, you’ve suffered an injury and cannot perform your duties as you should, you may also be required to retire.

You must write a resignation letter and complete a formal retirement application. If you’ve worked in the organization for a long time, giving the company some notice before you retire is a good idea. After retirement, you are entitled to social benefits like insurance and healthcare for a specific period. You will also be entitled to the money you saved during your career as a pension.

Your retirement eligibility depends on different factors that can vary from one company to another. People plan for retirement years in advance, and companies have policies you need to initiate in advance, which could be several months before the retirement date.‍

Process of Retirement

You need to follow specific steps in your retirement process, which can vary from company to company. However, the general process would take the following format.

1. Verbally inform your boss about your retirement.

2. Make a written letter to your boss and copy the same to the company’s human resource department.

3. Inform your coworkers about your retirement

4. Share your plans to retire with your family, friends, and clients

5. Share the same information on your social media‍

Contents of the Retirement Letter

A retirement letter is a formal notice of your retirement and should include details like the retirement date and personal information. Remember to put your letter in a cheerful voice, which should be short and formal. Having only three paragraphs is ideal because the only purpose of the letter is to announce your retirement. Have a short part in the letter where you express gratitude or thank your colleagues and the company.

  • Paragraph 1- About your retirement date
  • Paragraph 2 – Highlight your career and express gratitude
  • Paragraph 3 – Express your gratitude or thank your coworkers and the company for the support they gave you and what you’re looking forward to in your retirement

The essential point is to formally inform your boss and the HR department about your retirement plans. You can have your retirement party if you choose to celebrate  ‍

What is Resignation

Resignation means you’ve opted to leave your job voluntarily. The reason for leaving could be that you have found a better job or don’t like the company. Alternatively, maybe you want to take a break from working. Depending on your situation, resignation could be temporary or permanent. For example, some may resign from their job to take a year off, only to decide they do not want to return to work. Therefore, you can take a temporary resignation, which extends to a permanent one.‍

Process of Resignation

It is a straightforward process if you decide to resign from your job. Most companies will require you to write a signed resignation letter and forward it to your employer. Typically, people give notice in their resignation letters that range between two weeks and one month.

From employee experience, you need to discuss with your financial advisor the drawbacks, such as losing health insurance. You need to ask yourself if it’s the right decision to resign if you do not have any other source of income. Remember you still have to pay all the bills. It is critical to remember that without health insurance, life can be challenging.‍

Which One is Better

When considering retirement vs resignation, both possibilities involve leaving your job; however, there are some benefits you’re entitled to get when you retire instead of resigning. If you’ve reached retirement age, the best option would be to retire instead of resigning.

Most people who have attained retirement age often choose to retire to enjoy the benefits that come with retirement. However, if you resign, even if you have reached retirement age, you will not be eligible for benefits such as pension benefits or health insurance.

You need to assess your situation and decide the best option for your case. A financial advisor will guide you to make an informed decision.‍

After Retirement

After retirement, most people take up part-time jobs. Retirees are often healthy and can work; some may choose volunteer work. Most people want to take time to relax and get part-time jobs or casual work after some time, often after several months. You can also consider working from home because there are many jobs you can do remotely working from home.

If you choose to retire due to disability, finding work that suits your pace and abilities is still possible. Finding part-time work after retirement can help supplement your income so that you don’t have to use much of your savings immediately. Additionally, it’s a great way to have something that occupies your time.

Key Takeaways

Retirement and resignation are often options that come to mind for anyone at one point in time, and both involve quitting your job. You will not get social benefits like health insurance if you choose to resign. However, if you choose to retire, you will enjoy these benefits.

Additionally, you have to assess your situation and use the services of a financial advisor to decide which option best suits your situation. Whether you retire or resign is up to you and depends on your unique situation.

https://www.qualee.com/blog/retirement-vs-resignation-which-is-better

QCD Timing

By Andy Ives, CFP®, AIF®
IRA Analyst

 

Year after year, this topic continues to bubble up. Confusion exists over when a QCD can be done in relation to the RMD. Qualified charitable distributions (QCDs) can offset all or a portion of an RMD (required minimum distribution). However, for whatever reason, the sequencing of these items (QCDs and RMDs) confounds people. Let’s set the record straight, starting with some QCD fundamentals:

  • QCDS are only available to IRA owners who are age 70½ and over.
  • For 2024, the QCD cap is $105,000. (This cap increases to $108,000 in 2025.)
  • QCDs cannot be done from employer plans – like a 401(k).
  • Yes, QCDs can be done from an inherited IRA if the owner is 70 ½ or older. (It does not matter how old the now-deceased previous owner was.)
  • Donations paid directly from an IRA to an eligible charity may be excluded from income. However, there can be no benefit back to the taxpayer.

That’s the easy part. This next section is where the confusion starts:

A popular recommendation is to execute a QCD early in the year to avoid any conflict with the “first-dollars-out rule.” The first dollars withdrawn from an IRA are deemed to count toward the RMD. Once an RMD is taken, it cannot be retroactively offset with a later QCD. Hence the advice to do your QCDs early to avoid this mistake.

Example: John is 75 in 2024. The RMD on his IRA is $5,000. John committed to his church that he would gift this full amount. Prior to doing any QCDs, John takes a $2,000 distribution from his IRA in January 2024 to help pay the credit card bills from the previous holiday. Now it is December 2024. John informs his advisor that he would like to offset his entire RMD with a QCD. John cannot retroactively offset the $2,000 he took back in January. That $2,000 will be taxable. Since John has $3,000 remaining on his 2024 RMD, he has a handful of QCD options:

  • John can do a $3,000 QCD to his church to offset the remaining portion of his RMD, but this would leave him short of his donation commitment.
  • To meet his commitment, John can still do a $5,000 QCD to his church. This will result in $7,000 being withdrawn from his IRA for the year. This is perfectly acceptable, assuming John is willing to withdraw more than his RMD.
  • In fact, John could do a QCD of $105,000 to his church. The total QCD amount is NOT limited to the RMD amount. The end result would be $107,000 distributed from his IRA, with only $2,000 being taxable to John.

The point is that QCDs can be done at any time throughout the year. QCDs can also be done after all or a portion of the RMD has already been taken. The only reason it is suggested to do QCDs early is to avoid what John did – mistakenly take a taxable distribution that cannot be retroactively offset with a future QCD.

End Note: Since 2024 is coming to a close, there is another reason to do QCDs early: Some IRA accounts allow check-writing privileges. Checks written to a charity from a “checkbook IRA” qualify as a valid QCD. However, the custodian may not recognize the distribution until the check is cashed! That could be in early 2025…and then we have problems.

https://irahelp.com/slottreport/qcd-timing/

New 401(k) Provisions That Become Effective in 2025

By Ian Berger, JD
IRA Analyst

 

Get ready! Several new 401(k) provisions from the SECURE 2.0 Act kick in on January 1, 2025. One that we’ve already written about is the ability of employees to make extra catch-up contributions in a year they turn age 60, 61, 62 or 63 by the end of the year. (This “super catch-up” also applies to SIMPLE IRA participants.) Here are two others:

Automatic Enrollment

Most newly-established 401(k) (and 403(b) plans will be required to institute automatic enrollment. This requirement doesn’t apply to plans established before December 29, 2022 – the date SECURE 2.0 was enacted. It also doesn’t apply to plans started by employers with 10 or fewer employees, new employers (those that have been in business for less than three years), and church-sponsored plans, governmental plans or SIMPLE plans. Of course, existing plans have been (and continue to be) free to institute automatic enrollment if they want.

What does automatic enrollment mean? It means that, unless they opt out, covered employees will be required to make elective deferrals. The employer can set the deferral rate for those who don’t opt out – as long as the rate is at least 3% of pay and no more than 10% of pay. Each year after that, the employer must increase the required deferral rate by 1% until it reaches a rate of at least 10% and no more than 15% of pay.

A number of studies have shown that automatic enrollment is an effective way of boosting participation in 401(k) plans. However, some critics have argued that many employees are effectively duped into contributing when they can’t afford it since they aren’t aware of the opportunity to opt out.

Participation by Part-Time Employees

Before the SECURE Act, 401(k) plans could exclude part-time employees if they did not work at least 1,000 hours of service in a 12-month period or were under age 21. These rules have prevented many long-term part-timers from the opportunity to save in 401(k) plans.

The SECURE Act provided relief by requiring plans to permit any employee who has worked at least 500 hours in three consecutive 12-month periods (but excluding periods before 2021), and who is age 21 or older by the end of the three-year period, to start making elective deferrals. This allowed many previously ineligible part-time employees hired in 2021 or earlier to start participating on January 1, 2024.

In SECURE 2.0, Congress kept the age-21 requirement, but shortened the consecutive 12-month periods from three to two (but excluding periods before 2023). This means many part-timers hired in 2023 or earlier and not already eligible will be able to start saving as of January 1, 2025.

Employers are free to apply more liberal eligibility rules for their 401(k) plan. Also, neither the SECURE Act nor the SECURE 2.0 rules replace the pre-SECURE Act 1,000-hour/age 21 rule if that rule allows an employee to participate earlier than under the new rules. Finally, keep in mind that these part-time rules only apply for purposes of eligibility for elective deferrals – not eligibility for employer contributions.

Besides 401(k)s, the new SECURE 2.0 rule also covers part-timers under ERISA-covered 403(b) plans, starting January 1, 2025.

https://irahelp.com/slottreport/new-401k-provisions-that-become-effective-in-2025/

 

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

The holiday-shortened week saw the S&P 500 and Dow rise to new all-time highs.  Investors cheered the nomination of Scott Bessent as Treasury Secretary, who is seen as a fiscal hawk and someone who will support Trump’s trade policies.  US Treasuries rallied significantly on the idea of fiscal restraint.  Markets were tested on the announcement that Trump plans to place an additional 10% tariff on Chinese goods while imposing a 25% tariff on goods from Mexico and Canada. The news catalyzed the leaders of Mexico and Canada to come to the table to strengthen policy on immigration and border security.  A ceasefire agreement between Israel and Hezbollah was also constructive for the broader market, even as the war premium in oil faded.  The 60-day agreement will likely be tested, and everyone recognizes this is a complicated situation that will require an extension of the timeline to find a comprehensive resolution.  Third-quarter results posted this week from Dell, Hewlett Packard, Crowdstrike and Macy’s were disappointing.

The S&P 500 gained 1.4%, the Dow added 1.7%, the NASDAQ increased 1.4%, and the Russell 2000 rose 1.4%.  US Treasuries had a fantastic week of gains.  The 2-year yield fell by twenty-one basis points to 4.16%, while the 10-year yield decreased by twenty-three basis points to 4.18%.  Oil prices tumbled 4% or $2.83 to close at $68.45 a barrel.  Gold prices fell 1.2% to close at $2678.10 an Oz.  Copper price increased by five cents to $4.14 per Lb.  Bitcoin fell by ~$900 to close at $96,600.  The US Dollar index fell for the first time in eight weeks by 1.6% to 105.80.

The economic calendar featured the Fed’s preferred measure of inflation, the PCE, which showed little progress on inflation.  Headline PCE for the month of October came in line with expectations at 0.2% but, on a year-over-year basis, ticked to 2.3% from 2.1% in September.  The core reading that excludes food and energy came in at 0.3%, which is also in line with the street’s expectations but rose 2.8% on a year-over-year basis, up from 2.7% in September.  Notably, the price index for services rose to 3.9% in October from 3.7% in September.  The data could provide the Fed some cover if it decides to hold rates at the current level at the December FOMC meeting.  Fed Fund futures currently ascribe a 66% probability of a twenty-five basis point rate cut on December 18th.  Personal Income increased by 0.6%, while Personal Spending rose by 0.4%.  New Home Sales fell short of the consensus estimate at 610k.  Consumer Confidence came in at 111.7, well above the prior reading of 109.6.  The 2nd estimate of Q3 GDP came in at 2.8%, while the forecast for the GDP deflator came in at 1.9%.  Initial Claims were unchanged at 213k, while Continuing Claims increased by 9k to 1907k.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

6 End-of-Year Retirement Deadlines You Shouldn’t Miss for 2024

6 End-of-Year Retirement Deadlines You Shouldn’t Miss for 2024

Navigate these tax and retirement milestones to optimize savings and avoid penalties.

Staying on top of year-end tasks helps you avoid penalties and take full advantage of tax benefits.

Key Takeaways

  • Contributions to retirement accounts like 401(k)s must be made by Dec. 31, while contributions to individual retirement accounts and SEP IRAs can be made until the tax filing deadline in April 2025.
  • Required minimum distributions must be taken by Dec. 31 to avoid penalties, but first-time RMD takers have until April of the following year.
  • Roth IRA conversions must be completed by Dec. 31, while recharacterizations back to a traditional IRA have an extended deadline of Oct. 15 of the following year.
  • Retirement savers over 50 can make catch-up contributions, with deadlines tied to tax filing.
  • Charitable contributions must be made by Dec. 31 to qualify for deductions.

The end of the year brings several deadlines that could be costly for investors to overlook. Chief among them are tax-related deadlines for retirement account contributions and capital gains harvesting.

Staying vigilant about these year-end tasks saves you money in penalties for missed deadlines and helps you utilize the benefits of the tax code. These year-end retirement deadlines include:

  • Qualified account contribution deadlines
  • Mandatory withdrawal deadlines
  • Deadlines for conversion or recharacterization
  • Deadlines for catch-up contributions
  • Deadline for charitable contributions
  • Medicare and Social Security deadlines

Qualified Account Contribution Deadlines

If you plan to contribute to your employer-sponsored 401(k) plan, the deadline is Dec. 31.

However, if you intend to contribute to an individual retirement account, you have until the tax filing deadline in April 2025.

If you are a business owner and would like to set up a simplified employee pension, or SEP IRA, that deadline is also April 2025, said Stefan Greenberg, managing partner at Lenox Advisors in Stamford, Connecticut, in an email.

“If you plan to contribute to a solo 401(k), your employee contributions need to be made by Dec. 31, but the employer contributions can be made before the business files their taxes,” Greenberg said.

Mandatory Withdrawal Deadlines

One of the most important year-end withdrawal deadlines concerns required minimum distributions from IRAs. Those withdrawals must be made before Dec. 31 or the account owner faces a penalty.

Signed into law in December 2022, the SECURE 2.0 Act reduced the penalty for a missed RMD or incomplete withdrawal to 25% from 50%, and the penalty may be reduced to 10% if the mistake is corrected within two years.

A U.S. House of Representatives Ways and Means Committee report from March 2022 found that many failures to take an RMD are inadvertent rather than attempts to avoid taxation. The committee said it wanted to take steps to reduce the penalty on retirement savers who attempt to correct an honest mistake.

“If this is your first time taking an RMD, you get a little extra time,” Greenberg said. “You can take your distribution by April of the following year. Your RMDs thereafter would adhere to the Dec. 31 deadline.”

Deadlines for Conversion or Recharacterization

The deadline for converting a traditional IRA to a Roth IRA is Dec. 31.

A Roth conversion involves transferring funds from a traditional IRA or 401(k) to a Roth account, with the converted amount subject to income tax. Investors use this strategy to benefit from tax-free withdrawals in retirement.

According to brokerage Fidelity, a Roth recharacterization typically occurs for one of three reasons:

  • An investor wants the tax deduction from a traditional IRA.
  • An investor wants tax-free earnings from a Roth.
  • An investor’s income is too high to qualify for a Roth.

The timetable for recharacterizing a Roth IRA contribution back to a traditional IRA contribution differs from some of the other retirement account cutoff dates.
“The deadline for recharacterizing a Roth IRA contribution back to a traditional IRA contribution is Oct. 15 of the year following the year in which you need to make the adjustment,” said Aaron Cirksena, founder and CEO of MDRN Capital in Annapolis, Maryland, in an email.

Deadlines for Catch-Up Contributions

According to the Internal Revenue Service, retirement savers who are age 50 or older at the end of the calendar year can make annual catch-up contributions.

The catch-up contribution limit for 401(k) and similar employer-sponsored plans is $7,500 in 2024.

The IRS allows catch-up contributions of up to $1,000 to your traditional or Roth IRA. Catch-up contributions to an IRA are due by the due date of your tax return in April or in October for those who extend their tax filing.

Deadline for Charitable Contributions

These days, fewer Americans itemize their taxes, but it’s still possible to deduct up to 60% of adjusted gross income when you make a cash donation to a qualified charity. If you donate appreciated securities, you may be able to deduct 30%.

However, you must make contributions by Dec. 31 to get those deductions.

If you don’t itemize your taxes, you could still get the deduction using a strategy called bunching. That involves clustering charitable deductions in a single year, then skipping the following year or even a few subsequent years.

According to Fidelity, “This strategy can work well when your total itemized deductions for a single year fall below the standard deduction. Charitable contributions for several years made at once may allow the total of itemized deductions to exceed the standard deduction, making it possible to obtain a tax deduction for at least part of the charitable contributions.”

Medicare and Social Security Deadlines

The enrollment period for Medicare begins three months before you turn 65 and ends three months after your 65th birthday.

The open enrollment period runs from Oct. 15 through Dec. 7. “You can apply during this time if you missed the initial enrollment period, but keep in mind you may have to pay a late enrollment penalty,” said Kendall Meade, a certified financial planner at San Francisco-based SoFi, in an email.

Social Security has no particular deadlines pegged to the year’s end. New recipients can apply for their Social Security retirement benefits up to four months in advance and begin receiving benefits as early as age 62, said Meade.

“The Social Security Administration will reduce your benefit if you do not wait until full retirement age, which is 67 for most,” she added. “Some people may choose to delay until age 70 to receive the maximum benefit. There is no benefit to waiting past age 70.”

Related: 

Reasons to Take Social Security Late at Age 70

 

Importance of Adhering to These Deadlines

Adhering to end-of-year investing and tax deadlines is crucial if you want to maximize the benefits of saving and minimize penalties.

By taking action in a timely fashion as required by tax law, you can capitalize on investment opportunities. You’ll also avoid missed contributions that could impact your financial health in the long term.

https://money.usnews.com/money/retirement/401ks/articles/year-end-retirement-planning-deadlines

What We Are Thankful for at The Slott Report

Sarah Brenner, JD
Director of Retirement Education

Each year it is a Thanksgiving tradition here at the Slott Report to take a moment to give thanks for the rules that are helpful to retirement savers. There are many times when rules governing retirement accounts can seem illogical, confusing, and maybe even unfair. However, there are other rules that work well and give us the tools necessary to not only save for a secure retirement but maybe even get a few tax breaks along the way.

Here are a few retirement account rules for which we are thankful in 2024:

All Things Roth!  – Who doesn’t love tax-free savings? With Roth accounts, qualified distributions in retirement are tax-free. The Roth IRA first became available in 1998. Since then, Roth savings opportunities have grown. Roth employee deferrals are now common, Roth employer contributions accounts are now available, and millions of retirement savers have done Roth conversions. Roth savings continue to grow under the recent SECURE Act and SECURE 2.0 and for this we are thankful.

New Rules for Spouse Beneficiaries – Believe it or not we are feeling thankful for the IRS. The SECURE 2.0 Act upended the rules for spouses who inherit retirement accounts and left confusion in its wake. This year the IRS stepped in and provided some much-needed guidance. The recently released regulations provide unexpected clarity on the new rules and expand the advantages to spouse beneficiaries of retirement accounts.

The NUA Strategy – In 2024, with the markets booming, many individuals have seen substantial growth in their retirement plan balances. If the account includes company stock, then it can be a good strategy to distribute that stock in-kind to a nonqualified account to take advantage of lower capital gains rates on the net unrealized appreciation (NUA). For this tax break, we are grateful!

Portability. Nowadays people change jobs frequently. The days of staying in one job for life and retiring with a pension are long gone. We give thanks for the rules which recognize the increased mobility of the workforce and allow more portability between retirement plans. Rollovers from plans to IRAs and trustee-to-trustee transfers between IRAs allow us to protect and maximize our retirement savings.

Qualified Charitable Distributions – A QCD allows an IRA owner to move funds from her IRA to charity tax-free. A QCD is a great way to get a tax break for giving if you are charitably inclined and use the standard deduction. A QCD can also satisfy an RMD. What is not to like? We are grateful for this tax break that not only helps the IRA owner but also contributes to the greater good.

Happy Thanksgiving from all of us at the Slott Report!

https://irahelp.com/slottreport/what-we-are-thankful-for-at-the-slott-report/

So Many IRA Beneficiary Variables!

By Andy Ives, CFP®, AIF®
IRA Analyst

 

When an IRA owner dies, what is the payout schedule for the beneficiary? The key to distinguishing the correct program (i.e., 10-year rule, stretch RMDs, 5-year rule, etc.) is to identify all the important variables. But there are so many! Nevertheless, each detail must be considered. Every scenario requires that we navigate through a mental flow chart. The correct answer lies at the end of every beneficiary maze.

For example, questions that we must definitively ask include:

1. When did the original IRA owner die? This is the foundational question for every case. If the answer is 2019 or earlier, then the “old rules” apply. The SECURE Act does not apply to deaths prior to 2020. So, we literally have two sets of rules to maintain within our mental filing cabinet. The answer to Question #1 dictates which filing drawer of information we access.

2. How old was the original owner when he died/RBD? After identifying when the IRA owner died (assume it was after the SECURE Act), we must know how old the person was at death. Did he die before or after the required beginning date (RBD)? It is imperative to know if required minimum distributions (RMDs) were started by the deceased IRA owner.

3. Is this a Roth or traditional IRA? This question is often overlooked. The payout rules are slightly different for Roth and traditional IRAs. Since RMDs do not apply to Roth IRA owners while they are alive, Roth IRA owners are always deemed to have died before the RBD. (As such, Question #2 is irrelevant for Roth IRAs.)

4. Who/what type of beneficiary is listed (NDB, EDB or NEDB)? This is the biggie. Questions #1 – 3 narrow the scope of each beneficiary situation. Question #4 about the type of beneficiary nails down the applicable payout.

  • If the beneficiary is a Non-Designated Beneficiary (NDB, or what I like to call a “non-person”), then we have either the 5-year rule or the “ghost rule” depending on the age of the deceased (Question #2).
  • If the beneficiary is a Non-Eligible Designated Beneficiary (NEDB), then we have the 10-year rule. Whether annual RMDs apply in years 1 – 9 of the 10-year rule is also dictated by Question #2 above. If RMDs were started by the deceased IRA owner, then they must continue within the 10-year period.
  • If the beneficiary is an Eligible Designated Beneficiary (EDB), then we have a full stretch RMD situation. RMDs based on the single life expectancy of the beneficiary must begin in the year after the year of death.

These four questions will lead us nearly to the end of the “beneficiary payout mental flowchart.” However, there are always minor tweaks. For example, if death is before the RBD (Q2), then an EDB can choose between the 10-year rule or a full lifetime stretch. Also, don’t forget to ask if we are talking about an inherited IRA that was already passed to the first beneficiary. If such is the case, then we must open our mental file cabinet drawer containing the “Successor Beneficiary Rules.” Without knowing ALL the variables, it is impossible to answer a beneficiary payout question accurately. Each and every situation requires a meticulous navigation of what is nothing more than an “if this, then that” flow chart. The proper answer does exist at the end.

https://irahelp.com/slottreport/so-many-ira-beneficiary-variables/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

Markets bounced back as investors reengaged the pro-growth Trump 2.0 trade.  President-elect Trump continued to fill out his cabinet and, late Friday announced Scott Bessent as his nominee for Treasury Secretary.  Wall Street has endorsed Bessent, who is seen as a fiscal hawk who will support Trump’s tariffs and trade policies.  Matt Gaetz removed himself as the nominee for Attorney General amid allegations of sexual misconduct, which prompted Trump to nominate Pam Bondi for the position.  Current SEC Chairman Gary Gensler announced he would step down in January, which led to more discussions on deregulation, with much attention placed on the Cryptocurrency markets.  Notably, Bitcoin approached $100k in Friday’s session.

An escalation of tensions in the Russia-Ukraine war sent investors to safe-haven assets such as gold, the US Dollar, and US Treasuries.  The use of US and British-made missiles by Ukraine on Russian assets prompted the Kremlin to update its nuclear doctrine and to use an intercontinental ballistic missile in a subsequent attack on Ukraine.

All eyes were on NVidia and its third-quarter earnings results.  The company did not disappoint, posting better-than-expected results and raising guidance for the coming quarter.  The stock ended the week flat, which is kind of crazy, given the market expectations for a sizeable move in either direction post-earnings.  Other notable earnings included solid results from Walmart, Ross, and Snowflake.  Target’s results were a disaster, sending shares lower by more than 20%.

The S&P 500 gained 1.2%, the Dow jumped 2%, the NASDAQ advanced 1.7%, and the Russell 2000 increased by 4.5%.  Despite an early week’s bid into Treasuries, the yield curve saw selling at the front end of the curve.  The 2-year yield increased by seven basis points to 4.37%, while the 10-year yield fell by two basis points to 4.41%. The 2-10 spread compressed to just four basis points.

Oil prices advanced by 6.3% or $4.26 to close at $71.28 a barrel.  Gold prices increased by 5.5% to $2713.10, the largest weekly move since May 2023.  Copper prices rose by $0.02 to $4.09 per Lb.  Bitcoin rose by $6300 to $97,455, falling just short of 100k on Friday.  The US Dollar index rose for the eighth consecutive week, gaining 0.8% and closing at 107.55.  The Euro fell to 1.0410, while the Japanese Yen closed the week just under 155.

The economic calendar was relatively quiet.  Housing Starts and Permits were weaker than expected as Existing Home Sales topped estimates.  S&P Global Manufacturing and Services PMI data were weak globally, but Eurozone data was materially weaker than anticipated.  In the US, Services data indicated further expansion, coming in at 57 versus 55 in October.  Manufacturing in the US remained in contraction, but the pace of contraction was less than in October.  Initial Jobless Claims fell by 6k to 213k, while Continuing Claims increased by 36k to 1908k.  The final reading of the University of Michigan’s Consumer Sentiment Index came in at 71 versus the consensus estimate of 73.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Qualified Charitable DIstributions and Inherited IRAs: TOday’s Slott Report Mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst

 

QUESTION:

Hello Ed Slott Team,

We have a client with an IRA who wants to do a qualified charitable distribution (QCD) to a charity. The charity also has an account with the same custodian of the IRA and has asked that the client simply journal assets from her IRA directly to the charity’s account. Logistically, this can be done. Two questions on the topic: 1.) Is it OK to journal assets directly in this manner and still have it count as a QCD? 2.) Do QCDs need to be done in cash, or can they be done in positions?

Dustin

ANSWER:

Dustin,

If the custodian is willing to do so, then yes, they can journal the assets from the IRA to the charity’s account. As long as the custodian reports the transaction as a distribution from the IRA, then all will be well. As for question #2, QCDs do not have to be in the form of cash. If a charity is willing to accept, for example, shares of stock, then shares of stock delivered directly to the charity can qualify as a valid QCD.

QUESTION:

I inherited an IRA from my mother in 2015. I misunderstood that it was an IRA and have not been taking required minimum distributions (RMDs). In his most recent book, Ed Slott mentions that the IRS frequently waives the missed RMD penalty. Do I have to file Form 5329 for each of the years I missed taking the RMD (back to 2015)? Should I pay the penalty, or try to get it waived?

Thanks,

Leslie

ANSWER:

Leslie,

The IRS has shown that it is agreeable to waiving the 25% (previously 50%) missed RMD penalty for good cause. There is a process for requesting a waiver: 1.) Take all the past missed RMDs. 2.) Complete a Form 5329 for each year with a missed RMD. (You may need the help of a tax professional.) 3.) Submit the forms to the IRS along with a brief letter explaining what happened, that the oversight has been corrected (i.e., missed RMDs have been taken), and you have taken steps to make sure it won’t happen again. Finally, do not pay the penalty. If the IRS declines your waiver request, it will be in touch. Otherwise, you can assume your waiver request has been granted.

https://irahelp.com/slottreport/qualified-charitable-distributions-and-inherited-iras-todays-slott-report-mailbag/

Three Changes Coming for Social Security in 2025

Three Changes Coming for Social Security in 2025

The Social Security Administration has announced the 2025 final COLA, wage cap, and amount needed to earn SS credits.

Anticipating changes coming to Social Security in 2025 can help you start planning for the new year and identify any adjustments you can make to maximize your eligibility for the most benefits.

People who think these changes only impact retirees would be wrong. Current workers need to keep an eye on accumulating enough Social Security credits and understand how much of their wages will be subject to the 6.2% Social Security tax.

1. Social Security cost of living adjustment for 2025

The Social Security annual cost-of-living adjustment (COLA) for 2025 is 2.5%, the Social Security Administration (SSA) announced recently. This is the smallest increase since 2020, as expected, and follows an increase of 3.2% in 2024.

According to the SSA, the 2.5% increase will translate to an additional $49 for the average retiree, increasing the average monthly check from $1,927 to $1,976. Married couples will see an average increase of $75, raising their monthly benefit to $3,089 up from $3,014.

The COLA for 2025 is 2.5%. The final number is based on the July, August and September CPI numbers. These three sets of numbers are used by the SSA to determine the annual COLA.

Keep in mind that while a lower inflation rate should lead to a smaller increase in prices, it does nothing to lower the current prices for groceries, utilities or housing that many are struggling to meet.

2. Full retirement age (FRA) in 2025

Retirees will have to wait a little longer to reach their full retirement age (FRA) in 2025. The full retirement age is increasing gradually if you were born from 1955 to 1960, until it gets up to 67.

In 2025, the full retirement age will be 66 years and 10 months. For those who turned 66 in 2024, FRA is 66 years and eight months.

Here is when you will reach your FRA, by birth year:

  • If you were born in 1958, your FRA is age 66 and six months and was reached in 2024
  • If you were born in 1959, your FRA is age 66 and 10 months and is reached in 2025
  • If you were born in 1960 or later, your FRA is age 67 and will be reached in 2026 and after
  • NOTE: People born on January 1 of any year, refer to the previous year.

If you retire at age 62, the earliest possible Social Security retirement age, your benefit will be lower than if you wait till your FRA. The more months remaining between age 62 and your FRA, the more your monthly payments will be reduced.

Early retirement will reduce your benefits by 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 5/12 of one percent per month.

If you choose to continue working beyond your full retirement age and delay applying for benefits, you can increase future Social Security benefits in two ways: Each extra year you work adds another year of earnings to your Social Security record, and higher lifetime earnings can mean higher benefits when you retire.

Benefits will increase from the time you reach full retirement age until you start to receive benefits, or until you reach age 70. For each full year you delay receiving Social Security benefits beyond full retirement age, 8% is added to your benefit.

3. Social Security credits and taxes in 2025

In 2025, you’ll have to earn more to qualify for Social Security credits, and the wage cap for Social Security taxes will increase.

Social Security credits. You must earn a minimum number of Social Security credits to qualify for retirement benefits. The Social Security Administration cannot pay you benefits if you don’t have enough credits. You must earn 40 work credits to become eligible for benefits, and you are allowed to earn up to four credits per year.

The SSA also uses the number of credits you’ve earned to determine your eligibility for retirement or disability benefits, Medicare, and your family’s eligibility for survivor benefits.

To earn one credit in 2025, you must have wages and self-employment income of $1,810, and you must earn $7,240 to get four full credits. This amount increases annually, so it will rise in 2026. In 2024, you only needed to earn $1,730 to earn a credit, $80 less than what you need to earn in 2025.

Once you earn the 40 credits, earning more credits won’t increase your benefit payment. Instead, your retirement benefit is based on how much you earned during your working years.

Wage cap. Social Security caps the amount of income you pay taxes on and get credit for when benefits are calculated. The Social Security tax limit in 2025 is $176,100, up $7,500 from $168,600 in 2024. The tax limit is indexed to inflation and is therefore estimated to rise in 2026.

In 2024, the wage cap rose by $8,400 to $168,600 from $160,200 the previous year.

https://www.kiplinger.com/retirement/social-security/changes-coming-for-social-security-in-2025

Nothing SIMPLE About It: 3 Different Catch-Up Limits for 2025

Ian Berger, JD
IRA Analyst

Here’s something you can only find in the Internal Revenue Code: Starting in 2025, there will be not one, not two, but three different catch-up limits for older SIMPLE IRA participants.

Like IRAs and workplace plans like 401(k)s, SIMPLE IRAs allow annual elective deferrals up to a dollar limit and “catch-up” contributions for those who reach age 50 or older by the end of the year. Both of these limits are indexed for inflation. For 2024, the regular elective dollar limit is $16,000, and the catch-up limit is $3,500 – for a total limit of $19,500. For 2025, the regular elective deferral limit increases to $16,500, but the catch-up remains $3,500 – for a total of $20,000.

But Congress could not leave well enough alone. Starting this year, the SECURE 2.0 legislation bumped up both of these limits by 10% for many – but not all – SIMPLE IRA plans. The 10% bonus applies to plans sponsored by companies with 25 or fewer employees – which includes most SIMPLE plans. But it also applies to companies with more than 25 employees if the company agrees to increase its SIMPLE IRA employer contribution to a level higher than usually required. (If the employer matches deferrals, the match must be up to 4% of pay instead of the usual 3% of pay. If the employer contributes to all eligible employees, the contribution must be 3% of pay instead of the usual 2%.) The 10% bonus boosted the 2024 regular deferral limit to $17,600 and the catch-up limit to $3,850 – for a total limit of $21,450. Both limits are indexed for inflation, but because of indexing rules, they will remain $17,600/$3,850 for 2025.

Adding even more complexity to the mix, starting in 2025 SIMPLE IRA participants turning 60, 61, 62 or 63 by the end of a calendar year can make an even higher catch-up contribution for that year. This “super catch-up” is $5,250 (150% of $3,500 – the 2025 regular catch-up limit.)

So, if you’re an older SIMPLE IRA plan participant, where does that leave you for 2025 (besides confused)? Assuming your plan already allows the standard $3,500 age 50-or-older catch-up (as most do), here are the rules for increased catch-ups for 2025:

  • If you’ll be between ages 50 and 59 OR age 64 or older on December 31, 2025 and your company has 25 or fewer employees, you can defer up to $3,850 of catch-ups (on top of regular deferrals of $17,600).
  • If you’ll be between ages 50 and 59 OR age 64 or older on December 31, 2025 and your company has more than 25 employees, you’ll be eligible for catch-ups up to $3,850 (on top of regular deferrals of $16,500) only if your employer elects to make a higher-than-usual company contribution (as outlined above). If your employer doesn’t, your catch-up limit will be the standard $3,500 (on top of regular deferrals of $16,500).
  • If you’ll be between ages 60 and 63 on December 31, 2025, you can defer up to $5,250 of catch-ups (on top of regular deferrals of either $17,600 or $16,500). It doesn’t matter how many employees work for your company or if the plan offers the higher company contribution.

SIMPLE, isn’t it?

https://irahelp.com/slottreport/nothing-simple-about-it-3-different-catch-up-limits-for-2025/

Tax-Free HSA Distributions

By Sarah Brenner, JD
Director of Retirement Education

 

Health Savings Accounts (HSAs) continue to become more popular. If you have a qualifying high deductible health plan, you may make deductible contributions to an HSA. Then, you can take tax-free distributions to pay for qualified medical expenses. Here is what you need to know about taking tax-free HSA distributions.

What Are Qualified Medical Expenses?

Qualified medical expenses are more than just doctor bills. Qualified medical expenses include those costs that would generally qualify for the medical expense deduction under the Tax Code. This means you can take a tax-free distribution from your HSA to pay not only medical expenses like doctor and hospital bills, but also medical supplies, prescriptions co-payments, dental care, vision services, and chiropractic expenses. You can take tax-free distributions from your HSA to pay for your spouse or child’s medical expenses, even if they are not covered by your high deductible health insurance plan.

Reimbursing Expenses from Previous Years

You can take a tax and penalty-free distributions from your HSA in 2024 to pay for medical expenses in a previous year, as long as the expenses were incurred after you established your HSA. That means you do not have to make an HSA withdrawal every time you have a medical expense. You can pay that expense from your pocket, and let your account grow, and decide to reimburse yourself in a later tax year.

Even if you no longer have a high deductible health plan and you are no longer contributing to your HSA, you can keep the HSA and continue to take tax-free distributions from your HSA to pay for your qualified medical expenses for you, your spouse, and your dependents.

Special Benefits at Age 65

You cannot contribute to an HSA once you are enrolled in Medicare. However, you can keep your existing HSA, and you can still take tax-free distributions for qualified medical expenses.

When you reach age 65, you also gain some new benefits with your HSA. Generally, insurance premiums are not considered qualified medical expenses. However, after age 65 and enrollment in Medicare, certain insurance premiums can be paid tax-free with HSA distributions. You can take tax-free distributions from your HSA to pay for Medicare premiums, excluding Medigap.

Spouse HSA Beneficiaries

If your HSA beneficiary is your spouse, after your death, he or she can maintain the HSA in his or her own name and can continue to access the funds. Distributions for qualified medical expenses will be tax-free, just as they would have been to you.

https://irahelp.com/slottreport/tax-free-hsa-distributions/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

US equity markets pulled back last week as investors took profits from the outsized move higher seen following the US election. Sticky inflation prints, coupled with solid retail sales and hawkish comments from Federal Reserve Chairman J. Powell, sent interest rates higher, giving investors another reason to sell the market.  Powell said, “The economy is not sending any signals that we need to be in a hurry to cut rates.” The probability of a twenty-five basis point rate cut at the Fed’s December meeting fell from nearly 80% to 55% off his comments.  President-elect Trump’s announcements of some controversial anti-establishment cabinet nominees also influenced the markets. For instance, his pick to head the Department of Health and Human Resources, Robert Kennedy Jr- a vaccine skeptic, catalyzed a sell-off in the healthcare sector, which fell by 5.5% in the week.

World leaders continued to vet Trump 2.0 on tariff implications, economics, and the military conflicts in the Middle East and Ukraine.  China’s President met with President Biden in Peru on Saturday and stated, “China is ready to work with the new US administration to maintain communication, expand cooperation and manage differences, so as to strive for a steady transition of the China-US relations for the benefit of the two peoples.  No doubt there is more to come on how the new administration’s agenda will play out and how it will influence Wall Street.

The S&P 500 fell 2.1%, the Dow was off by 1.2%, the NASDAQ declined by 3.1%, and the Russell 2000 slumped by 4%.  US Treasuries continued to sell off, with longer-tenured paper taking the brunt of the move.  The US 2-year yield increased by five basis points to 4.30%, while the US 10-year yield increased by twelve basis points to 4.43%.  The 10-year yield hit 4.5% during Friday’s session, the highest level since May 31st.  Higher US yields continued to strengthen the US Dollar, which hit a 2-year high.  The US Dollar index rose by 1.6% to close at 106.67.  The stronger dollar continued to impact the commodity complex. Generally, as the US Dollar appreciates, it becomes a headwind for commodity prices.  Oil prices tumbled by $3.36 or 4.8% to close at $67.02 a barrel.  Gold prices fell $123.70 or 4.5% to $2,570 an Oz.  Copper lost 5.5%, closing at $4.07 per Lb.  Bitcoin topped $93,000 before settling up 20% on the week at $91,188.

The economic calendar featured a look at October consumer and producer inflation data.  The headline Consumer Price Index increased by 0.2%, in line with the street consensus estimate.  The reading was up 2.6% on a year-over-year basis, up from the 2.4% print in September.  Core CPI, which excludes food and energy, also came in line with expectations at 0.3% and was up 3.3% year-over-year, the same level seen in September.  Headlined and Core October PPI came in as expected at 0.3%.  However, both year-over-year readings in October, 2.4% and 3.1%-respectively, were higher than the previous September readings.  October Retail sales were better than expected, coming in at 0.4% versus the consensus estimate of 0.2%.  There was also a notable revision higher to the September retail figures.  The consumer continues to be resilient, which provides a healthy backdrop for corporate profits.   With 3rd quarter earnings nearly completed, the S&P 500 saw an 8.4% increase in profits- roughly double what was expected.  Initial Claims fell by 4k to 217k, while Continuing Claims declined by 11k to 1873k.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

7 Things You’ll Be Happy You Downgraded in Retirement

7 Things You’ll Be Happy You Downgraded in Retirement

Downsizing for retirement is a good way to simplify your life and cut down on expenses. Making some key changes, like moving into a smaller home, could reduce financial strain and improve your quality of life. It could also give you room to grow in new, unexpected ways.

As you approach retirement, here are some things you’ll be glad you downgraded.

Your Home

There’s a reason retirement experts often suggest downsizing your home or living space in retirement. It’s perhaps one of the most significant ways of lowering costs while simplifying your lifestyle.

“Downsizing to a smaller and newer living space can often translate to less cleaning and maintenance costs in retirement, which can optimize your cash flow in retirement and remove the stress of constantly having to upkeep your home,” said Steve Sexton.

Moving into a smaller or energy-efficient space can also cut down on your utility bill. If you were spending a lot of time or money on your outdoor space, downsizing can make things easier here as well.

Before taking the plunge, there are a few things you should do first, though.

“Make sure you consider all potential factors,” Sexton said, “like HOA fees, property tax, homeowners insurance, closing costs, real estate agent fees, interest rates, moving costs, etc., to make sure this makes financial sense for you.”

Your Work

While you can work full-time until the day you retire, Taylor Kovar, CFP and CEO of 11 Financial, suggested cutting back on your work-related commitments and working part-time for a while instead. This is something you can even do after you’ve officially retired if you still want or need some structure or additional funds.

Switching to semi-retirement or switching to part-time work can lead to a better work-life balance and more flexibility in your life. It also can cut down on any work-related stresses you might have had previously while giving you greater financial stability.

Your Investments

If you have multiple investment accounts, retirement could be a good time to combine or streamline some of them.

“I’ve advised clients to simplify their investment portfolios, moving from a diverse array of complex investments to more straightforward, lower-risk options,” said John F. Pace.

Doing this can cut down on account management fees, which is another plus for those trying to cut costs. Plus, it shifts the focus from wealth accrual to wealth management which, depending on your situation, could be a good change.

Your Financial and Legal Affairs

If you’ve been dealing with a relatively complex financial situation over the years, you might want to simplify it before retiring.

“Simplifying financial and legal affairs can greatly alleviate the stress and confusion that often accompanies retirement planning,” said Marty Burbank.

This includes consolidating any financial accounts you have — in addition to your investment accounts. It also involves creating clear-cut estate plans and ensuring everything is current when it comes to your legal documents.

“This simplification allows for an easier transfer of assets when the time comes and ensures that [your] wishes are respected,” Burbank said.

It also brings about peace of mind for both you and your loved ones.

Clutter

If you’re like most people, you’ve probably accumulated a good deal of clutter over the years. This can include sentimental items as well as other things you no longer need or use.

“While you’ll want to hold on to family heirlooms or things that have sentimental value,” Sexton said, “decluttering your space and selling off items you don’t need — sports/workout equipment, outdated electronics, furniture and clothes that no longer fit — can help you organize your space while making some extra cash on the side.”

https://www.gobankingrates.com/retirement/planning/things-you-will-be-happy-you-downgraded-in-retirement/?hyperlink_type=manual&utm_term=related_link_1&utm_campaign=1288640&utm_source=yahoo.com&utm_content=2&utm_medium=rss

Roth IRA Conversion Considerations

By Andy Ives, CFP®, AIF®
IRA Analyst

 

Roth IRA conversions remain as popular as ever. However, based on some recent questions we’ve received, it is apparent that folks don’t fully understand all the nuances of this transaction. Here are some of the basic concepts and items of consideration:

There are no income limits on Roth IRA conversions. Yes, there are income limits when making a Roth IRA tax-year contribution, but not on a conversion. A person could make a million dollars and still do a Roth conversion. Or, a person could be unemployed with zero income and do a Roth conversion. (If you reside in a low-income bracket, just be sure you have the money available to pay the tax on the conversion.) Back in the day there were income limits for Roth conversions, but those limitations have long since been repealed.

There is also no limit on the amount that can be converted. If you want to eat all the taxes due on a multi-million-dollar Roth conversion, go for it. For some people, this could be a wise strategy. Maybe their ultimate goal is to provide a tax-free inheritance to their beneficiary? Maybe they are sick of taking required minimum distributions (RMDs) and just want to rip the tax band aid off? Whatever the case may be, a single, gigantic Roth conversion is perfectly acceptable. (There have been proposals to limit conversion amounts, but such ideas have fallen on deaf ears.)

There is no such thing as a “prior year conversion.” There are prior-year Roth IRA tax-year contributions, but not conversions. For a conversion to count for a particular year, the funds must leave the traditional IRA by December 31. For example, if an IRA owner takes a distribution from his traditional IRA on December 31, 2024, and deposits those funds into a Roth IRA in early 2025 (within 60 days of the distribution), that will count as a valid Roth conversion for 2024.

A Roth conversion will generate a Form 1099-R showing the distribution in Box 1, and a Form 5498 showing the Roth conversion in Box 3. Continuing with the example above; the distribution in late 2024 will create a Form 1099-R for 2024. But since the rollover/conversion “crossed tax years” and wasn’t completed until early 2025, Form 5498 won’t be generated until 2026! Proper tax preparation is paramount to ensure the IRS knows what happened.

An important fact for anyone under age 59 ½ who does a conversion: taxes withheld on a Roth IRA conversion do not get converted. There is no age limit or penalty for doing a Roth conversion – only taxes due. But if a younger person has the taxes withheld from the IRA when doing the conversion, those taxes withheld are an early withdrawal and will trigger a 10% penalty on the money you are sending to the IRS!

One final interesting Roth conversion item: ordering rules. We know that Roth IRAs can consist of three different types of dollars – contributions, conversions, and earnings. Ordering rules dictate that Roth distributions follow that exact sequence when paid out. A person always has access to their Roth IRA contributions tax- and penalty-free. But be careful. A person could make a bunch of contributions to a TRADITIONAL IRA, and subsequently have a large amount of earnings in that traditional IRA. If this IRA were to be converted to a Roth IRA, those dollars would no longer be “contributions and earnings,” but would now be converted dollars within the Roth. Their “character” changed as they are now slotted into the Roth conversion bucket within the Roth IRA.

The Roth IRA conversion conversation can go on for pages and pages. (I didn’t even mention the 5-year Roth clocks!) Be sure to consider the laundry list of Roth conversion items before haphazardly diving in.

https://irahelp.com/slottreport/roth-ira-conversion-considerations/

Annual RMDs For Certain Beneficiaries Kick in Soon

By Ian Berger, JD
IRA Analyst

 

The get-out-of-jail card that has allowed many IRA and plan beneficiaries to forego annual required minimum distributions (RMDs) is about to expire.

Here’s some background:

In its 2022 proposed regulations, the IRS took the position that a retirement account beneficiary subject to the 10-year payout rule who inherits from an IRA owner after the owner had reached his required beginning date (RBD) for starting RMDs must continue annual RMDs during the 10-year period. (The RBD for IRA owners is generally April 1 of the year following the year you turn age 73. The RBD for plan participants is usually April 1 of the year following the later of the year you turn 73 or the year you retire.)

The IRS said that annual RMDs were required on account of the tax code’s “at-least-as-rapidly rule.” This rule says that once RMDs have started, they must continue after death (although not in the same amount).

Because of the confusion this unexpected interpretation caused, the IRS waived RMDs for 2021-2024 for beneficiaries who would have been required to start annual RMDs. But in its July 18, 2024 final regs, the IRS doubled down on its reading of the “at-least-as-rapidly rule” and made clear that annual RMDs for beneficiaries subject to to the 10-year rule must begin in 2025 if the IRA or plan account holder died after his RBD.

So, how is the 2025 RMD calculated? Here’s an example:

In 2020, Sofia, who was then age 55, inherited an IRA from her father Alejandro, who died at age 80. Because Alejandro died after his RBD, Sofia must take annual RMDs starting in 2025. We must first go back and figure out what Sofia’s baseline life expectancy was in 2021 (the year following the year Alejandro died) when she was 56, and then subtract 1.0 for each subsequent year up to 2025. The life expectancy of a 56-year old under the IRS Single Life Table is 30.6. Subtracting 1.0 for each subsequent year gets us to a 26.6-year life expectancy for Sofia’s 2025 RMD. Her 2026 RMD will be 25.6 (26.6 – 1.0), her 2027 RMD will be 24.6 (25.6 – 1.0), and so on until 2030. By December 31, 2030, Sofia must empty out the remaining inherited IRA.

Even though beneficiaries subject to the 10-year rule don’t have to take annual RMDs for 2024, they may want to do so anyhow while federal tax rates are relatively low. Taking advantage of low tax rates is also a good reason why beneficiaries required to starting taking RMDs in 2025 should consider taking more than the RMD. Otherwise, they may be stuck with a large tax bill in the 10th year when the account must be emptied. That’s especially true for beneficiaries like Sofia who, because of the delayed effective date of the annual RMD rule, will only have five yearly RMDs instead of nine.

https://irahelp.com/slottreport/annual-rmds-for-certain-beneficiaries-kick-in-soon/

Annual RMDs For Certain Beneficiaries Kick in Soon

By Ian Berger, JD
IRA Analyst

 

The get-out-of-jail card that has allowed many IRA and plan beneficiaries to forego annual required minimum distributions (RMDs) is about to expire.

Here’s some background:

In its 2022 proposed regulations, the IRS took the position that a retirement account beneficiary subject to the 10-year payout rule who inherits from an IRA owner after the owner had reached his required beginning date (RBD) for starting RMDs must continue annual RMDs during the 10-year period. (The RBD for IRA owners is generally April 1 of the year following the year you turn age 73. The RBD for plan participants is usually April 1 of the year following the later of the year you turn 73 or the year you retire.)

The IRS said that annual RMDs were required on account of the tax code’s “at-least-as-rapidly rule.” This rule says that once RMDs have started, they must continue after death (although not in the same amount).

Because of the confusion this unexpected interpretation caused, the IRS waived RMDs for 2021-2024 for beneficiaries who would have been required to start annual RMDs. But in its July 18, 2024 final regs, the IRS doubled down on its reading of the “at-least-as-rapidly rule” and made clear that annual RMDs for beneficiaries subject to to the 10-year rule must begin in 2025 if the IRA or plan account holder died after his RBD.

So, how is the 2025 RMD calculated? Here’s an example:

In 2020, Sofia, who was then age 55, inherited an IRA from her father Alejandro, who died at age 80. Because Alejandro died after his RBD, Sofia must take annual RMDs starting in 2025. We must first go back and figure out what Sofia’s baseline life expectancy was in 2021 (the year following the year Alejandro died) when she was 56, and then subtract 1.0 for each subsequent year up to 2025. The life expectancy of a 56-year old under the IRS Single Life Table is 30.6. Subtracting 1.0 for each subsequent year gets us to a 26.6-year life expectancy for Sofia’s 2025 RMD. Her 2026 RMD will be 25.6 (26.6 – 1.0), her 2027 RMD will be 24.6 (25.6 – 1.0), and so on until 2030. By December 31, 2030, Sofia must empty out the remaining inherited IRA.

Even though beneficiaries subject to the 10-year rule don’t have to take annual RMDs for 2024, they may want to do so anyhow while federal tax rates are relatively low. Taking advantage of low tax rates is also a good reason why beneficiaries required to starting taking RMDs in 2025 should consider taking more than the RMD. Otherwise, they may be stuck with a large tax bill in the 10th year when the account must be emptied. That’s especially true for beneficiaries like Sofia who, because of the delayed effective date of the annual RMD rule, will only have five yearly RMDs instead of nine.

https://irahelp.com/slottreport/annual-rmds-for-certain-beneficiaries-kick-in-soon/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

The S&P 500 notched its 50th all-time high of 2024 as investors piled into equities after a decisive US election.  Wall Street embraced the idea that President-Elect Trump would enact several pro-growth policies to bolster corporate profits.  Lower taxes, deregulation, and a protectionist stance on trade sent Small-caps, Financials, and Technology higher.  The definitive results sent VIX, a measure of volatility, lower by 5 points or nearly 22% in a single day!  The notion of lower taxes and no fiscal austerity initially hit the bond market, where the US 10-year yield advanced by seventeen basis points.  Interestingly, the bond market settled down over the next three sessions to end the week higher.

A twenty-five basis point cut by the Federal Reserve was announced as a unanimous decision on Thursday.  A dovish Powell recognized the strong US economy, the resilient labor market albeit weaker than the beginning of the year, and the progress on inflation without signaling a definitive stance on a rate cut at the Fed’s December meeting.  Fed Funds futures currently assign a 65% probability of a twenty-five basis point rate cut at the December meeting.

91% of the S&P 500 companies have reported third-quarter results.  It has been a mixed bag of results, but on the margin, Earnings per Share growth has been slightly better than expected.  Notable results this week came from Palantir, Novo Nordisk, Global Foundries, Taiwan Semiconductor, McKesson, Exact Sciences, Moderna, Applovin, and Qualcomm.

The S&P 500 gained 4.95%, the Dow rose by 5.25%, the NASDAQ added 6.08%, and the Russell 2000 rocketed higher by 8.13%.  US Treasury yields were mixed across the curve in volatile trade, with lower duration constituent yields increasing while longer-tenured paper saw yields fall.  The 2-year yield increased by five basis points to 4.25%, while the 10-year yield fell by five basis points to 4.31%.  Oil prices increased by 1.2% or $0.86 to $70.38 a barrel.  Gold prices fell by 2% or $55.80 to $2693.70 an OZ.  Copper prices fell by six cents to $4.31 per Lb.  Bitcoin rallied nearly 10% to close at $76,350 on Friday and, as I write, has topped $80k for the first time.  The US Dollar Index gained 0.7% on the week to close at 105.03.

The economic calendar was relatively light this week. October ISM Services showed a robust US services sector with a better-than-expected print of 56, up from the prior reading of 54.9.  Initial Claims were up by 3k to 221k, while Continuing Claims added 39k to 1.892M.  Q3 productivity came in line at 2.2%, while Unit Labor Costs exceeded estimates at 1.9%.  A preliminary look at November’s University of Michigan’s Consumer Sentiment showed continued strength with a reading of 73 versus the prior reading of 70.5.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Why Your Current Retirement Plan May Not Be Enough in 2025

Why Your Current Retirement Plan May Not Be Enough in 2025

Retirement: the wonderful time of life when you no longer have to work for your money. Instead, your money is finally working for you. If you’re well on your way to retirement, kudos to you.

Today, more Americans are retiring than ever before.

According to the Alliance for Lifetime Income (ALI), 2024 marks the start of the “Peak 65 Zone” which is the largest surge of retirement-age Americans turning 65 in U.S. history. Over 4.1 million Americans will turn 65 each year through 2027 — that’s more than 11,200 every day.

However, if you’re planning to retire as soon as next year, there are several reasons why your current retirement plan may not be sufficient, according to GOBankingRates and The Motley Fool.

You Don’t Have Enough Money Saved

If you haven’t saved enough money, this is the first sign that your current retirement plan is not sufficient. As a general rule of thumb, it’s advisable to save 10 to 15% of your income annually during your full-time working years (more if you can). If you started saving too late, you would have needed to save an even higher percentage of your income to be on track for retirement.

If you’re not sure, check out Fidelity’s retirement calculators to figure out how much money you’d need to retire comfortably next year and whether you’re actually on track to do so.

You Have Too Much Debt

If you still haven’t paid off your mortgage, you still have student loans to pay off or you’re deep in credit card debt, it may not be the best idea to retire next year. Debt burns a hole in your wallet and makes it difficult to save and invest money. Focus on reducing and eliminating your debts now before you enter your golden years.

You Aren’t 59 1/2 Yet

According to the IRS, in 2024 the earliest you can withdraw funds from your 401(k) without penalties is age 59 1/2. If you choose to withdraw funds before this age, you’ll be subject to a 10% tax on any distributions. You may be exempt from the 10% tax under certain circumstances such as becoming disabled or if you’re using the funds for qualifying medical expenses. Otherwise, you’ll end up spending a lot more of your retirement fund, which could mean that your money doesn’t last for the rest of your life.

https://finance.yahoo.com/news/why-current-retirement-plan-may-130049890.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAJjqY86iwgc6ACkf1KF-caeTxlfdaaoxcCGh5cLmQZRLImki4uvhteZQsrY0HPg4BO-DjRRPZl6eBp_03IBvJMUeWSPmSrngeKAaean2HaxX0soj8o80OWnl2tlxoasYwKNXG5V8QxxgFGaNmsrlE4odznuLzclPSFkPHQRVJgeN

 

 

INHERITED ROTH IRAs AND TRUST BENEFICIARY PAYOUTS: TODAY’S SLOTT REPORT MAILBAG

By Ian Berger, JD
IRA Expert

 

Question:

For a non-spousal inherited roth IRA account, there seems to be contradictory advice on different websites about when to take distributions. Some say there are annual required minimum distributions (RMDs) within the 10 years; others say you can wait until the 10th year for a lump sum. If you can wait and don’t need the money, wouldn’t it be wiser to wait until the last year since the money compounds tax free and the final lump sum distribution would also be tax-free?

Regards,

Jake

Answer:

Hi Jake,

Most non-spouse roth IRA beneficiaries are subject to the 10-year payout period. The annual RMD requirement in years 1-9 never applies in this situation. So, yes, it would be smart to leave the inherited roth account until the end of the 10-year period for maximum accumulation of tax-free growth. Instead of the 10-year rule, a non-spouse beneficiary who is an “eligible designated beneficiary” can also choose to have annual RMDs stretched over her lifetime.

Question:

Does the same 10-year rule that applies to other non-spouse beneficiaries also apply when the beneficiary is a trust? My mom passed away in 2023 and left a small IRA to a trust for my sister and me.

Phyllis

Answer:

Hi Phyllis,

Yes, assuming the trust document satisfies the rules for being a “see-through trust,” then the trust for you and your sister would be subject to the 10-year payout rule. (This also assumes the trust is a “conduit trust,” where the IRA funds are paid to the trust and then immediately out to the trust beneficiaries.) However, if your mother died after the required beginning date for starting RMDs, the trust would also need to start receiving annual RMDs from the inherited IRA starting in 2025 – and through 2033 – based on the life expectancy of whichever of you is the oldest. (Annual RMDs for 2024 were waived by the IRS.)

https://irahelp.com/slottreport/inherited-roth-iras-and-trust-beneficiary-payouts-todays-slott-report-mailbag/

401(k) Contribution Limits Increase for 2025

By Sarah Brenner, JD
Director of Retirement Education

 

There is some good news for retirement savers! The IRS has released the cost-of-living adjustments (COLAs) for retirement accounts for 2025, and many of the dollar limit restrictions on retirement accounts will increase next year. In addition, new rules from the SECURE 2.0 Act also will bring more savings opportunities.

401(k) Plans

For savers looking to max out 401(k) contributions, higher contribution limits will be available for 2025. The salary deferral limit for employees who participate in 401(k) plans, including the Thrift Savings Plan, as well as 403(b) and 457(b) plans, is increased to $23,500, up from $23,000.

The catch-up contribution limit for those age 50 or over remains unchanged at $7,500. Under a change made in the SECURE 2.0 Act, a higher catch-up contribution limit applies starting in 2025 for individuals aged 60, 61, 62 and 63This higher catch-up contribution limit is $11,250, instead of $7,500.

SEP and SIMPLE IRA Plans

The maximum SEP contribution will increase from $69,000 to $70,000. The cap on compensation that can be taken into account for calculating SEP and other retirement plan contributions is increased from $345,000 to $350,000.

SIMPLE salary deferral contributions will increase as well, going from $16,000 to $16,500 for 2025. The SECURE 2.0 Act allows individuals in certain SIMPLE plans, including those sponsored by companies with 25 or fewer employees, to contribute a higher amount. For 2025, this higher amount remains $17,600.

The catch-up contribution limit that applies for individuals aged 50 and over who participate in a SIMPLE plan remains $3,500 for 2025. Under a change made in the SECURE 2.0 Act, a higher catch-up limit applies for employees aged 50 and over who participate in certain SIMPLE plans, including those sponsored by companies with 25 or fewer employees. For 2025, this limit remains $3,850. Under another change from the SECURE 2.0 Act, an even higher catch-up contribution limit applies starting in 2025 for employees aged 60, 61, 62 and 63. This higher catch-up contribution limit is $5,250.

IRA Contributions

The IRA contribution limit will remain at $7,000 for 2025. The $1,000 IRA catch- up contribution is now indexed for inflation but remains unchanged for 2025. This will again allow those who are aged 50 or over to again contribute $8,000 to an IRA for 2025. The phase-out range for savers making contributions to a Roth IRA is increased to $150,000-$165,000 for single filers, up from $146,000-$161,000. For those who are married filing jointly, the income phase-out range is increased to $236,000-$246,000, up from $230,000-$240,000.

Phaseout ranges for active participants in employer plans looking to make deductible traditional IRA contributions have also been increased. For single individuals covered by an employer retirement plan, the phase-out range is $79,000-$89,000 for 2025, up from $77,000-$87,000. For married couples filing jointly, if the spouse making the IRA contribution is covered by an employer retirement plan, the phase-out range is increased to $126,000- $146,000, up from $123,000-$143,000. For those not covered by an employer retirement plan but are married to someone who is covered, the phase-out range is increased to $236,000-$246,000, up from $230,000-$240,000.

More details on the COLAs for 2025 can be found at https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000

https://irahelp.com/slottreport/401k-contribution-limits-increase-for-2025/

New Rule: All IRA RMDs Must Be Satisfied Prior to Doing a Roth Conversion

By Andy Ives, CFP®, AIF®
IRA Analyst

 

Yes, you read that title correctly. This rule was confirmed in the 2024 final SECURE Act regulations, released this past July. If a person has multiple IRAs, even if they are held at different custodians, the total aggregated IRA required minimum distribution (RMD) must be withdrawn before any Roth IRA conversion (or 60-day rollover) can be completed. [This does NOT include RMDs from work plans like a 401(k).]

Aggregation rules tell us that RMDs for each IRA must be calculated separately, but the aggregated total may be taken from any one or more of a person’s IRAs. The first dollars distributed from an IRA in a year when RMDs are due are considered the RMD. In addition, we know that RMDs cannot be rolled over or converted. Ergo, the RMD must be taken prior to any conversion – sequencing matters.

Example: Arnold (age 80; Uniform Lifetime Table factor of 20.2) has three IRAs held at three different custodians. The total balances and RMDs (rounded up) for each IRA are as follows:

IRA #1:   $100,000 year-end balance; RMD: $4,951

IRA #2:   $300,000 year-end balance; RMD: $14,852

IRA #3:   $450,000 year-end balance; RMD: $22,278

Arnold’s total aggregated RMD is $42,081. He can split this up any way he chooses between his three IRAs. He must take the total amount before the end of the year.

Prior to taking any distributions, Arnold tells his financial advisor that he would like to do a Roth conversion of IRA #1. Arnold must take the entire $42,081 before a Roth conversion can be processed with IRA #1 or any of his other IRAs. It is not good enough to ONLY take the $4,951 RMD from IRA #1 and then subsequently do a conversion within that same IRA #1.

If Arnold completes a Roth conversion before he satisfies his entire $42,081 RMD for the year, whatever remained of his RMD before the conversion is considered an excess contribution in the Roth IRA and must be removed.

For example, if Arnold took only the $4,951 RMD from IRA #1 and then did a $50,000 Roth conversion within that same IRA #1 (or any of the others), he would have an excess contribution in the Roth IRA of $37,130. This represents what Arnold had remaining on his total aggregated RMD ($42,081 – $4,951 = $37,130). Arnold would then have to follow the excess contribution corrective measures.

Again, sequencing matters. RMDs have always had to be taken before any Roth IRA conversion. The difference now is that ALL of a person’s total aggregated IRA RMDs must be withdrawn prior to a conversion – not just the RMD on the account being converted. Be careful here as this new rule flies in the face of how many RMDs and conversions have been processed in the past.

https://irahelp.com/slottreport/new-rule-all-ira-rmds-must-be-satisfied-prior-to-doing-a-roth-conversion/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

It was a very busy week on Wall Street as investors analyzed a deluge of corporate earnings reports and a full economic data calendar.  The S&P 500 traded lower for the second consecutive week and could not close out October with a gain, having gained ground in the prior six consecutive months.   Mega-cap earnings results were mixed, with results from Google and Amazon cheered, while results from Apple, Microsoft, and Meta were booed.  A common theme in these names is increased capital expenditures on AI, and management teams continued to convey that the elevated spending would continue.  Questions regarding when investors would see a return on investment resurfaced and put further question marks around the mega-cap issue’s valuations.  The semiconductor sector came under some pressure this week, catalyzed by poor results from AMD and the announcement that Ernst and Young had resigned as Super Micro Computer’s accountant.  AMD fell 11.29% while Super Micro cratered 45.41%.  Other notable earnings came from Eli Lilly, which missed its quarterly estimates and telegraphed a weaker forecast. Intel missed estimates, but the guidance encouraged investors.  Chevron and Exxon Mobile posted solid results.

The S&P 500 lost 1.4%, the Dow gave back 0.2%, the NASDAQ slid 1.5%, and the Russell 2000 posted a gain of 0.1%.  The US Treasury market continued to struggle as yields across the curve increased.  The 2-year yield increased by ten basis points to 4.20%, while the 10-year yield jumped by thirteen basis points to 4.36%.  Much of the narrative around the increase in yields over the last month has been related to the idea that there will be no fiscal austerity in Washington with either presidential candidate.  The market continues to price in a twenty-five basis point cut by the Fed this coming Thursday.

Oil prices fell early in the week as a war premium was taken off but rallied late in the week on news that Iran is planning fresh attacks on Israel.  WIT was off $2.25 or 3.1%, closing at $69.52 a barrel.  Gold prices fell by $5.30 to $2,749.50 an Oz.  Copper prices were unchanged on the week, closing at $4.37 per Lb.

This week, the economic data calendar was stacked, with investors focused on the PCE print and the Employment Situation Report. Headline PCE increased by 0.2%, in line with expectations. On a year-over-year basis, the figure increased by 2.1%, down from 2.3% in August.  Core PCE, which excludes food and energy, rose by 0.3%, slightly above the expected 0.2%, and was up 2.7% over the last year, unchanged from the prior two months.  The Employment Situation report was viewed with some reservations, given the impact expected from hurricanes Helene and Milton.  The report showed that non-farm payrolls increased by just 12k, well below the estimated 125k.  Private Payrolls fell by 28k versus the estimated 115k.  The Unemployment rate came in at 4.1%, unchanged from September.  Average Hourly earnings increased by 0.4%, slightly higher than the expected 0.3%.  The Average work week came in at 34.3 hours versus the expected 34.2 hours.  These two reports gave the green light for the Fed to cut rates in their upcoming meeting.  Initial Claims fell by 12k to 216k, while Continuing claims fell by 26k to 1862k.  Personal Income increased by 0.3% and Personal Spending increased by 0.5%.  Consumer Confidence showed a nice uptick to 108.7; the street was looking for a print of 99.3.   ISM Manufacturing showed an acceleration in contraction with a below-consensus reading of 46.5%.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Trusts as the Beneficiary and Inherited IRAs: Today’s Slott Report Mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst

 

QUESTION:

Hello,

I’m working with a retired client who has a sizable IRA. He set up a trust and named it as the beneficiary of the IRA, assuming that the trust would reduce or eliminate the income tax liability. Is this the case? Also, does a trust circumvent the 10-year rule?

Thanks!

ANSWER:

Naming a trust as IRA beneficiary does not reduce or eliminate the income tax on an inherited IRA. In fact, naming a trust as IRA beneficiary could exacerbate the tax liability. Trusts hit the top tax bracket (37% in 2024) when 2024 income exceeds just $15,200. Of course, the taxes could be shifted to the trust beneficiaries at their personal tax bracket, but the potential hit of the high trust tax rates still exists. Additionally, naming a trust does not circumvent the 10-year rule. In a worst case scenario, if the trust is designed improperly, the trust beneficiaries could be saddled with a 5-year payout. As we have said for years, do not name a trust as your IRA beneficiary unless there is a valid reason to do so and you know what you are doing.

QUESTION:

Has there been any clarification on the requirement and time frame for required minimum distributions (RMDs) for inherited IRAs during the 10-year rule? Specifically, for inherited IRAs where a parent had already started taking RMDs and the beneficiaries are not eligible designated beneficiaries? I know that the IRS delayed the need to take RMDs over the last few years, but has that been clarified yet for the future?

Thanks,

Mike

ANSWER:

Mike,

Yes, we do have guidance from the IRS on RMDs within the 10-year payout period. The SECURE Act dictates that when a non-eligible designated beneficiary (NEDB) inherits an IRA from a person who died after the required beginning date for starting RMDs, then annual RMDs must continue within the 10-year term. Since this rule created so much confusion, the IRS waived RMDs within the 10-year period for 2021, 2022, 2023 and 2024. For beneficiaries subject to RMDs within the 10-years, those RMDs must commence in 2025.

https://irahelp.com/slottreport/trusts-as-the-beneficiary-and-inherited-iras-todays-slott-report-mailbag/

Key change coming for 401(k) ‘max savers’ in 2025, expert says — here’s what you need to know

Key change coming for 401(k) ‘max savers’ in 2025, expert says — here’s what you need to know

Key Points
  • Many Americans face a retirement savings shortfall, but setting aside more could get easier for some older workers in 2025.
  • Enacted in 2022, the Secure Act 2.0 ushered in several retirement system improvements, including higher 401(k) plan catch-up contributions.
  • Starting in 2025, workers aged 60 to 63 can boost annual 401(k) catch-up contributions to $10,000 — or 150% of the catch-up limit — whichever is greater.

Many Americans face a retirement savings shortfall. However, setting aside more money could get easier for some older workers in 2025.

Enacted by Congress in 2022, the Secure Act 2.0 ushered in several retirement system improvements, including updates to 401(k) plans, required withdrawals, 529 college savings plans and more.

While some Secure 2.0 changes have already happened, another key change for “max savers,” will begin in 2025, according to Dave Stinnett, Vanguard’s head of strategic retirement consulting.

Some 4 in 10 American workers are behind in retirement planning and savings, according to a CNBC survey, which polled roughly 6,700 adults in early August.

But changes to 401(k) catch-up contributions — a higher limit for workers age 50 and older — could soon help certain savers, experts say. Here’s what to know.

Higher 401(k) catch-up contributions

Employees can now defer up to $23,000 into 401(k) plans for 2024, with an extra $7,500 for workers age 50 and older.

But starting in 2025, workers aged 60 to 63 can boost annual 401(k) catch-up contributions to $10,000 — or 150% of the catch-up limit — whichever of the two is greater. The IRS hasn’t yet unveiled the catch-up contribution limit for 2025.

“This can be a great way for people to boost their retirement savings,” said Jamie Bosse, in Manhattan, Kansas.

An estimated 15% of eligible workers made catch-up contributions in 2023, according to Vanguard’s 2024 How America Saves report.

Those making catch-up contributions tend to be higher earners, Vanguard’s Stinnett said. But they could still have “real concerns about being able to retire comfortably.”

More than half of 401(k) participants with income above $150,000 and nearly 40% with an account balance of more than $250,000 made catch-up contributions in 2023, the Vanguard report found.

Roth catch-up contributions

Another Secure 2.0 change will remove the upfront tax break on catch-up contributions for higher earners by only allowing the deposits in after-tax Roth accounts.

The change applies to catch-up deposits to 401(k), 403(b) or 457(b) plans who earned more than $145,000 from a single company the prior year. The amount will adjust for inflation annually.

However, the IRS in August 2023 delayed the implementation of that rule to January 2026. That means workers can still make pretax 401(k) catch-up contributions through 2025, regardless of income.

https://www.cnbc.com/2024/10/16/catch-up-contributions-change-2025.html

Turn Your Clocks Back, and Pay Attention to the Roth IRA Clocks

By Ian Berger, JD
IRA Analyst

Don’t forget to turn your clocks back this weekend!

With that reminder comes another: pay attention to the Roth IRA distribution clocks. The key point to remember is that there are two different clocks, each used for a different purpose.

The First Clock: Is a Distribution of Converted Dollars Subject to Penalty?

When you do a Roth IRA conversion, you’re not subject to the 10% early distribution penalty at that time – even if you are under age 59 ½. But if you receive a distribution of converted Roth amounts when you’re under 59 ½, you could be hit with the penalty. This is the only time that the first five-year clock comes into play. This clock starts ticking on January 1 of the year of the conversion. If you’re under 59 ½ and take out the converted amount before the end of the five-year period that starts on that January 1, you’ll be penalized (assuming no penalty exception applies). If you do Roth conversions in different years, each conversion has its own five-year clock. But remember: If you don’t touch the converted funds until after age 59 ½, the first five-year clock will never come into play.

The Second Clock: Is a Distribution of Earnings Subject to Taxes?

The second clock is completely different than the first one. This clock helps determine whether earnings on Roth IRA contributions (and conversions) are taxable when distributed. Earnings avoid taxes if two conditions are met: The 5-year clock is satisfied, and you are at least age 59 ½ (or disabled or a first-time home buyer). When both conditions are satisfied, you’ve received what’s called a “qualified distribution.”

This second clock (which we like to refer to as the “5-year forever clock”) starts ticking on January 1 of the year of your first contribution or conversion to ANY Roth IRA. There is no separate 5-year forever clock for any subsequent contribution or conversion. If you take out earnings on your Roth contributions or conversions before the end of the five-year period that starts on that January 1, those earnings will be taxable. Getting the 5-year forever clock ticking is why it’s so important to open up a Roth IRA as early as possible – even if it’s funded with $10 or $20.

But don’t fret if your Roth IRA distribution is not “qualified.” Roth IRA ordering rules allow contributions and conversions to come out before earnings. This means that you can always receive a tax-free distribution of an amount equal to your Roth contributions and conversions without even reaching your earnings (in other words, before the second clock even comes into play).

Confused? Well, you do have an extra hour this weekend to figure it all out.

https://irahelp.com/slottreport/turn-your-clocks-back-and-pay-attention-to-the-roth-ira-clocks/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

Global markets pulled back last week as investors took the opportunity to reduce some risk before a very close US Presidential election. In the US, nearly 20% of the S&P 500 reported earnings. Generally, results came in better than expected; however, the market’s response was mixed.  Tesla’s results were met by a 22% gain in the stock’s price as better margins, a strong outlook on deliveries, and the promise of a lower-priced Tesla model enthused market participants.  Dow components IBM, HON, and GE results were met with selling pressure.  Financials, Industrials, and Materials were laggards throughout the week.  Mega-cap Technology issues flexed their market leadership as NVidia forged new all-time highs as investors await earnings from Google, Microsoft, Amazon, Apple, and Meta next week.  These results and a much anticipated Employment Situation report on Friday will set the stage before the US election and the Federal Reserve’s November monetary policy decision.

The S&P 500 shed 1%, the Dow lost 2.7%, the NASDAQ eked out a 0.2% gain, and the Russell 2000 fell by 3%.  Notably, the NASDAQ was able to gain in a weak tape and is only 1% away from regaining its early July all-time highs.  US Treasuries sold off across the curve in a volatile week of trade as expectations for further rate cuts were curtailed.  The 2-year yield rose by fifteen basis points to 4.10%, while the 10-year yield increased by sixteen basis points to 4.23%.  The significant increase in rates across the curve since the Federal Reserve decided to cut rates appears to have been dismissed by the equity markets; however, these increases in rates, alongside elevated market valuations, may have also provided reason for some profit-taking this week.

Oil prices increased by 3.7% to close at $71.77 a barrel, fueled by increased tensions in the Middle East and the announcement of more stimulus to the Chinese economy.  On Saturday, Israel attacked Iranian military assets but avoided targeting energy infrastructure.  The tempered response may pull the war premium out of oil and suggest lower prices for crude.  The calibrated move is also seen as a chance for tensions to subside and for a restart of negotiations.  Gold prices hit another record high before closing up $24.60 to $2754.80 an Oz.  Copper prices fell by a penny to close at $4.37 per Lb.  Bitcoin fell by $1,200 to 67,170.  The US Dollar Index gained 0.8% to 104.27.  The Japanese Yen hit a 3-month low relative to the US Dollar, and it is likely the Bank of Japan will intervene on any further weakness.

The economic calendar was quiet this week.  A preliminary look at S&P Global Manufacturing and Services PMI showed progress on both manufacturing and services.  Manufacturing came in at 47.8 versus the prior reading of 47.3, while Services ticked to 55.3 from the previous reading of 55.2.  September New Home sales came in at 738k versus the consensus estimate of 713k.  Existing home sales fell 1% to 3.84m as Mortgage Applications fell 6.7% from the prior week.  Initial Claims fell by 15k to 227K, well below the street forecast of 246k.  Continuing Claims increased by 28k to 1.897M.  The final October reading of the University of Michigan’s Consumer Sentiment Index increased to 70.5 from the prior reading of 68.9.  This was the third consecutive month of increasing sentiment with election uncertainly top of mind for consumers.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

3 IRA Tasks to Complete by the End of 2024

Sarah Brenner, JD
Director of Retirement Education

 

The year 2024 has flown by and the holidays season will soon be upon us. That means time is running out on year-end IRA deadlines. You will want to be sure to get the following three IRA-related tasks done sooner rather than later to avoid penalties and missed opportunities:

1.) Take your RMD. If you have a traditional IRA and turned age 74 or older this year, you will need to take a 2024 required minimum distribution (RMD) by the end of the year. If you turned 73 in 2024, you will have a little extra time to take your first RMD. Your deadline will be April 1, 2025. (But delaying your 2024 RMD into 2025 means you will have two RMDs due for 2025.) Those who must take an RMD for 2024 should not wait until the last minute. Many custodians have earlier internal deadlines to process these transactions, and waiting until the last minute can result in mistakes.

Many beneficiaries are required to take 2024 RMDs from inherited IRAs. If you inherited an IRA prior to 2020 or if you are an eligible designated beneficiary who inherited an IRA between 2020 and 2023, you will need to take an RMD for this year. Beneficiaries subject to the new 10-year payout rule under the SECURE Act catch a break. Due to all the confusion surrounding the 10-year rule, the IRS has said that a beneficiary subject to this rule is not required to take a 2024 RMD.

2.) Do a QCD. The holiday season is the time when many are feeling charitable. A good way to give if you have an IRA and are age 70 ½ or older is to do a qualified charitable distribution (QCD). This is a tax-free transfer directly from your IRA to the charity of your choice. The limit for 2024 is $105,000. A QCD can satisfy an RMD and is not included in modified adjusted gross income. There is no such thing as a “prior year QCD,” so if this strategy is of interest to you for this year, you will need to get it done by December 31, 2024.

3.) Convert to a Roth IRA. Tax rates are historically low, and those rates may not last much longer. This may be the ideal time for Roth IRA conversions. Time is running out though for 2024. The deadline for converting for this year is December 31, 2024.

https://irahelp.com/slottreport/3-ira-tasks-to-complete-by-the-end-of-2024/

What the Fed’s Rate Cut Means for You

What the Fed’s Rate Cut Means for You

The Federal Reserve just reduced interest rates for the first time in four years. Here’s how it will impact borrowers and saver

What goes up must come down, and after four years, that’s finally true about interest rates.

The Federal Reserve cut its benchmark rate on Sept. 18 a half point, dropping its target range to between 4.75 and 5.0 percent, signaling that it is now less concerned about inflation than it is about indications that the overall economy and job market are starting to cool.

“The Fed is mindful of both inflation and job growth, and inflation is coming down close to its target, and the broad markets are showing signs of softening,” says Gary Schlossberg, global strategist with the Wells Fargo Investment Institute. “That’s all against the backdrop of slowing economic growth.”

The Fed’s rate cut and those that will likely follow in the coming months have broad implications for older Americans and the economy as a whole, potentially bringing some relief to borrowers 50 and older who are struggling amid high interest rates. Unfortunately, rate cuts also potentially mean lower returns for savers.

This month marks the first time the Federal Reserve has cut interest rates since March 2020, when the Fed slashed rates to nearly zero in a bid to resuscitate the economy after it ground to a halt during the pandemic. Rates remained at rock-bottom levels until 2022, when the Fed began a series of rate hikes aimed at taming then-rampant inflation.

Why the Fed lowers interest rates

The federal funds rate is one of the most powerful tools the Fed has in its arsenal to influence the economy. The benchmark rate has a trickle-down effect on interest rates for consumers across a range of financial products, such as mortgagesauto loans and credit cards. The Fed cuts interest rates when it’s looking to stimulate the economy by making borrowing cheaper.

“Now that [the Fed has] pushed interest rates up high enough to get inflation into a neighborhood they feel comfortable with, they have to ease off the brakes so the current high interest rates don’t slow the economy too much, too soon,” says Greg McBride, chief financial analyst at Bankrate.com.

Here’s what you need to know about the impact of the Fed’s new rate cut.

What the rate cut means for borrowers

Borrowers are the clearest winners following a Fed rate cut, since many consumers’ interest rates tend to rise or fall in the same direction as the federal funds rate.

“For borrowers, rate cuts are generally good news, because it lowers the cost of borrowing, but different parts of the market are impacted differently,” says Collin Martin, fixed income strategist at the Schwab Center for Financial Research.

Many auto loans have fixed interest rates. That means if you have an existing fixed-rate auto loan, the rate will remain at its current level unless you refinance. New car buyers, however, will likely see lower rates for auto loans.

Credit cards, on the other hand, typically have adjustable interest rates. Cardholders will likely see rates slowly start to come down from their current average of 25 percent, the highest monthly average credit card rate in at least five years, according to LendingTree data.

“It’s also worth remembering that even if they do influence them, the Fed doesn’t directly set rates for credit cards and auto loans,” says Jacob Channel, a senior economist at LendingTree. “So even if the Fed’s benchmark rate comes down, other factors like [consumers’] credit scores and incomes will still play a major role in the types of rates that individual borrowers get.”

What the rate cut means for savers

While savers are likely to see a decline in the amount of interest they’ll earn on savings accounts and certificates of deposit (CDs), McBride says that in the near term, they should still be able to earn a high enough return on high-interest products to at least beat inflation.

“The outlook for savers is still a good environment, and it will be for the foreseeable future,” says McBride. “In the end, it depends on how the economy fares as to how aggressive the Fed has to be. If we get a soft economic landing, the Fed won’t have to cut rates dramatically, and savers could be in a situation where they’re earning 3 percent in a 2 percent inflation environment, and you’re still ahead of the game.”

In the meantime, savers should ensure that they’re taking advantage of high-yield savings accounts, which can offer rates as much as 10 times higher than those of traditional savings accounts.

McBride also suggests that consumers with extra cash consider locking in today’s higher rates for CDs before they start to fall. For retirees looking for steady returns on their savings, a CD could be a good place to grow money.

“Now is a great time to be locking in those CDs or high-quality bonds, setting up that predictable stream of interest income,” McBride says. “You’re not going to get better yields by waiting, so doing that now, when you can still find yields of 4 or 5 percent across the maturity spectrum, that’s the move to make.”

https://www.aarp.org/money/budgeting-saving/info-2024/fed-rate-cuts-meaning.html

The Zombie Rule

 

By Andy Ives, CFP®, AIF®
IRA Analyst

This article is NOT about the “ghost rule” applicable to non-living beneficiaries. That payout rule applies when a non-person beneficiary (like an estate) inherits an IRA when the original owner died on or after his required beginning date (RBD). With the ghost rule, a non-person beneficiary is allowed to use the single life expectancy of the deceased individual to determine annual required minimum distributions (RMDs). As such, the name “ghost rule” seems wholly appropriate. (I most recently wrote about the ghost rule in the Slott Report on February 7, 2024, “Ghost vs. 5-Year: The Calendar Dictates.”)

No, this is something different. Since we are approaching Halloween, I thought I’d write about a unique beneficiary payout rule available to living, breathing people…one that has yet to be named. I hereby deem the following beneficiary option as…the “Zombie Rule.”

We know that the SECURE Act created five classes of eligible designated beneficiaries (EDBs). These include surviving spouses; minor children of the account owner; disabled individuals; chronically ill individuals; and individuals not more than 10 years younger than the IRA owner. (Those older than the IRA owner also qualify.) These EDBs are still permitted to take annual stretch RMDs over their own single life expectancy.

Spouse beneficiaries will typically do a spousal rollover into their own IRA, so we will disregard that EDB class. As for the next three EDB classes, more often than not they will be younger than the IRA owner when they inherit. (Obviously that is the case with minor children.)

But that final class of EDBs – individuals not more than 10 years younger than the IRA owner – is interesting. ANY beneficiary who is OLDER than the deceased IRA owner qualifies as an EDB under this classification. As an older EDB, that living, breathing person can choose which single life expectancy to use for calculating annual RMDs – their own age, or that of the deceased individual. Since the living, breathing beneficiary can inhabit the deceased person’s single life expectancy space, we have the Zombie Rule!

Example:

Ichabod dies at age 75, which is after his RBD. Ichabod’s beneficiary is his older sister Salem, age 80. Since Salem is not more than 10 years younger than Ichabod (she is older), she qualifies as an EDB and can stretch RMD payments. Since Ichabod died AFTER his RBD and Salem is older than Ichabod, Salem is permitted to use Ichabod’s single life expectancy to calculate her RMDs. Ichabod’s life expectancy in the year OF his death is 14.8 for a 75-year-old. For subsequent years, Salem subtracts 1 each year (starting with 13.8 for her first RMD calculation). As such, the inherited IRA should last for 14 years until Salem is 94.

By leveraging the Zombie Rule, Salem can minimize her RMDs and extend the period for which she must take distributions, thereby spreading the total taxes due over a longer time horizon. (While 94 may seem old to be taking inherited IRA RMDs…that witch may live to be 300!)

https://irahelp.com/slottreport/the-zombie-rule/

Higher Catch-Up Contributions Available for Certain Older Employees Starting in 2025

By Ian Berger, JD
IRA Analyst

The year is flying by, and before we know it 2025 will be here. With the arrival of the new year, several new provisions from the 2022 SECURE 2.0 law that impact retirement plans will become effective. One of the changes allows certain older participants in company savings plans and SIMPLE IRAs to make higher catch-up contributions.

401(k), 403(b) and Governmental 457(b) Plans

Under current law, employees in 401(k) plans (and 403(b) and governmental 457(b) plans) who attain age 50 by the end of a year can make salary deferrals in excess of the regular deferral limit. For example, in 2024, participants aged 50 or over can make an additional $7,500 on top of the regular $23,000 limit – for a total of $30,500. Starting in 2025, employees who turn 60, 61, 62 or 63 by the end of a year will be able to make even higher catch-up contributions for that year. So, for example, as long as you reach 60 by December 31, 2025, you’re eligible for the extra catch-up for that year – even if you’re only 59 when you make those deferrals.

How much is this special catch-up for 2025? Unfortunately, that’s not crystal clear. SECURE 2.0 says it’s the greater of $10,000 or 150% of the 2024 regular catch-up limit. The 2024 catch-up limit is $7,500, and 150% of that amount is $11,250. So, it would seem the 2025 special catch-up should be $11,250. But the Congressional summary of SECURE 2.0 suggests that Congress actually intended the 2025 special catch-up to be the greater of $10,000 or 150% of the 2025 regular catch-up limit. A draft bill in Congress, which hasn’t yet been introduced, would fix this error and several other SECURE 2.0 glitches. In any case, we know the 2025 catch-up for ages 60-63 will be at least $11,250.

Whatever the special catch-up for 2025 ends up being, it will be indexed for inflation starting in 2026.

SIMPLE IRAs

The higher catch-up also will be available starting in 2025 for SIMPLE IRA participants turning 60, 61, 62 or 63 by the end of the year. (The 2024 regular deferral limit is $16,000, and the age 50-or-older catch-up is $3,500 – for a total of $19,500). SECURE 2.0 is clear that the 2025 special catch-up is the greater of $5,000 or 150% of the 2025 regular catch-up limit. We won’t know the 2025 regular catch-up limit until the IRS announces all of the 2025 retirement dollar limits in a few weeks. However, the 2025 regular catch-up limit will certainly be the same as, or higher than, the 2024 $3,500 regular catch-up limit. So, the 2025 special catch-up will be at least $5,250 (150% x $3,500). Again, that amount will be adjusted for inflation starting in 2026.

Keep in mind that plans and SIMPLE IRAs don’t have to offer age 50-or-older catch-ups at all. If yours doesn’t – then the new special catch-up for ages 60-63 won’t be available.

https://irahelp.com/slottreport/higher-catch-up-contributions-available-for-certain-older-employees-starting-in-2025/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

The S&P 500 advanced for the sixth consecutive week, closing at a new record high. This week, a broadening out of the market’s rally was evident, with small caps and the equally weighted S&P 500 index outperforming. Markets also appear to be embracing parts of the market that were favored when Trump won the presidential election in 2016. The so-called Trump trade includes exposure to the financials, the US Dollar, Small Caps, and, this time around, crypto assets.  Interestingly, national polling shows the presidential race as a dead heat within the margins of error; however, in the betting venues, where over two billion is wagered on the presidential election, Trump is the clear favorite.  With just over two weeks before the election, markets feel a bit extended. Still, better-than-expected third-quarter earnings, along with robust economic data, have prompted investors off the sidelines for fears of missing out on further gains.

On the earnings front, I would highlight continued strength in the financials.  Morgan Stanley, Goldman Sachs, and Blackstone were notable outperformers.  Netflix posted solid results, and so did United Airlines.  The Semiconductor sector posted mixed results this week as the Biden Administration announced further measures to curb the sales of advanced AI chip technology to specific countries.  The news came just before the errant early release of Dutch semiconductor equipment maker ASML’s quarterly results, where the company missed on earnings, revenues, and bookings while slashing its full-year 2025 guidance.  The news sent shares lower by 17% while its peers sold off in sympathy.  Later in the week, the Semis caught a bid off of the better-than-anticipated results from Taiwan Semiconductor.  The healthcare sector struggled this week due to disappointing results from United Health and Elevance.  Apple advanced on the news that sales of the iPhone 16 accelerated in China.

The S&P 500 added 0.9%, the Dow rose by 1%, the NASDAQ gained 0.8%, and the Russell 2000 jumped 1.9%.  The Treasury market ended the week flat, with the 2-year yield increasing by one basis point to 3.95%, while the 10-year yield closed unchanged at 4.07%.

Oil prices tumbled 8.4% on the week as several reports suggested that Israel is not currently targeting Iran’s energy infrastructure. Israel also announced that the IDF had killed the leader of Hamas, Yahya Sinwar.  The news prompted calls for renewed cease-fire discussions. Oil and other commodities were also weak due to the lackluster stimulus announcement made by China’s Minister of Finance, which offered very little regarding how the Chinese aim is to boost domestic consumption.   WTI, which lost $6.30 to close at $69.16, posted the largest weekly loss this year. Copper prices fell by 2.4% to $4.38 per Lb.  Gold prices topped $2700 for the first time and closed higher by 2% at $2730.20 an Oz. Bitcoin rallied 8% or $5,500 to close the week at $68,400.  The US Dollar index advanced by 0.6% to close at 103.49.

The economic calendar was relatively quiet this week.  Retail sales came in better than expected and showed a resilient consumer.  The headline number increased by 0.4% versus the consensus estimate of 0.2%, while the Ex-Autos number increased by 0.5% versus the forecast of 0.1%.  Initial claims fell by 19k to 241k, while Continuing Claims increased by 9k to 1867k.  Finally, Housing Starts were a tad light of expectations at 1354k, while Building Permits fell short of expectations at 1428k. 

QTIP Trusts and Successor Beneficiaries: Today’s Slott Report Mailbag

Ian Berger, JD
IRA Analyst

Question:

We have a client who has children from a previous marriage. Upon the husband’s death, he wants to make sure his current spouse has access to income from his IRA. But he also wants to make sure the remaining balance, when she passes, goes to his children from his first marriage and not to someone else, e.g., her children.

How best to make sure that happens?

Answer:

We do not normally recommend that a trust be named as IRA beneficiary, but this is one situation where naming a trust makes sense. The trust you would use is called a “QTIP” (qualified terminable interest property) trust. This is a special trust that is created to qualify for the estate tax marital deduction while giving the IRA owner (the trust creator) control over the trust principal (the IRA) after his death and after the death of the spouse. But QTIP trusts must also satisfy the IRA beneficiary distribution rules, and that can be difficult. For this reason, you should work with a estate attorney who is familiar with those rules.

To avoid the complications of a QTIP trust, another strategy you may consider is simply splitting the IRA. The client could decide how much he would like his wife to have and set up a separate IRA with her as beneficiary. The remainder could be left in the IRA with his children from his prior marriage as beneficiaries.

Question:

Hello, I attended the IRA workshop at National Harbor in July. I’ve searched through my materials, but I’m still confused about this situation.

My client has recently inherited an inherited IRA. Dad passed away a couple of months ago and he had an IRA that he inherited from his aunt (post 2020). The aunt was already taking RMDs. Dad was using the 10-year rule.

What are the minimum requirements for Dad’s 32 year-old daughter that just inherited this account?

Thank you much!!

Ricky

Answer:

Hi Ricky,

Your client (the daughter) is a successor beneficiary – the beneficiary of a beneficiary. All successor beneficiaries are subject to the 10-year payment rule. If, as in this case, the original beneficiary (Dad) was himself subject to the 10-year rule, the successor must empty the inherited account by the end of the original beneficiary’s 10-year period. In other words, the successor cannot tack on a new 10-year term of her own. Starting in 2025, the daughter must also receive annual required minimum distributions (RMDs) during those remaining years – based on Dad’s single life expectancy.

https://irahelp.com/slottreport/qtip-trusts-and-successor-beneficiaries-todays-slott-report-mailbag/

Social Security COLA 2025: How Much Will Payments Increase Next Year?

Social Security COLA 2025: How Much Will Payments Increase Next Year?

With inflation cooling, analysts estimate benefit boost could come in around 2.5%

The second of three numbers the Social Security Administration (SSA) will use to determine the 2025 cost-of-living adjustment (COLA) is in, and it points to a more modest increase in monthly benefit payments next year.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) rose by 2.4 percent in August compared to a year ago, the U.S. Bureau of Labor Statistics (BLS) reported Sept. 11. That followed a 2.9 percent increase in July.

The COLA is based on how much the CPI-W, a federal gauge of inflation, changes in July, August and September from one year to the next. The final figure for 2025 will be announced in October.

The 2024 COLA, derived from 2023 inflation data, increased monthly benefits by 3.2 percent. “Based on recent inflation figures and looking at historical data, I estimate we can expect a [2025] COLA in the low to mid 2 percent range,” says Mike Lynch, a managing director of applied insights at Hartford Funds.

Alicia Munnell, director of the Center for Retirement Research at Boston College, projected a 2025 adjustment of 2.5 percent to 2.6 percent.. “People are still not happy because prices are high,” she says, but “I think we’re working our way out of this inflation situation and the harm that it did.”

A 2.5 percent COLA would increase the average benefit for a retired worker — about $1,920 a month in August 2024 — by $48 a month starting in January 2025. The average monthly survivor benefit ($1,509 in August) would go up by a little less than $38, and the average Social Security Disability Insurance (SSDI) payment ($1,540 in August) would tick up by $38.50.

The 2024 COLA boosted benefits by $59 a month for the average retiree. The annual adjustment declined sharply last year in tandem with cooling inflation. The 2023 COLA of 8.7 percent, a byproduct of the sharp spike in consumer prices the year before, was the largest percentage increase since 1981.

“Social Security is generally the only inflation-protected source of income for seniors in retirement,” says David Certner, legislative counsel and legislative policy director for AARP. “Whether the cost of living rises significantly or by modest amounts, AARP has fought for years to protect the COLA, which helps seniors keep up with rising prices throughout their retirement years.”

How is the COLA calculated?

The CPI-W is a measure of price changes for a selection of goods and services, including food, energy and medical care, that is reported monthly by the BLS. It is a subset of the Consumer Price Index (CPI), which tracks a broader range of retail prices and is considered the “headline” number in measuring inflation. (The main index increased 2.5 percent year over year in August, down from 2.9 percent in July.)

To calculate the COLA, the SSA compares the average CPI-W for the third quarter of each year to the figure for that same period the year before.

In 2023, the CPI-W rose 2.6 percent in July compared to the prior year, 3.4 percent in August and 3.6 percent in September. Over the full quarter, the index was 3.2 percent higher on average than for the same period in 2022, resulting in the COLA that took effect in January 2024.

While a 2.5 percent COLA would be the lowest since 2021, it would be more in line with the pre-pandemic period of relatively flat inflation. From 2001 through 2020, the COLA averaged about 2.2 percent. If there is no inflation, there’s no COLA — that happened in 2009, 2010 and 2015. The biggest adjustment ever was 14.3 percent in 1980.

Does the COLA keep pace with inflation?

Social Security benefits can lag behind inflation during short-term periods of price volatility, depending on whether the CPI is trending up or down, but “over the cycle, it really does protect people,” says Munnell, who has studied the issue.

For example, beneficiaries lost buying power in 2021, when the 1.3 percent COLA — based on low inflation in 2020 — was outpaced by surging consumer prices. That pattern repeated in 2022, when benefits increased by 5.9 percent but inflation reached a 9 percent peak. However, beneficiaries effectively caught up over the last two years as the inflation rate fell.

“The COLA precisely matches national inflation data, meaning it will fully offset the price increases Americans have seen since the last COLA,” says Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center, a Washington, D.C.–based think tank. “Beneficiaries will receive only a moderate adjustment [in 2025] because they have enjoyed relatively stable price levels this year — a welcome change from the past few years.”

Prices for some major items, including rent and grocery staples such as meat and eggs, are rising faster than inflation overall, according to the BLS report. That can create problems for older adults, says Lynch.

“A low COLA may not be able to keep up and enable beneficiaries to do all the thing they choose to do in retirement,” he says. “A lower COLA reminds us of the importance of diversification and working with a financial professional to help manage Social Security and other sources of income efficiently. Beneficiaries should focus on what they can control, including other sources of income.”

Do Medicare costs affect the COLA?

Medicare costs can also affect the COLA’s value as a hedge against inflation. An increase in Medicare Part B premiums in 2025 would offset a portion of the cost-of-living increase for Social Security recipients who have premiums deducted directly from their benefit payments, as do most Medicare enrollees.

In their 2024 annual report, issued in May, Medicare’s trustees estimated the standard Part B premium paid by most enrollees would increase from the current $174.70 a month to $185 next year, effectively lessening the COLA increase by $10.30 a month for affected Social Security recipients. But that figure is preliminary; the actual premium is typically announced in the fall.

Social Security’s trustees, in their annual report this year, projected that absent congressional action to shore up the program’s long-term funding shortfall, benefits could be reduced by 17 percent by 2035. Sprick says that issue should remain top of mind even as beneficiaries anticipate an inflation adjustment.

“I think we can sometimes overemphasize COLAs,” he says. “They are certainly important, but by far the biggest threat to older Americans’ financial well-being is the program’s [projected] financial shortfall.”

https://www.aarp.org/retirement/social-security/info-2024/cola-estimate-2025.html

You Missed the October 15 Deadline to Correct an Excess IRA Contribution – Now What?

By Sarah Brenner, JD
Director of Retirement Education

 

October 15, 2024 has come and gone. This was the deadline for correcting 2023 excess IRA contributions without penalty. If you missed this opportunity, you may be wondering what your next steps should be. All is not lost! While you may not have avoided the excess contribution penalty for this year, you can still correct the issue for future years.

Excess IRA Contributions

Maybe your income ended up being higher than expected and you were ultimately ineligible for the Roth IRA contribution you made. Maybe you did not have earned income and contributed to an IRA anyway. Excess IRA contributions can happen in all sorts of ways. The cutoff for removing an excess IRA contribution for 2023 without penalty was October 15, 2024.

Two Options for a Fix After the Deadline

Regardless of the reason, if there is an excess IRA contribution it can still be corrected after the deadline. One way to fix the problem is to withdraw the contribution from the IRA. The good news is that only the excess contribution amount needs to be withdrawn. When correcting an excess before the October 15 deadline, any net income attributable (NIA) must also be withdrawn. However, in an odd tax code anomaly, since we are after the deadline, the NIA to the excess contribution can remain in the traditional or Roth IRA.

The bad news is that there will be a 6% excess contribution penalty, and IRS Form 5329 will need to be filed to pay it. Fixing the excess contribution is still the smart thing to do because if the excess contribution is not fixed – the 6% penalty will continue to accrue each year until either the excess is corrected, or time runs out under the new SECURE 2.0 statute of limitations (six years).

Besides withdrawal, there is another option to correct excess IRA contributions after the deadline. You can elect to carry forward the excess and apply the overage to future years. To use this method of correction, you must be eligible to make the contribution in the future year(s), and the 6% penalty must be paid each year until the original excess contribution amount is used up or the statute of limitations runs out.

https://irahelp.com/slottreport/you-missed-the-october-15-deadline-to-correct-an-excess-ira-contribution-now-what/

Nuances of NUA

We have written about the net unrealized appreciation (NUA) tax strategy many times. Generally, after a lump sum distribution from the plan, the NUA tactic enables an eligible person to pay long term capital gains (LTCG) tax on the growth of company stock that occurred while the stock was in the plan. But there are finer points to NUA. Here are some more nuanced details:

Step-Up in Basis. NUA (meaning the appreciation that occurred in the plan prior to the lump sum distribution) never receives a step-up in basis. If the company stock is still held by the former plan participant upon his death, the beneficiary of that account will pay LTCG tax on the NUA no matter when the shares are sold. But what about any appreciation of the stock AFTER it was distributed from the plan? Appreciation after the lump sum plan distribution DOES receive a step-up in basis.

Example: John completed a proper NUA distribution 10 years ago of his company stock that was valued at $500,000. At that time, John paid ordinary income tax on the cost basis of his shares ($100,000) and he anticipated paying LTCG tax on the NUA of $400,000 when he sold the shares. John held all the shares until his death, when the total value had increased to $750,000. John’s beneficiary (his daughter Susan) immediately sells the shares. She will pay LTCG tax on the $400,000 of NUA. However, Susan will get a step-up in basis on the $250,000 of additional appreciation and owe no tax on that part of the transaction. (The original $100,000 is also tax-free as a return of basis.)

“Specific Identification Method.” Retirement plans will typically use an “average cost per share” to determine the NUA. Over the years, as the company stock price goes up and down, a plan participant will acquire shares at different price points with each salary deferral. However, the plan may not track all these different purchase prices. Instead, the plan could use the total purchase amount (the cost basis) vs. the current value of the stock. For example, if the current value of the stock within a 401(k) is $1,000,000, and if the total amount used to purchase the stock was $400,000, the NUA is $600,000. Average cost per share is cost basis ($400,000) divided by the total number of shares owned within the plan.

If a plan participant maintains detailed records and documents the specific historical stock purchase prices, the person could decide to only include the low-cost-basis shares in an NUA transaction. The high-cost-basis shares would be rolled to an IRA and excluded from the NUA calculation. By following the “specific identification method” and targeting the low-basis shares, a person could further maximize the NUA tax strategy.

In-Plan Roth Conversions: Caution! When an NUA “trigger” is hit, a plan participant does NOT have to act immediately on an NUA distribution. However, if the trigger is “activated” by certain transactions – like a normal distribution – the NUA lump sum withdrawal must occur within that same calendar year. If not, the trigger will be lost. Be careful! An in-plan Roth conversion is considered a distribution and WILL activate an NUA trigger.

10% Penalty for Those Under 55 Years Old. Assume a plan participant was under 55 at the time of separation of service. As such, she could not leverage the age-55 exception to avoid a 10% early withdrawal penalty. But there is a silver NUA lining. If she pursued an NUA transaction before age 59 ½ (and rolled over her non-stock plan funds), she would owe a 10% penalty ONLY ON THE COST BASIS of shares. If the appreciation is high enough, it could be advantageous to pay the 10% penalty on the cost basis to preserve the LTCG tax break on the NUA.

The NUA tax strategy is part art and part science. To maximize the benefits, understanding the different nuances is essential.

https://irahelp.com/slottreport/nuances-of-nua/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

The S&P 500 and Dow Jones Industrial Average forged another set of all-time highs despite facing several macro headwinds. Chinese markets reopened after celebrating Golden Week with significant losses. Investors were expecting an announcement with more significant stimulus initiatives. Still, the initial stimulus amount fell short of market expectations and hit shares on Hong Kong’s Hang Seng (-6.5 %) and the Chinese Shanghai Composite (-3.6%).  Investors also had to contend with Hurricane Milton devastating parts of Florida after Helene’s horrific destruction across the southeast.  The fallout from these storms will profoundly affect regional economies, influencing economic data sets for several months.  Our prayers and thoughts go out to those affected by the hurricanes.  Investors were also focused on the direction of monetary policy.  Expectations of further rate cuts have been tempered after the stronger-than-anticipated September Employment Situation Report.

The minutes from last month’s Federal Reserve’s Open Market committee meeting yielded very little incremental information but indicated some pushback on cutting by fifty basis points.  Inflation data reported this week came in a bit hotter than expected, strengthening the argument for less aggressive policy easing.  There was plenty of corporate news to digest as the third-quarter earnings season kicked off.  The financials led markets higher on Friday after JP Morgan, Wells Fargo, and Blackrock earnings were cheered by Wall Street.  Other notable corporate news included the Department of Justice’s intentions to break up Alphabet (Google), Wells Fargo’s downgrade of Amazon due to worries about future margin compression, and Tesla’s disappointing/underwhelming Robo-Taxi launch event.

The S&P 500 gained 1.1% as Goldman’s CIO Kosten and Morgan Stanley’s Market Strategist, Mike Wilson, increased their 12-month S&P 500 forecasts higher.  The Dow advanced by 1.2%, the NASDAQ added 1.1%, and the Russell 2000 increased by 1%.  The yield curve continued to steepen, with shorter-tenured Treasuries outperforming their longer-duration counterparts.  The 2-year yield increased by one basis point to close at 3.94%, while the 10-year yield rose by nine basis points to 4.07%.

Oil prices extended recent gains on continued tensions in the Middle East.  An Israeli attack on Iranian energy infrastructure is likely and was considered eminent last week after Israel’s defense secretary canceled a scheduled trip to Washington.  West Texas Intermediate crude prices increased by $1.06 or 1.4% to $75.46 a barrel.  Gold prices increased by $6.90 to $2675.80 an Oz.  Copper prices fell by $0.08 to $4.40 per Lb.  Bitcoin gained ~ $1000 to close at $62,916.  The US Dollar index advanced by 0.4% to 102.86, with a noticeable weakness in the Japanese Yen, which closed at 149.09.

The Economic calendar featured two measures of inflation.  Headline CPI increased by 0.2%, above the consensus estimate of 0.1%.  Core CPI, which excludes food and energy, increased by 0.3% versus the forecast of 0.2%.  On a year-over-year basis, headline CPI increased by 2.4%, while Core CPI advanced by 3.3%.  Interestingly, the shelter component of the data series showed declines, something we have not seen for quite some time.  The producer Price Index (PPI) was flat versus an anticipated increase of 0.1%.  Core PPI increased by 0.2%, in line with the consensus estimate.  On a year-over-year basis, the headline PPI increased by 1.8% while the Core figure advanced by 2.8%.  Initial Jobless Claims surprised to the upside with an increase of 33k to 258k, while Continuing Claims rose by 42k to 1861k.  Some of the uptick in Initial Claims may be related to Hurricane Helene.  A preliminary look at the University of Michigan’s Consumer Sentiment fell to 68.9 from 70.1 due to continued frustration with elevated prices.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

The 10-Year Rule and Required Minimum Distributions: Today’s Slott Report Mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst

 

QUESTION:

Good afternoon,

If a client passed this year with four adult children inheriting equally, and each beneficiary is using the 10-year rule, how do they determine yearly required minimum distribution (RMD) calculations? Is it based on life expectancy or on a number that will empty the IRA within the 10 years?

Thank you for your help.

Sherry

ANSWER:

Sherry,

When RMDs apply within the 10-year period (and assuming the four inherited IRAs are properly established), each beneficiary will use his own age to determine the appropriate RMD. Use the beneficiary’s age in the year AFTER the year of death (2025) to determine the initial factor from the IRS Single Life Expectancy Table. Then, subtract 1 from that factor for years 2 – 9 of the 10 years, and deplete the entire account by the end of year 10 (12/31/34). A beneficiary can always take more than the RMD, which could be a wise tax-planning decision.

QUESTION:

My wife’s mom, age 96, died in June and still has about $6,000 in IRA assets. She had been taking required minimum distributions (RMDs). Do we need to take an RMD for her in 2024, or can the remaining funds pass to her beneficiaries?

Thanks,

Michael

ANSWER:

Michael,

All (or whatever portion remains) of your mother-in-law’s year-of-death RMD becomes the responsibility of the beneficiaries. To avoid a late penalty, Mom’s final RMD must be taken by December 31 of the year AFTER the year of death (12/31/25) – this is the new extended deadline. To help streamline tax reporting, a custodian will typically establish an inherited IRA for the beneficiary and pay the year-of-death RMD from that inherited account. Note that if there are multiple beneficiaries, the year-of-death RMD does not need to be spread equally among them. As long as the full amount is taken, the IRS will be satisfied.

https://irahelp.com/slottreport/the-10-year-rule-and-required-minimum-distributions-todays-slott-report-mailbag/

Tax Filing Relief and Retirement Account Withdrawal Options for Hurricane Victims

By Ian Berger, JD
IRA Analyst

Victims of Hurricane Helene have at least a glimmer of good news when it comes to their tax filings and ability to withdraw from their retirement accounts for disaster-related expenses.

The IRS usually postpones certain tax deadlines for individuals affected by federally-declared disaster areas.  On October 1, the IRS announced disaster tax relief for all individuals and businesses affected by Hurricane Helene, including the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia. Generally, the IRS extended the deadline to file certain individual and business tax returns and make tax payments until May 1, 2025. It is likely the IRS will provide similar relief for victims of Hurricane Milton.

Meanwhile, as a result of SECURE 2.0, victims of federally declared-disasters (such as Hurricanes Helene and Milton) can withdraw up to $22,000 from their IRAs. If you are under age 59 ½, you won’t have to pay a 10% early distribution penalty on these withdrawals. Further, the taxable income on these withdrawals can be spread over three years, and the funds can be repaid over three years. Your employer plan may also allow these withdrawals. Even if your plan doesn’t allow disaster-relief withdrawals, you may be able to treat a hardship withdrawal (see the last paragraph of this article) as a disaster-relief withdrawal on your federal tax return – this would allow you to avoid the 10% penalty, spread income over three years and repay the withdrawal.

SECURE 2.0 also allows you to pay back a withdrawal you made prior to a disaster that you intended to use to purchase or construct a home if you are unable to use the funds because of the disaster. Finally, if you have a company plan that allows for loans, the plan can allow you to borrow a larger amount and give you additional time to repay outstanding loans.

You may also take penalty-free withdrawals from your IRA for “unforeseeable or immediate financial needs relating to personal or family emergencies.” Your employer plan may also allow emergency distributions. These withdrawals are limited to one per calendar year and are limited to $1,000. Once an emergency withdrawal is taken, no other emergency withdrawal can be taken in the following three years unless the original distribution is repaid or future salary deferrals (for plans) or contributions (for IRAs) exceed the amount of the original distribution.

Finally, if your plan allows, you may be able to take a hardship withdrawal from your account. The withdrawal must be for an “immediate and heavy financial need.” Most plans allow employees to automatically satisfy this requirement if their expense fits into one of seven “safe harbor” categories. One of those categories is disaster-related expenses and losses. There is no dollar limit on hardship withdrawals, but withdrawing pre-tax funds subjects you to tax and the 10% penalty if you are under 59 ½.

https://irahelp.com/slottreport/tax-filing-relief-and-retirement-account-withdrawal-options-for-hurricane-victims/

Why Retirement Gets Better With Annuities

Why Retirement Gets Better With Annuities

Everyone aspires to have a steady source of income after retirement that replaces as much as possible of their pre-retirement earning. But for many people, one big challenge in saving for that goal is to find the right financial product that accommodates their specific requirements, such as when they want to retire or how much more they need over and above their Social Security benefits.

A new research paper by experts at Wharton and elsewhere solves that challenge with a comprehensive evaluation of the moving pieces of retirement planning. The best route is to include deferred income annuities in defined contribution retirement accounts, according to the paper titled “Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account.”

In the U.S., the longer one waits to start claiming Social Security payments, the bigger will be the monthly check. Someone who starts tapping into Social Security at age 62 (the minimum qualifying age) will receive much less in monthly payments than if they were to wait until age 67 or 70.

But the reality is that many people do not delay taking Social Security benefits until they are 70, and so they need a Plan B. “For most Americans, it is financially sensible to delay claiming Social Security until age 70, as this maximizes the retirement payments that they receive for the rest of their lives,” said Wharton professor of business economics and public policy Olivia S. Mitchell, who co-authored the paper with Goethe University finance professors Vanya Horneff and Raimond Maurer. “Nonetheless, most people do not do this, when they cannot or do not want to continue working until age 70.” Mitchell is also executive director of Wharton’s Pension Research Council.

In their research, the authors explore what happens when workers leave their jobs before age 70 while using their retirement savings as a “bridge” to the delayed claiming of Social Security benefits. “We show that most people would be better off if they had access to deferred income annuities in their 401(k) accounts that allowed them to finance consumption while deferring claiming benefits,” Mitchell said regarding their key research finding.

That finding is important in view of recent legislation (the SECURE 2.0 Act passed in December 2022), which encourages employers to include lifetime income payments in their 401(k) plans, Mitchell noted. The SECURE Act specifically recommended the inclusion of annuities in defined contribution (DC) plans and Individual Retirement Plans, also known as IRAs.

A Case for Variable Annuities

Specifically, the paper made a case favoring “well-designed deferred income annuities” in 401(k) accounts, but with an important additional feature. “If plan sponsors could also provide access to variable deferred income annuities with some equity exposure, this would further enhance retiree well-being, compared to having access only to fixed annuities,” Mitchell said. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

Equity investments inherently carry risk, but they can deliver significant gains if they are within limits and people make well-informed decisions about those. “Our research shows that including 20%–50% equities in a variable annuity could improve retiree well-being by 15%–20%, for both college-educated and high school graduates, compared to the currently permitted fixed income annuities,” Mitchell said.

In any event, legal barriers currently prevent retirees from going in that direction, since at present, U.S. law does not permit variable annuities in 401(k) accounts. Mitchell noted that “policymakers seeking to improve retiree well-being should consider allowing variable deferred income annuities in retirement plan portfolios.” The paper concluded that “well-designed variable deferred income annuities in retirement plan portfolios can markedly enhance retiree financial well-being.”

Striking a Balance Across Retirement Realities

The study also estimated how much money retirees would need under various scenarios differs according to their gender, education level, and benefit deferral ages (85, 80, and 67) when they begin receiving Social Security benefits. For instance, a college-educated woman who could delay claiming Social Security benefits but lacks access to a fixed deferred income annuity (DIA) requires an additional $17,367 in her DC plan to be as well off, the paper reported. The opposite is true for a female high school dropout: On average, she would be $4,056 worse off if she could not delay claiming but did have a DIA.

For the least-educated people, the preferred option is to delay claiming Social Security, the paper concluded. By contrast, higher-paid better-educated people benefit more from using accumulated DC plan assets to purchase deferred annuities. The authors also considered two other aspects: The least educated also have higher mortality rates, and the Social Security annuity is relatively higher for lower earners.

The most important factor in making those choices is the quantum of Social Security payments one could receive. The Social Security retirement system pays a lifetime annuity with fixed real benefits that depend (progressively) on retirees’ earning histories and claiming ages, the paper noted, setting the backdrop for this research.

“For this reason, if a retiree receives a substantial portion of her income through a Social Security annuity, it stands to reason that her remaining financial portfolio should include substantial exposure to risky equities, through a target date fund or with annuities whose payments are linked at least in part to the performance of an equity portfolio,” the paper found. (Target date funds are designed to maximize revenue and minimize risk until the target date when a retiree initiates her 401(k) payouts.)

Social Security payments are designed around “replacement rates,” or the extent to which they replace workers’ pre-retirement earnings. About 70% of pre-retirement income is considered sufficient by many advisors to maintain one’s pre-retirement lifestyle, and Social Security benefits replace about 40% of the average retiree, according to a bulletin from the Social Security Administration.

Social Security replacement rates are higher for lifetime low-earners, and lower for lifetime high-earners, Mitchell and colleagues noted. “Low lifetime earners receiving a higher replacement rate could decide to devote a greater proportion of their remaining financial wealth to risky equities,” as a result. Retirees with higher lifetime earnings whose Social Security replacement rate is lower could buy larger private annuities from their tax-qualified retirement accounts to secure “a predictable income stream sufficient to cover necessities,” they added.

A Snapshot of the Findings

Below are the main findings of the research:

  • Using retirement account assets to purchase at least some fixed deferred income annuities is welfare-enhancing for all sex/education groups examined.
  • The better-educated and thus higher-paid men and women benefit far more — 7 to 11 times more — compared to the least educated.
  • The better-educated will do better using retirement plan assets to purchase deferred income annuities, versus delaying claiming Social Security benefits by a year and financing consumption from retirement plan withdrawals.
  • By contrast, lower-paid and less-educated retirees will do better with the opposite strategy: They will delay claiming and use retirement assets to bridge their consumption needs, versus buying DIAs. This is because lower-paid retirees receive a higher Social Security replacement rate and also face a higher mortality risk, whereas the better-educated receive relatively lower Social Security benefits and can anticipate longer lifetimes.
  • Providing access to variable deferred annuities with some equity exposure would further enhance retiree well-being in most cases, compared to having access only to fixed annuities.

https://knowledge.wharton.upenn.edu/article/why-retirement-gets-better-with-annuities/

Final Regulations Allow Separate Accounting for Trusts

Sarah Brenner, JD
Director of Retirement Education

The recent final required minimum distribution (RMD) regulations include a new rule change that may be beneficial for IRA owners who name trusts as beneficiaries. In the new regulations, the IRS allows separate accounting for RMD purposes for more trusts. This can be helpful when a trust has beneficiaries who can potentially have different payout periods under the RMD rules.

Separate Accounting

When an IRA with multiple beneficiaries is split into separate inherited accounts for each beneficiary by December 31 of the year following the year of death, this is considered “separate accounting.” The RMD rules will then apply separately to each inherited IRA. For example, one beneficiary might be eligible to use a life expectancy payout on their inherited IRA while another would be required to use the 10-year rule. Without separate accounting – all of the beneficiaries would have to use the fastest payout method.

In the past, while separate accounting was allowed for multiple beneficiaries named directly on an IRA, it was never permitted for trusts. In many private letter rulings, when a single trust was named as the beneficiary and that trust was to split into three separate sub-trusts, the IRS allowed separate inherited IRAs to be created, one for each sub-trust, but did not allow separate account treatment for RMD purposes. To get around this issue, IRA owners could name separate trusts directly on the beneficiary form. In these situations, the IRS allowed the beneficiaries of sub-trusts to each use their own life expectancy. The difference was that each sub-trust was named as the beneficiary on the IRA beneficiary form, rather than the master trust.

The SECURE Act changed these rules in a limited way. It allowed separate accounting for certain special needs trusts called “applicable multi-beneficiary trusts.” While the SECURE Act limits most beneficiaries to a 10-year payout, special rules for these trusts for disabled or chronically ill beneficiaries allow RMDs to be paid from the IRA to the trust using the beneficiary’s single life expectancy, even if the trust has other beneficiaries who are not disabled or chronically ill.

New Rules

The final regulations expand this treatment beyond “applicable multi-beneficiary trusts” to permit separate accounting to be used for other see-through trusts – if certain requirements are met. Separate accounts may be used for “see-through” trusts if the terms of the trust provide that it is to be divided immediately upon the death of the account holder into separate shares for one or more trust beneficiaries.

To be considered “immediately divided upon death,” the following requirements must be met:

  • the trust must be terminated;
  • the separate interests of the trust beneficiaries must be held in separate trusts;
  • and, there can be no discretion as to the extent to which the separate trusts will be entitled to receive post-death distributions.

In addition, the final regulations clarify that a trust will not fail the requirement to be “divided immediately upon death” if there are administrative delays, as long as any amounts received by the trust during the delay are allocated as if the trust had been divided on the date of the IRA owner’s death.

https://irahelp.com/slottreport/final-regulations-allow-separate-accounting-for-trusts/

-Darren Leavitt, CFA

The S&P 500 closed higher for a fourth consecutive quarter, the first time it has done so since 2011. Investors continued to face a challenging macro environment. Escalating tensions in the Middle East, a Longshoremen’s strike, the aftermath of Hurricane Helene, and a packed calendar of economic data and central bank rhetoric, which all contributed to a hectic week on Wall Street.

An eminent retaliation from Israel on Iranian assets seems likely and focused on Iran’s energy infrastructure.  The Biden administration appeared to endorse that type of response but pushed back on a plan to target Iran’s nuclear assets.  Israel continues a land campaign in southern Lebanon while bombing targets in Beirut and Gaza.  The US also destroyed several Hezbollah assets in Yemen over the weekend.  The escalation sent oil prices significantly higher and briefly put a bid into safe-haven US Treasuries.

A Longshoremen’s strike that was estimated to cost the economy $4.5 billion a day and perhaps even more if it were to carry on for weeks was thankfully suspended. The two sides will allow more time to negotiate a comprehensive deal but did find common ground on a 61.5% wage increase over six years. On January 15th, the two sides will sit back at the bargaining table to iron out other details, including dock automation and job security.

The death toll from Hurricane Helene increased to 227 across six states, with several other persons still missing.  The Category 4 storm is the deadliest hurricane to hit the US since Katrina in 2005.  The debate about the Federal government’s response is notable, especially in an election year, and there is no doubt the damage done will have economic ramifications that investors must address.  Unfortunately, as I write, Milton has formed into a hurricane in the south Gulf of Mexico, and its trajectory is centering on Tampa Bay with expected impacts on southeastern Alabama, southern Georgia, southeastern South Carolina, and southeastern North Carolina.

The S&P 500 hit another all-time high and added 0.3% on the week.  The Dow increased by 0.9%, the NASDAQ advanced by 0.1%, and the Russell 2000 fell by 0.5%.

The real action in markets took place in fixed income and currency markets as investors recalibrated, once again, their expectations around central bank monetary policy.  Treasury markets sold off hard on labor data that surprised the upside and on Fed Chairman J Powell’s hawkish comments at the National Association for Business Economics, where he suggested the Fed was in no hurry to make additional rate cuts.  The 2-year yield increased by thirty-seven basis points to 3.93%, while the 10-year yield jumped by twenty-three basis points to 3.98%.  Fed Funds futures now assign no chance of a fifty basis point cut at the November meeting and a 97.4% chance of a twenty-five basis point cut.  The probability of a twenty-five basis point cut may still be too aggressive.  The Fed will get another look at the October Employment Situation report before its November meeting along with several other labor-related data sets.

Oil prices soared on escalating tensions in the Middle East.  WTI prices increased by $6.25 or 9.2%, closing at $74.40 a barrel.  The price of gold was unchanged on the week, closing at $2667.90 an Oz.  Copper prices increased by a penny to close at $4.57 per pound.  Bitcoin’s price fell by $3500 to $62k while the US Dollar index posted its best weekly move in two years with a 2.1% increase to close at 102.53.

The economic calendar was packed, with all eyes focused on Friday’s Employment Situation report. Non-farm payrolls increased by 254k, well above the estimated 150k. The August and July figures were also revised higher, pushing the 3-month average to 186k from 140k. Private Payrolls grew by 223k, again well above the consensus estimate of 125k.  The Unemployment rate fell to 4.1%, down from 4.2%, and the decrease occurred despite increased available labor.  Average Hourly earnings increased by 0.4% versus the estimated 0.3%.  On a year-over-year basis, wages grew by 4%, up from 3.9% in August.  The Average workweek came in at 34.2 hours versus the estimated 34.3 hours.  Overall, it was a very impressive report, sending investors back to the drawing board to recalibrate US monetary policy.  Initial Jobless Claims increased by 6k to 225k, while Continuing Claims fell by 1k to 1826k.  ISM Manufacturing continued to be in contraction mode with a reading of 47.2.  However, ISM Non-Manufacturing expanded at the fastest pace since February of 2023 at 54.9, well above the expected 51.7.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

Results From the 2024 Retirement Confidence Survey Find Workers’ and Retirees’ Confidence Has Not Recovered From the Significant Drop Seen in 2023, but Majorities Remain Optimistic About Retirement Prospects

Results From the 2024 Retirement Confidence Survey Find Workers’ and Retirees’ Confidence Has Not Recovered From the Significant Drop Seen in 2023, but Majorities Remain Optimistic About Retirement Prospects

Summary

– However, almost 8 in 10 workers and 7 in 10 retirees are concerned that the U. S. government could make significant changes to the American retirement system –

A new report published today from the 34th annual Retirement Confidence Survey finds workers’ and retirees’ confidence has not yet fully recovered from the significant drop seen in 2023, but majorities remain optimistic about their retirement prospects and the lifestyle they envisioned. The Retirement Confidence Survey (RCS) is the longest-running survey of its kind measuring worker and retiree confidence and is conducted by the Employee Benefit Research Institute (EBRI) and Greenwald Research.

“Overall, two-thirds of the workers and three-fourths of the retirees are very or somewhat confident about having enough money to live comfortably in retirement, which is unchanged from 2023. The survey also shows that workers and retirees are confident that government programs such as Social Security and Medicare will provide benefits of equal value to today and believe they understand the Social Security program,” said Craig Copeland, director, Wealth Benefits Research, EBRI. “Confidence is similar across all ages. But, in some cases, younger workers are actually more confident in certain aspects of retirement. For generation specific results, Boomers and Millennials reported higher confidence in having enough money to live comfortably throughout retirement than Gen Xers.”

The 2024 survey of 2,521 Americans (1,255 workers and 1,266 retirees) was conducted online from Jan. 2-31, 2024. All respondents were ages 25 or older and were prompted to respond to questions about retirement confidence, financial health & concerns, retirement savings & preparation, healthcare in retirement, workplace savings, retirement income, transition to retirement and trusted sources of information.

“Workers and retirees are also concerned that their retirement could be impacted by the U. S. government making changes to the American retirement system. In fact, 79% of workers and 71% of retirees have this concern,” said Lisa Greenwald, CEO, Greenwald Research. “Inflation’s impact on their retirement also remains a concern among workers and retirees.”

Key findings in the 2024 RCS report include:

• Workers’ and retirees’ confidence has not yet fully recovered from the significant drop seen in 2023, but majorities remain optimistic about their retirement prospects. While Americans’ confidence has not returned to prior levels, there are signs that it is making a positive recovery as 68% of workers and 74% of retirees are confident they will have enough money to live comfortably throughout retirement. However, this is not a significant increase from last year. Perhaps contributing to this positive trend upward is workers’ and retirees’ increased confidence in their income. According to the U.S. Census, wage growth is now outpacing inflation growth. Americans are starting to feel this shift as 28% of workers and 32% retirees who are confident feel that way due to their finances. However, inflation remains as a top reason for Americans’ lack of confidence. Among those who do not feel confident, 31% of workers and 40% of retirees cite inflation as the reason why. Additionally, 39% of workers and 27% of retirees who are not confident feel this way due to their lack of savings.

• Social Security remains the top source of actual and expected income for Americans in retirement. Most workers (88%) expect Social Security to be a source of income in retirement. Retirees confirm this sentiment as nearly all (91%) report Social Security as a source of income. However, nearly twice as many retirees (62%) report Social Security is a major source of income than what workers (35%) expect it to be. While most Americans expect/report Social Security as a source of income in retirement, fewer understand it, but those who understand it are a clear majority. Two-thirds of workers and three-quarters of retirees understand Social Security and the various employment and claiming decisions that impact their retirement benefits at least somewhat well. While most claim they understand Social Security, fewer than half of workers have reviewed the amount of their Social Security benefits at their planned retirement age, and 59% have thought about how the age at which they claim Social Security will impact the amount they receive. Expectedly, significantly more retirees than workers have completed either task, with 77% having undertaken each.

• Workers expect to claim Social Security as soon as they retire but also expect to work for pay in retirement. Workers believe they will start claiming Social Security benefits at a median age of 65, which is the same age workers expect to retire. While age 65 has been the historical median age workers expect to retire, significantly more workers (28%) this year expect to retire at age 65. Retirees, on the other hand, report retiring at a significantly lower age than workers anticipate. Most retirees, 7 in 10, report retiring earlier than age 65, with a median retirement age of 62. Also contradicting workers’ expectations, retirees report collecting Social Security later into their retirement but earlier than workers’ expectations at around age 64. Similar to last year, half of retirees say they retired earlier than expected. While 2 in 5 retirees who retired early say they did so because they could afford to, nearly 7 in 10 retirees indicate the reason was out of their control.

• Americans’ retirement calculations result in a desire to save more, as estimations drastically differ from what Americans currently have. Half of Americans have tried to calculate how much money they will need in retirement. In reaction to their calculation, 52% of workers and 44% of retirees started to save more. Even though 7 in 10 workers and nearly 8 in 10 retirees have saved for retirement, this renewed interest in saving is spurred by the drastic difference in what Americans believe they will need for retirement compared to how much they currently have saved. A third of workers who tried to calculate how much they will need in retirement estimate they will need $1.5 million or more. However, a third of workers currently have less than $50,000 in savings and investments. In addition, 14% of workers have less than $1,000 in savings and investments. As part of their retirement preparations, half of the workers have estimated how much income they will need each month in retirement. While a quarter of workers do not know how much pre-retirement income they will need to replace in retirement, an additional quarter of workers believe they will need to replace 75% or more of their pre-retirement income.

• Workers would like help saving for emergencies through their retirement plan. Two-thirds of workers and almost three-quarters of retirees believe they have enough savings to handle an emergency expense. Additionally, almost half of workers have planned how they will cover an emergency expense in retirement. However, the ability to save for emergencies is at the top of workers’ list of valuable improvements they would like to see be made to their retirement savings plan. Some Americans are already using their retirement plans to pay for emergencies as nearly 1 in 5 have taken a loan or withdrawal from their retirement plan. Many of those who took money from their plan did so to pay for unforeseen circumstances such as making ends meet (30%), paying for a home or car repair (17%), and covering a medical expense (15%).

• Workers are more likely this year to want to purchase a guaranteed income product with their retirement savings. Among workers who are offered a workplace retirement savings plan, one-third believe having investment options that provide guaranteed lifetime income to be the most valuable improvement to their plan. This landed second on workers’ list of most valuable improvements to their plan. Significantly up this year, more workers who are contributing to their employer’s retirement savings plan, 3 in 10, expect to use savings from their workplace retirement savings plan to purchase a product that guarantees monthly income for life once they retire. This is substantiated by the fact that 83% of workers who are participating in a workplace retirement plan would be interested in using some or all of their retirement savings to purchase a product that guarantees monthly income.

• While expenses in retirement are higher than some retirees originally anticipated, retirees’ lifestyle in retirement is better than they expected. Significantly up this year, over a third of retirees say their travel, entertainment or leisure expenses are higher than they expected. While half of retirees say their overall expenses in retirement are higher than they originally expected, nearly 4 in 5 say they are able to spend money how they want within reason. Despite higher-than-expected costs, significantly more retirees this year, 3 in 10, believe their overall lifestyle in retirement is better than expected. Additionally, over two-thirds of retirees agree they are having the retirement lifestyle they envisioned. A quarter of retirees strongly agree with this statement.

The 34th annual RCS report can be viewed by visiting www.ebri.org/retirement/retirement-confidence-survey. The 2024 survey report was made possible with support from American Funds / Capital Group, Ameriprise Financial (Columbia Threadneedle), Bank of America, Empower, Fidelity Investments, FINRA, Jackson National, JPMorgan Chase, Mercer, Mutual of America, Nationwide, National Endowment for Financial Education, PGIM, Principal Financial Group, T. Rowe Price, USAA and Voya Financial.

https://www.ebri.org/content/results-from-the-2024-retirement-confidence-survey-find-workers–and-retirees–confidence-has-not-recovered-from-the-significant-drop-seen-in-2023–but-majorities-remain-optimistic-about-retirement-prospects

Recharacterization Still Exists

By Andy Ives, CFP®, AIF®
IRA Analyst

 

When a traditional IRA owner wants to convert all or a portion of his account to a Roth IRA, he needs to think long and hard about the transaction. For example, some questions to consider:

1. When will this money be needed? Since the earnings on a conversion must remain untouched for 5 years AND the Roth IRA owner must be age 59 ½ before those earnings are tax-free, conversion is a long-term play.

2. What will future tax rates be? If they are anticipated to remain level or go up, then converting now could be a viable solution. But if rates are expected to go down, then it might be wise to reevaluate and possibly postpone a conversion.

3. Where will the money come from to pay the taxes on the conversion? It is often recommended that a person pay the taxes from another source, other than having taxes withheld from the IRA. This way the full amount can begin to grow tax-free.

Why are these foundational questions so important? Because there is no going back. As soon as you hit ENTER on your computer, or as soon as your financial advisor submits the transaction, the deed is done. It cannot be unwound. Recharacterization of a Roth conversion is off the table. (Congress did away with it back in 2018.) Whatever consequences that follow a conversion must be dealt with. Since a Roth conversion is such a major decision, and since conversions are so popular, the common advice is, “Be sure this is what you want to do, because recharacterization is no longer an option.”

This is 100% true – recharacterization is no longer allowed. That is, as it pertains to Roth conversions.

HOWEVER, recharacterization of a traditional IRA or Roth IRA CONTRIBUTION is still available. This is a common misunderstanding. Yes, an unwanted or ineligible contribution to one type of IRA can be recharacterized (changed) to another type of IRA. A traditional IRA contribution can be recharacterized to a Roth IRA, or vice versa. A contribution can be recharacterized for any reason as long as it can be a valid contribution to the other type of IRA.

Why would it be necessary to recharacterize a contribution? Maybe a person made a Roth IRA contribution, but then later in the year earned a big year-end bonus which pushed her over the Roth IRA phase-out limits ($230,000 – $240,000 for those married filing joint in 2024; $146,000 – $161,000 for single filers). Maybe a person made a traditional IRA contribution, but then learned that the contribution could not be deducted based on participation in a work plan.

Regardless of the reason, a traditional or Roth IRA contribution can still be recharacterized. But there is a deadline – October 15 of the year after the year for which the contribution is made. Beyond that drop-dead date, recharacterization is not available. Recognize that when processing a recharacterization, any earnings or losses applicable to the contribution must also be recharacterized. (For example, if you made a $5,000 contribution that was now worth $4,500, only $4,500 gets recharacterized.) Ultimately, it will be as if the original contribution was made to the proper IRA.

While the term “recharacterization” is often dismissed because it “does not exist anymore,” it is imperative to understand that recharacterization is alive and well…but only as it pertains to Roth or traditional IRA contributions.

https://irahelp.com/slottreport/recharacterization-still-exists/

Surprising News About the New Statute of Limitations for Missed RMDs and Excess IRA Contributions

By Ian Berger, JD
IRA Analyst

 

A big change made by the SECURE 2.0 Act of 2022 was adding a new statute of limitations (SOL) for the IRS to assess penalties for missed required minimum distributions (RMDs) and excess IRA contributions. On its face, it looks like the new SOL is 3 years for the missed RMD penalty and 6 years for the excess contribution penalty. But looks can be deceiving. In fact, for most of you, the new lookback period will be 6 years for both penalties.

The penalty for a missed RMD used to be 50% of the amount not taken. SECURE 2.0 reduced this penalty to 25%, and down to 10% if the missed RMD is timely corrected. This change was effective beginning in 2023. But the IRS can excuse this penalty if you ask for waiver. To do so, you must take the missed RMD and file Form 5329 with the IRS explaining that the RMD shortfall was due to reasonable error.

An excess IRA contribution is a contribution that exceeds the amount you can contribute to your IRA or Roth IRA in a year (e.g., making a Roth contribution when your income is too high or rolling over an RMD.) The penalty for an excess contribution is 6% for each year the excess amount stays in your account as of December 31. There is no penalty if you correct the excess contribution by October 15 of the year after the year for which you made it. The IRS cannot waive this penalty, unlike the penalty for a missed RMD.

Before 2022, most people had no SOL protection, and the IRS could go back indefinitely to assess both penalties. In SECURE 2.0, Congress tried to remedy this by providing new lookback periods for both penalties.

In a recent Tax Court decision, Couturier v. Commissioner, No. 19714-16; 162 T.C. No. 4, the Court ruled that the new 6-year SOL for the excess IRA contribution penalty is not retroactive. Although the Court didn’t address retroactivity of the 3-year missed RMD penalty SOL, the decision almost certainly applies to that penalty as well. This means there will continue to be no SOL protection for either penalty for years before 2022.

For 2022 and subsequent years, the lookback period for the missed RMD penalty for most of you is actually 6 years – not 3 years. The only way to keep a 3-year lookback period for any year is to file Form 5329 with the IRS each year indicating that no penalty is owed for that year and attach enough information to the form to show the IRS why you believed there was no missed RMD for that year. (This is sometimes called “zero-filing.”) But very few people will go to all the trouble to do this. Anyone who doesn’t will wind up with a 6-year lookback if the IRS hits them with a missed RMD penalty.

For 2022 and future years, the lookback period for the excess IRA contribution penalty starts out at 6 years. The only way to get that down to 3 years is to use the zero-filing strategy and provide the backup documentation showing why there was no excess contribution for that year. Once again, this is not something many people are willing to do.

The bottom line: Whether you miss an RMD or make an excess IRA contribution, if you don’t fix it the IRS will have 6 years to come after you.

https://irahelp.com/slottreport/surprising-news-about-the-new-statute-of-limitations-for-missed-rmds-and-excess-ira-contributions/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

US equity markets posted a third week of gains as global central banks continued to cut monetary policy rates.  China, Switzerland, Mexico, Hungry, and the Czech Republic cut their policy rates.  Chinese markets gained on the news that several funding rates would be reduced and that the government would increase its fiscal spending as needed to meet its growth targets.  It’s widely expected that the PBOC will also cut the prime rate soon. The CSI 300 gained 15% for the week, its largest weekly gain since 2008.  The shift in policy rates comes as inflation appears to be moderating globally.  The Fed’s preferred measure of inflation, the PCE, announced Friday, provided more evidence that prices are indeed trending lower.  Better-than-expected earnings results from Micron Technology also catalyzed the market to move higher.  The semiconductor sector regained leadership and led the market higher with sizeable moves in influential names such as NVidia, Intel, and ASML.  The move was dampened later in the week by news that the DOJ was investigating Super Micro Computer for accounting irregularities and on news that the Chinese government wants Chinese companies to avoid using NVidia’s GPUs.

The S&P 500 gained 0.6% while hitting its 42nd record high this year.  The Dow added 0.6%, the NASDAQ rose 1%, and the Russell 2000 shed 0.1%.  Yields increased across much of the curve this week as US Treasuries continued to consolidate their aggressive moves since August.  The 2-year yield fell one basis point to 3.56%, while the 10-year yield increased by two basis points to 3.75%.  Oil prices tumbled 4% despite escalating tensions in the Middle East.  WTI prices fell by $2.86 to $68.15 a barrel.  Notably, the UAE announced it would likely increase oil production in December. Gold prices increased by $22.00 to $2667.90 an Oz.  Copper prices advanced $0.25 or 5.7% to $4.58 per Lb.  Bitcoin closed at $65,500, while the US Dollar Index fell to 14-month lows at 100.43.

The economic calendar showed continued progress on the inflation front and telegraphed a resilient labor market.  Headline PCE increased by 0.1%, in line with the consensus estimate, while Core PCE inched up 0.1%, which was lower than the anticipated 0.2%.   On a year-over-year basis, PCE increased 2.2%, while the Core PCE rose 2.7%.  Personal Income increased by 0.2%, shy of the estimated 0.3%.  Personal Spending came in line with the consensus at 0.2%.  Initial Jobless Claims fell by 3k to 218k, while Continuing Claims climbed by 13k to 1834k.  The third look at Q2 GDP showed growth of 3% while the GDP Deflator grew by 2.5%- both in line with the street’s estimates.  Consumer Confidence came in a little better than expected at 70.1, while Consumer Sentiment fell from its prior reading to 98.7.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

2024 Pulse of the American Retiree Survey: Midlife Retirement ‘Crisis’ or a 10-Year Opportunity?

2024 Pulse of the American Retiree Survey: Midlife Retirement ‘Crisis’ or a 10-Year Opportunity?

Critically underprepared for retirement, 55-year-old Americans enter a crucial 10-year countdown to plan and prepare

  • With just a decade until retirement, 55-year-old Americans have less than $50K in median retirement savings
  • First modern generation confronting retirement without defined benefit pensions or full societal security benefits
  • “Silver Squatters” to rely more on family for housing, financial support
  • One-third have already postponed retirement due to persistent inflation
  • Women face acute challenges, exacerbated by caregiving duties71% say they are interested in annuities, but only 6% currently count them as part of their retirement strategy

NEWARK, N.J., June 24, 2024 – As a record number of Americans reach the traditional 65-year retirement age in 2024, a younger demographic of critically underprepared pre-retirees begins a 10-year countdown to protect retirement outcomes, according to Prudential Financial, Inc.’s 2024 Pulse of the American Retiree Survey.

Fifty-five-year-old Americans are far less financially secure than older generations, and face mental and emotional strain that extends beyond prevailing notions about the “midlife” crisis. These challenges are exacerbated by calculations that Social Security’s trust funds will be depleted as this generation reaches retirement age in 2035 — making this the first modern generation to confront retirement without full Social Security support, and in most cases without a defined benefit pension plan.

“Attention today is rightly centered on the approximately 11,000 65-year-olds entering retirement every day, but we must also focus as an industry on the opportunity to help a slightly younger generation of workers entering the critical 10-year countdown to retirement. Further, the financial futures of certain cohorts — such as women — are especially precarious,” said Caroline Feeney, CEO of Prudential’s U.S. Businesses. “The upside is that, with the right planning and strategy to protect their life’s work, we can ensure this generation is well-prepared to live not only longer, but better.”

Key findings of the survey include:

  • Deep savings shortfall: Fifty-five-year-olds have median retirement savings of less than $50K, falling significantly short of the recommended goal of having eight times one’s annual income saved by this age. Two-thirds (67%) of 55-year-olds fear they will outlive their savings, compared to 59% of 65-year-olds and 52% of 75-year-olds.
  • Rise of the “Silver Squatters”: Millennial and Gen Z adults who have counted on parental support will soon be paying their dues: nearly a quarter (24%) of 55-year-olds expect to need financial support from family in retirement — twice as many as 65- and 75-year-olds (12%). One in five (21%) also expects to need housing support, compared to 12% of 65-year-olds and 9% of 75-year-olds. Despite these expectations, nearly half of 55-year-olds (48%) who expect to need support have not discussed it with their family yet.
  • Inflation upending everyone’s plans: One-third of 55-year-olds and 43% of 65-year-olds have postponed retirement due to inflation and higher living costs.
  • Just scraping by: More than one-third (35%) of 55-year-olds say they would have trouble putting together $400 within one month to cover an emergency expense, compared to 19% of 65-year-olds and 15% of 75-year-olds.
  • Women in focus: Across all age groups, women are particularly vulnerable, with less than a third the median savings of men. They are nearly three times as likely to delay retirement due to caregiving duties.
  • Retirement funding gap: Amid the broader demise of defined benefit pension plans that supported prior generations, 55-year-olds are nearly twice as likely as 65- and 75-year-olds to rely on “do-it-yourself” employer-sponsored plans like 401(k)s to fund their retirement.
  • Untapped annuities opportunity: Despite growing industry recognition of the importance of lifetime income strategies to retirement security, just 6% of 55-year-olds plan to use annuities in retirement, compared to 11% of 65-year-olds and 20% of 75-year-olds. Yet, 71% of 55-year- olds say they are interested in annuities, presenting the industry with a significant opportunity to strengthen their retirement security with protected income solutions.

“America’s 55-year-olds have the opportunity to reimagine and protect retirement outcomes with a new set of tools that can help them safely grow their retirement nest egg while also ensuring a reliable stream of lifetime income,” said Dylan Tyson, president of Retirement Strategies at Prudential. “With the retirement model evolving beyond traditional pensions, lump sums and Social Security, it is critical that we work together to prepare for better and longer lives throughout retirement.”

Midlife Retirement “Crisis”
At an age where they are navigating the most complex balance of career, family and retirement planning obligations, 55-year-olds face the most significant mental and emotional health challenges, particularly if they are financially insecure.

  • Feeling “Just OK”: Fifty-five-year-olds are the least satisfied with their lives, rating life satisfaction just 6.2 on a 10-point scale. Seventy-five-year-olds, meanwhile, report the greatest life satisfaction (7.4), followed by 65-year-olds (7.0).
  • Money matters: Fifty-five-year-olds who lack financial security are significantly more likely to struggle with mental health (53%) than those who are financially secure (33%).
  • Relationship droughts: Forty-five percent of 55-year-olds find it difficult to maintain relationships as they age, significantly more than older generations (31% of 65-year-olds and 27% of 75-year-olds).

ABOUT THE SURVEY
The 2024 Pulse of the American Retiree Survey was conducted by Brunswick Group from April 26 to May 2, 2024 among a national sample of 905 Americans ages 55 (n=300), 65 (n=303), and 75 (n=302). The interviews were conducted online, and quotas were set to reflect a representative population based on age, gender, race/ethnicity, educational attainment, and region. Percentages may not total to 100 due to rounding or multiple choices.

https://news.prudential.com/latest-news/prudential-news/prudential-news-details/2024/2024-Pulse-of-the-American-Retiree-Survey/default.aspx

Eligible Designated Beneficiaries and Disclaimers: Today’s Slott Report Mailbag

Sarah Brenner, JD
Director of Retirement Education

Question:

When an IRA owner dies after their required beginning date, can an eligible designated beneficiary choose either the life expectancy option or the 10-year payout rule?

Answer:

If an IRA owner dies on or after their required beginning date, the 10-year rule is not an option for an eligible designated beneficiary (EDB). The 10-year rule (for an EDB) is only available when the IRA owner dies before the required beginning date. After the required beginning date, the eligible designated beneficiary would have to take distributions over life expectancy.

Question:

Can an IRA beneficiary do a “partial” disclaimer or is a full disclaimer required? Thanks.

Answer:

A beneficiary can disclaim all or part of an IRA that they inherit. A full disclaimer of all the inherited IRA assets is not required.

https://irahelp.com/slottreport/eligible-designated-beneficiaries-and-disclaimers-todays-slott-report-mailbag/

Recharacterization Deadline Approaches

By Sarah Brenner, JD
Director of Retirement Education

 

It happens. You have made a 2023 contribution to the wrong type of IRA. All is not lost. That contribution can be recharacterized. While recharacterization of Roth IRA conversions was eliminated by the Tax Cuts and Jobs Act, recharacterization of IRA contributions is still available and can be helpful in many situations you may find yourself in.

Maybe you contributed to a traditional IRA and later discovered the contribution was not deductible or maybe you contributed to a Roth IRA, not knowing that your income was above the limits for eligibility. You may recharacterize the nondeductible traditional IRA tax-year contribution to a Roth IRA and have tax-free instead of tax-deferred earnings if your income is within the Roth IRA contribution limits for the year. Or, if your Roth IRA contribution is an excess contribution because your income was too high, you may recharacterize that contribution to a traditional IRA because there are no income limits for traditional IRA contributions.

It’s still not too late to recharacterize your 2023 IRA contribution. The deadline for recharacterizing a 2023 tax year contribution is October 15, 2024 for taxpayers who timely file their 2023 federal income tax returns. This is true even if you do not have an extension. You may need to file an amended 2023 federal income tax return if you recharacterized after you have already filed.

If you decide that recharacterization is a good move for you, contact your IRA custodian. You will need to provide the custodian with some information to conduct the transaction such as the amount you would like to recharacterize and the date of the contribution.  Most IRA custodians can provide you with form to collect all the necessary information to complete a recharacterization. The IRA custodian will then directly move the funds you choose to recharacterize, along with the earnings or loss attributable, from the first IRA to the second IRA. This is a tax-free transaction but both IRAs report the transactions to you and the IRS. You will receive a 2024 Form 1099-R from the first IRA and a 2024 Form 5498 from the second IRA.

https://irahelp.com/slottreport/recharacterization-deadline-approaches/

IRA Acronyms

By Andy Ives, CFP®, AIF®
IRA Analyst

 

When presenting a particular section of our training manual, I usually make the joke that, “if we were playing an acronym drinking game, we would all be on our way to a hangover.” The segment is titled: “Missed stretch IRA RMD by an EDB, when the IRA owner dies before the RBD.” This part of the manual discusses the automatic waiver of the missed RMD penalty in a certain situation, and the acronym soup is borderline comical. So that everyone knows which end is up, here is a spiked punch bowl of common retirement-account-related acronyms.

IRA: Individual retirement arrangement. (Not “account!”)

RMD: Required minimum distribution. Minimum amount that must be withdrawn from a retirement account each year after reaching a certain age.

RBD: Required beginning date (for starting RMDs). Generally, April 1 of the year after the year a person turns 73.

QLAC: Qualifying longevity annuity contract. An annuity whose value (up to $200,000) can be excluded from an IRA owner’s balance for RMD calculation purposes.

EDB: Eligible designated beneficiary. Category of beneficiary who may take stretch RMDs.

NEDB: Non eligible designated beneficiary. Category of beneficiary who gets the 10-year rule.

NDB: Non designated beneficiary. Category of beneficiary that includes “non-people,” like an estate or charity. Payout rules applicable to NEDBs are the 5-year rule or “ghost rule.”

ALAR: At least as rapidly. The rule dictating that when RMDs have begun, they must be continued by the beneficiary. ALAR is a function of frequency, not amount.

QCD: Qualified charitable distribution. A distribution from an IRA to a qualified charity, subject to an age requirement of 70 ½ or older.

CWA: Contemporaneous written acknowledgement. This is just a receipt for your QCD!

CGA: Charitable gift annuity. A one-time QCD of $53,000 (for 2024) can go to an entity like a CGA, CRAT (charitable remainder annuity trust), or CRUT (charitable remainder unitrust).

DAF: Donor advised fund. A QCD cannot be made to a DAF.

NUA: Net unrealized appreciation. Tax strategy used to pay long term capital gains on the appreciation of company stock. (Be sure to know all the NUA rules before proceeding.)

NIA: Net income attributable. The gain or loss on an excess IRA contribution.

QDRO: Qualified domestic relations order. Used to split a retirement plan after divorce.

SECURE Act: Setting Every Community Up for Retirement Enhancement Act.

I feel dizzy. Maybe I should go lie down and sleep it off.

https://irahelp.com/slottreport/ira-acronyms/

 

Weekly Market Commentary

Weekly Market Commentary

The S&P 500 notched its 39th record high in 2024 on the back of a fifty-basis-point rate cut by the Federal Reserve. Global central banks took center stage this week, with the Fed playing the headliner. Leading into the Fed’s decision, the street was divided over the magnitude of the cut but agreed that the message surrounding the decision would dictate market action.  Notably, the market had a significant bounce in the prior week, and the rates market has significantly rallied over the last several weeks- so it felt like some of the rate cut decisions had already been baked into the market.  The Fed’s decision to cut by fifty- basis points was immediately met with a bid into the markets, but that bid faded late in the day as markets settled back to little changed.  Fed Chairman Powell cautioned the street’s expectations of continued big rate cuts despite the market pricing in another seventy-basis points of cuts in 2024 and over two hundred more in 2025.  The Chairman’s post-decision narrative was constructive and pointed to this fifty basis point cut as a recalibration of rates rather than a cut based on the economy falling into a recession.  We think this statement bodes well for risk assets in the future, but we continue to expect continued volatility based on seasonality and into the US elections.

The Bank of England and the Bank of Japan left their policy rates in place.  The BOE came across as more hawkish, telegraphing that they are in no rush to cut rates.  On the other hand, the BOJ statements post-decision were taken as a bit more dovish and partially closed the door on the idea that the bank needs to raise rates in the near term.  The US Dollar lost ground to the Euro and British Pound while strengthening against the Japanese Yen.  The Dollar index fell 0.4% to 100.72

The S&P 500 gained 1.6%, the Dow also hit a record high and added 1.8%, the NASDAQ increased by 1.8%, and the Russell 2000 jumped by 2.2%. The broadening out of the market rally continued as the equal-weight S&P 500 index outpaced the market cap-weighted index. Small caps will likely continue to benefit as rate cuts continue, but only in situations where the overall economy is doing well.

US Treasuries took a small step back this week on what feels to be some consolidation of the curve’s recent strong move.  The 2-year yield fell by one basis point to 3.57%, while the 10-year yield increased by eight basis points to 3.73%.  Oil prices rose by $2.33 or 3.4% to close at $71.01 a barrel.  Gold prices notched another all-time high before settling the week up $34.60 to close at $2645.90. Copper prices rose by $0.11 to $4.33 per Lb.  Bitcoin ended the week materially higher on the risk-on trade, closing at $63,269.

The economic calendar this week showed a resilient economy.  Retail Sales came in better than expected at 0.1%; the street was looking for a decline of 0.2%.  Industrial production increased by 0.2% versus the estimated 0.1%.  Capacity Utilization came in line at 78%.  Initial Claims decreased by 12k to 219k, while Continuing Claims fell by the same amount to 1829k.  Housing data also came in better than expected:  Housing Starts at 1356k, Building Permits at 1475k, and Existing Home sales at 3.86M.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

NEW SPOUSAL BENEFICIARY RULES AND EFFECTIVE DATE OF 10-YEAR RULE: TODAY’S SLOTT REPORT MAILBAG

By Ian Berger, JD
IRA Analyst

 

Question:

I inherited an IRA from a younger deceased spouse who wasn’t required to take required minimum distributions (RMDs) until this year. Can I take advantage of the new section 327 rules under SECURE 2.0 since the RMDs haven’t commenced yet?

Answer:

Yes. The recently-released IRS proposed RMD regulations say that section 327 can be used by a surviving spouse who inherits before 2024 as long as the deceased IRA owner would have reached age 73 (the current first year for RMDs) in 2024 or later. The advantage of section 327 is that you can remain an IRA beneficiary (as opposed to doing a spousal rollover) and use the IRS Uniform Lifetime Table (and your age) to calculate RMDs. This will produce smaller RMDs than if you were using the IRS Single Life Table, which was required before section 327. An added benefit of being a spouse beneficiary is that these RMDs will not start until the deceased spouse would have been age 73. (As an alternative, you could elect to have the inherited IRA emptied by the end of the 10th year following the year your spouse died. No annual RMDs would be required in years 1-9.)

Question:

My father passed away in March of 2018 and I inherited his 401(k). I rolled over the 401(k) to an inherited IRA. Do I have to liquidate this IRA by the end of 2028?

Thank you.

Rick

Answer:

Hi Rick,

No. The 10-year payment rule for inherited IRAs applies to most non-spouse beneficiaries (including adult children) of IRA owners who die after 2019. Since your father died in 2018, you aren’t subject to the 10-year rule. You can continue taking annual RMDs over your single life expectancy.

https://irahelp.com/slottreport/new-spousal-beneficiary-rules-and-effective-date-of-10-year-rule-todays-slott-report-mailbag/

Federal Reserve data shows sharp rise in amount Americans 65 and older owe

Americans across generations are carrying more debt than they did three decades ago, according to Federal Reserve data, but the rise has been especially steep among the oldest age groups.

The Fed’s most recent Survey of Consumer Finances (SCF) found that among all groups younger than 65, debt roughly doubled from 1992 to 2022. That’s in line with inflation over that time.

But debt more than quadrupled in households headed by people aged 65 to 74 in that period (from $10,150 to $45,000 per household, on average), and for those 75 and up it has increased sevenfold (from just under $5,000 to $36,000).

Older adults are also considerably more likely to have debt now than they were a generation ago. Fifty-three percent of households headed by someone 75-plus had debt in 2022, compared to 32 percent in 1992. For the population at large, the increase was just a few percentage points.

“There are a lot of folks who just don’t have enough money put away,” says Jason Athas, manager of educational programs at Debt Management Credit Counseling Corp., a Florida-based nonprofit that provides debt relief and counseling services.

As a result, he says, he is seeing more older adults struggling to keep up with their costs. Research by AARP and others bears him out.

An October 2023 AARP study found that 65 percent of people 65 and older who have debt consider it a problem, including 29 percent who call it a major problem. According to a July 2024 report from the Nationwide Retirement Institute, a research and consulting arm of the insurance company, nearly a third of retirees expect to be less financially secure in retirement than their parents or grandparents.

“Credit card debt is one of the biggest problems seniors have today,” Athas says.

Inflation impact

Household debt among those 75 and older has declined since 2010, when it more than doubled to nearly $41,000 on average in the wake of the Great Recession, according to the SCF, which the Fed conducts every three years. Their debt had declined sharply by 2013 but has risen steadily since, subsequent surveys showed.

Runaway inflation in 2021 and 2022, and the Federal Reserve’s campaign to tamp it down by sharply raising interest rates, have played a part, financial professionals say.

“We’re all impacted by the accelerated cost of living,” says Hector Madueno, financial education manager at SAFE Credit Union in Northern California.

While painful for all consumers, higher prices are more easily absorbed by people in the workforce because wages typically rise in tandem with prices.  “Retirees are less likely to have this buffer,” says Fred Perez, chief lending officer at Southern California’s First City Credit Union. The ultralow interest rates in place before the inflation spike also contributed to higher debt by prompting more older homeowners to tap into their accrued housing equity.

“Part of why we’re seeing more mortgage debt at older ages is [because] the nature of how people manage their debt across a lifespan has changed,” says Lori Trawinski, director of finance and employment at the AARP Public Policy Institute.

“There’ve been a lot more refinancing opportunities that didn’t exist in the ’60s and ’70s, so now it’s rare for someone not to refinance their mortgage if they’re in their home a long time,” she says. “People have become much more used to carrying a mortgage into their retirement years.”

Mortgages account for roughly three-quarters of the debt held by Americans 70 and older, according to a May 2024 report from the New York Fed.

Recession legacy

Economists and financial advisers tend to broadly segment debt into “good” and “bad” categories. Low-rate and fixed-rate debt such as mortgages are generally considered less worrisome than revolving, high-interest debt such as a credit card balance.

As a credit counselor in the aftermath of the Great Recession, Athas saw people rely on credit cards after job losses. Older workers in their peak earning years struggled to rejoin the labor force and attain their former income. For many, the result was a legacy of debt.

Today’s high interest rates are exacerbating that, he says: “If they’re carrying a balance and not paying it off, they’re getting hit with a good amount of interest on that debt.”

Nearly half of boomers have credit card debt, and nearly two-thirds have been carrying it for more than a year, according to a June 2024 Bankrate survey.

Even so-called good debt like home loans can pose a unique threat to the oldest borrowers because they have fewer options to increase their income if they find themselves struggling to make payments.

Nearly 40 percent of people 80 and up pay at least 30 percent of their income on housing, compared to 32 percent of the overall population, says Jennifer Molinsky, director of the Housing and Aging Society Program at the Harvard Joint Center for Housing Studies.

Borrowers who have already tapped their home equity or taken out loans to manage older debts without changing their spending habits risk digging themselves in deeper, Perez says. “They don’t curtail their spending. That’s a particularly troublesome concern.”

Steps to rein in debt

Advisers use a metric called debt-to-income ratio to evaluate a person’s financial health. As a rule of thumb, many lenders look for a ratio of no more than 36 percent, meaning the total amount you owe each month — including mortgages and home loans, student loans, credit cards and other debt — should not exceed 36 percent of your monthly income.

The recent rise in interest rates has scrambled this math for many older homeowners, a prospect that worries finance pros like Madueno. “As everything rises and people rely more frequently on their credit cards, people don’t take a look and see what their rates are,” he says.

Still, there are steps older adults can take, in the run-up to retirement or during it, to tackle debt before it becomes unsustainable.

Just the act of making a budget can be eye-opening, says Ryan Derousseau, a financial adviser at United Financial Planning Group in Hauppauge, New York. “If you haven’t learned how much you can spend on a month-to-month basis, no matter how much you earn, you’re going to run into this,” he says.

Ana Salazar, a goals coach at U.S. Bank, helps people identify additional money in their budgets by targeting items like unused subscriptions on automatic renewal. “Once we’re able to uncover those things and stop them, they have a little extra money they can use to pay down debt,” she says.

Nonprofit credit counseling organizations can negotiate with credit card companies to lower interest rates and waive penalty fees. “We can eliminate a lot of what they are spending on a high-interest credit card,” Athas says, which makes it easier for people to pay back the borrowed principal more easily.

Consolidating credit card debt into a lower-rate instrument like a personal loan also can reduce what you spend on interest. According to the Federal Reserve, the average interest assessed on credit cards in the second quarter of 2024 was 22.76 percent, a near record high.  “If we can move that down to a 7 percent or 10 percent rate, that’s a heck of a lot better,” Derousseau says.

To make those solutions stick, however, it’s important to identify and address problematic spending behaviors so you don’t just run your credit card balances back up.

“People kind of get used to borrowing,” he says. “If you haven’t kicked that habit, you’re going to continue to be borrowing at 70 and 80.”

https://www.aarp.org/retirement/planning-for-retirement/info-2024/retirees-carrying-more-debt.html

What’s the First RMD Year for Those Born in 1959?

By Ian Berger, JD
IRA Analyst

If you were born in 1959, what is the first year that you must start taking required minimum distributions (RMDs)? That would seem like an easy question to answer, but because of a snafu by Congress, it isn’t quite so clear.

For many years, RMDs started at age 70 ½. Then, in the 2019 SECURE Act, Congress postponed the RMD age to 72 for people born on or after July 1, 1949. In the 2022 SECURE 2.0 Act, Congress delayed the first RMD year even further with the following language:

It didn’t long for commentators to notice a drafting error in this rule. The glitch caused anyone born in 1959 to have two first RMD ages.

Example: Jason Alexander, who played George in Seinfeld,was born on September 23, 1959. Jason is covered by the first part of the rule, which would make 73 his first RMD age. But he is also covered by the second part, which would also make 75 his first RMD age.

Obviously, even George cannot have two RMD ages, so this error had to be fixed. Back in May 2023, four high-ranking members of Congress from both parties sent a letter to the IRS promising they would introduce legislation to correct this mistake and several others in SECURE 2.0.

But guess what? This promised corrective legislation hasn’t happened yet. So, the IRS stepped into the breach and decided it would fix the 1959 “ambiguity.” In the proposed RMD regulations issued on July 18, 2024, the IRS said the SECURE 2.0 rule should work as follows:

  • The first RMD age is 73 for those born on or after January 1, 1951 and before January 1, 1960; and
  • The first RMD age is 75 for those born on or after January 1, 1959 January 1, 1960.

With this fix, those born in 1959 would only have one RMD age: 73. And the RMD ages would be as follows:

          Age 70 ½        Born before July 1, 1949
          Age 72            Born on or after July 1, 1949 and before January 1, 1951
          Age 73            Born on or after January 1, 1951 and before January 1, 1960
          Age 75            Born on or after January 1, 1960

However, it’s not entirely clear whether the IRS has the authority to make this correction. Earlier this year, the U.S. Supreme Court issued the Loper Bright Enterprises v. Raimondo decision, which gives judges more power to overturn IRS (and other governmental) regulations. Based on that decision, it is possible a judge could decide that only Congress has the power to fix its own mistake.

But for now, your best bet is to follow the RMD chart above.

https://irahelp.com/slottreport/whats-the-first-rmd-year-for-those-born-in-1959/

What You Need to Know About Withholding and Your IRA

By Sarah Brenner, JD
Director of Retirement Education

If you take a distribution from your traditional IRA, in most cases you will owe taxes. The government wants to be sure those taxes are paid, so IRA distributions are subject to federal income tax withholding. The good news is that there is a lot of flexibility when it comes to withholding on your IRA distribution. Here is what you need to know.

How Withholding Works

Your IRA custodian is required to apply federal income tax withholding rules to a traditional IRA distribution when more than $200 is distributed from your IRA in a year. Roth IRA distributions generally are not subject to withholding. When you take a distribution from your IRA, the custodian must provide you with a withholding notice explaining the rules prior to the distribution.

Unless your IRA distribution is from an IRA annuity that has been annuitized, your withholding choices are to withhold 0%, 10%, or more than 10%. You can even choose to have 100% of your IRA distribution withheld! If you don’t choose, the choice will be made for you. If you don’t choose anything after being notified, the custodian must withhold 10%. You should be aware that the 10% rule even applies to distributions that are converted to Roth IRAs. Be sure to elect 0% withholding if you want to convert an entire traditional IRA distribution to a Roth IRA. If any amounts are withheld, they will not be considered to be converted to the Roth IRA.

Withholding applies differently to annuitized distributions from an IRA. For these distributions, withholding applies as if the payments were wages. You can elect out of withholding on distributions from your annuitized IRA.

How Much Should I Withhold?

Your IRA custodian is required to inform you about withholding, but the custodian isn’t required to tell you how much you should actually withhold. How much should be withheld from your IRA distribution is based on your overall tax situation. You should consider a number of factors, such as total anticipated income, deductions, credits and other withholdings.

You may be subject to penalties for not paying enough federal income tax during the year, either through withholding or estimated tax payments. Withholding is automatically treated as being paid in ratably, throughout the year. This can be a benefit for you if you take an IRA distribution late in the year and are concerned that you may not have made high enough quarterly payments. You can choose to withhold on the IRA distribution to make up the shortfall.

Some taxpayers mistakenly equate their withholding with the tax they owe, but that, of course, is not usually the case. For example, if you withhold 10% from your IRA distribution, that doesn’t necessarily mean you’ll owe 10% in taxes. You could owe 10%, but you could also owe less than 10% or, most likely more than 10% – potentially much more. For 2024, the federal 10% tax bracket only applies to taxable income from $0 to $11,600 for single filers and $0 to $23,200 for those married and filing joint returns. Therefore, withholding only 10% of an IRA distribution for federal income taxes could easily result in you owing additional amounts at tax time.

Withholding can be complicated. You will want to keep in mind that federal withholding is only part of the picture. Many states also require withholding on IRA distributions. If you have questions, you will want to discuss your situation with a knowledgeable financial advisor.

https://irahelp.com/slottreport/what-you-need-to-know-about-withholding-and-your-ira/

Weekly Market Commentary

Weekly Market Commentary

-Darren Leavitt, CFA

Markets bounced back nicely in the second week of September.  It was an intriguing week of trade with several undercurrents to consider.  The first and likely only Presidential debate between Harris and Trump appeared to be won by Harris, although polls continue to suggest an extremely close election.  Policy agendas continue to be assessed for their impact on markets.  Tariffs and taxes remain top of mind for Wall Street.

Inflation data announced on Wednesday and Thursday showed slightly higher than expected readings in Core CPI and Core PPI but nothing that would change the likelihood of the Federal Reserve cutting its policy rate in the coming week. Interestingly, the probability of a fifty-basis-point hike increased to 45%, according to what some think was a leak by the Fed to a Wall Street Journal journalist, suggesting that the Fed may indeed cut by fifty basis points.  Of note, the European Central Bank cut its policy rate by twenty-five basis points and then came across as more hawkish on future cuts in post-decision commentary.

Intraday volatility was notable, as was the broadening out of the market rally.  That said, the Semiconductor sector, which had been the market leader until the last couple of months, had a fantastic week.  NVidia’s share price increased by over 15% last week, while the Semiconductor index advanced by over 9%. Small-cap issues, which have been on a rollercoaster ride for most of the year, posted a solid week of gains on the idea that the Federal Reserve would be cutting rates to normalize their policy rate rather than on growth concerns.

However, those growth concerns were manifested at Barclay’s Financials Services conference.  At the conference, JP Morgan lowered their Net Interest Income, and Goldman Sachs conveyed weaker-than-expected revenue from trading. Ally Financial tumbled 16% as the CFO highlighted increasing stress on the consumer, which has led to weaker credit trends.

The S&P 500 gained 4%, the Dow added 2.6%, the NASDAQ jumped 6%, and the Russell 2000 increased by 4.4%.  US Treasuries continued to rally across the yield curve.  The 2-year yield fell by seven basis points to 3.58%, while the 10-year yield fell by six basis points to 3.65%.  West Texas Intermediate crude prices increased by $1.00 on perhaps some supply concerns related to Hurricane Francine.  Gold prices soared to new all-time highs and closed the week $86.00 higher at $2611.30 an Oz.  Copper prices increased by $0.15 to close at $4.22 per Lb.  The US Dollar index fell by 0.1% to 101.07.

The economic calendar was focused on the Consumer Price Index and the Producer Price Index.  Headline CPI came in at 0.2%, in line with expectations, and was up 2.5% over the last year.  Core CPI, which excludes food and energy, increased by 0.3% versus the consensus estimate of 0.2%.  On a year-over-year basis, the core reading increased by 3.2%.  Shelter costs continue to be sticky, rising 0.5% in August.  Headline PPI came in at 0.2%, in line with the street estimate.  PPI increased by 1.7% over the last year, down from 2.1% in July.  Core PPI came in at 0.3%, slightly above the consensus estimate of 0.2%.  On a year-over-year basis, the core figure increased by 2.4% in August, up from 2.3% in July.  Initial Claims increased by 2k to 230k, while Continuing Claims increased by 5k to 1850k.  A preliminary reading of the University of Michigan’s Consumer Sentiment Index came in better than expected at 69 versus the prior reading of 68.3.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.

REQUIRED MINIMUM DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

By Andy Ives, CFP®, AIF®

IRA Analyst

QUESTION:

I inherited a traditional IRA from my mother in 2024. She passed before her required beginning date (RBD.) I know that I fall under the 10-year rule. The question is, do I need to start required minimum distributions (RMDs) in 2024 and deplete the account by 2034, or can I wait until 2034 and deplete the entire account all at once?

Thank you,

Holly

ANSWER:

Holly,

Since your mother passed away before her RBD, she never officially “turned RMDs on.” Since she did not start RMDs, then RMDs do not apply within the 10-year period. As such, you can leave the inherited IRA untouched and take a lump sum distribution by the end of 2034 if you wish. (However, it may behoove you to gradually draw down the inherited IRA over the full 10-year period to avoid a big tax hit in year 10.)

QUESTION:

Some of my IRAs are Roth and some are traditional. If my RMD is $1,500, can I withdraw the $1,500 from my Roth IRA, or must I take it from a traditional IRA?

ANSWER:

Your RMD must be withdrawn from the traditional IRA, because that will generate a taxable distribution. The IRS gives us the opportunity to maintain a tax-deferred IRA until it’s time for RMDs. At that point, the IRS wants their tax dollars. Consequently, a distribution from a Roth IRA cannot qualify as your traditional IRA RMD.

https://irahelp.com/slottreport/required-minimum-distributions-todays-slott-report-mailbag-2/

3 Changes Coming To Retirement Required Minimum Distributions in 2025

3 Changes Coming To Retirement Required Minimum Distributions in 2025

Saving and investing early, often, and continuously throughout your entire working career is absolutely critical to securing your financial future in retirement. Making contributions to your 401(k) or IRA provides tax benefits, allowing you to defer taxes owed on your contributions until you start making withdrawals in retirement. But, you can’t defer taxes forever.

The federal government requires that seniors start withdrawing funds from tax-deferred retirement accounts starting in their 70s, which are known as required minimum distributions (RMDs). If you neglect to take your RMDs on time, you could owe a penalty of up to a whopping 25% of the amount you were supposed to withdraw. Plus you’ll still owe taxes on your RMDs too.

To avoid getting yourself into a financial pickle during your golden years, there are three important RMD rule changes coming in 2025 that you’ll want to be aware of, as explained by The Motley Fool.

1. You’re Required To Continue Making RMDs for an Inherited IRA

The Secure 2.0 Act will change the rules regarding inherited IRAs. If you inherit an IRA from someone who passed away after Dec. 31, 2019, you may be subject to RMDs on that account — in addition to your own — once these rule changes take effect.

Instead of being able to stretch out the withdrawals from an inherited IRA across your lifetime, you’ll only have 10 years to deplete the account, with few exceptions.

2. If You’re an Older Beneficiary, You Can Take Smaller RMDs

If you’re an older retiree who has inherited a retirement account from someone who was already taking RMDs, you’re currently required to continue taking RMDs under the current rules. This can create an increased tax burden.

However, the upcoming changes could offer some tax relief. If you find yourself in this situation, you may be able to take RMDs on the inherited account based on the original owner’s life expectancy, rather than your own. This means you might be able to take smaller RMDs and stretch them out over your lifetime, as you then wouldn’t be subject to the 10-year rule on the inherited IRA.

3. You Should Plan To Start Taking RMDs at Age 73 if You Were Born in 1959

The Secure 2.0 Act increased the RMD age from 72 to 73 as of 2023 — and the age will increase to 77 starting in 2033.

So, even those born in 1959 (who will reach age 73 in 2032 and be required to take their first RMD by April 2033) will have to start taking their RMDs by age 73, even though they might turn 74 before the second age change takes effect in 2033.

To clarify this confusion, the IRS has provided specific guidelines for RMDs based on birth year:

  • Born before 1949: Your RMD age is 70½.
  • Born between 1949-1950: Your RMD age is 72.
  • Born between 1951-1959: Your RMD age is 73.
  • Born in 1960 or later: Your RMD age is 75.

https://www.gobankingrates.com/retirement/planning/changes-coming-to-retirement-required-minimum-distributions-in-2025/

All written content on this site is for informational purposes only. Opinions expressed herein are solely those of Texas Retirement Solutions and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. Investing involves risk. There is always the potential of losing money when you invest in securities. Asset allocation, diversification and rebalancing do not ensure a profit or help protect against loss in declining markets. All information and ideas should be discussed in detail with your individual advisor prior to implementation. The presence of this website, and the material contained within, shall in no way be construed or interpreted as a solicitation or recommendation for the purchase or sale of any security or investment strategy. In addition, the presence of this website should not be interpreted as a solicitation for Investment Advisory Services to any residents of states where otherwise legally permitted to conduct business. Fee-based financial planning and Investment Advisory Services are offered by Sound Income Strategies, LLC, an SEC Registered Investment Advisory firm. Texas Retirement Solutions and Sound Income Strategies LLC are not associated entities. © 2020 Sound Income Strategies