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Navigating Inherited Retirement Accounts
The 10-year rule, RMDs, and more
Happy Sunday everyone, and welcome to Benzinga’s financial advisor newsletter.
According to a recent report, millennials stand to become the richest generation in history— they are poised to inherit approximately $90 trillion worth of assets from the Silent Generation and Baby Boomers.
However, the inheritance process has become harder to navigate in the face of new regulations, specifically those targeting inherited retirement accounts. Lucky for you, we’ve got some tips— scroll down for the industry chatter.
Lastly, if you would like to be featured in our upcoming advisor spotlight editions, click here to send us an email.
INDUSTRY CHATTER
Once upon a time, inheriting a retirement account and doling out distributions was a fairly straightforward process. Those days are over because of the Secure Act of 2019.
Experts agree that the new process is hard to understand— CPA and IRA expert Ed Slott told CNBC that the updated rules are “so complicated” that it’s “almost unfair” for heirs trying to access the money.
Advisors are often tasked with navigating convoluted policies, so let’s dive into the ins and outs of inherited retirement accounts.
Rule of Ten
The first regulation to note is the 10-year rule. It dictates that all assets within the retirement account must be distributed by the end of the 10th year, beginning when the original account owner dies.
The policy applies to inheritors, referred to as “non-eligible designated beneficiaries,” who inherited the account after the start of 2020.
Eligible beneficiaries refer to a spouse, certain trusts, minor children, or beneficiaries who are disabled or chronically ill. If a client doesn’t fall within one of these categories, they are considered a “non-eligible designated beneficiary.”
Regular Distributions
Another rule to note applies to required minimum distributions (RMDs).
If a beneficiary inherits an account after the previous account owner has started taking RMDs, the beneficiary must continue distributions annually.
The penalty for failing to make that annual withdrawal is 25% of what should have been distributed, although it can be lowered to 10% if the issue is corrected within two years.
Some Relief
The federal government has been struggling to get the message out about changes to inherited retirement accounts.
To avoid numerous fines, the IRS has started waiving the penalties for missed RMDs on inherited accounts. Penalties were waived in 2022 and then again in 2023.
This leeway did upset some on-the-ball accountants and advisors who had their clients take RMDs for those years. They believe their clients were punished for following the rules. As everyone gets on the same page regarding the new rules, there aren’t expectations for another grace period in 2024.
But Wait, There’s More
The Secure Act’s regulations extend beyond the 10-year rule and RMDs.
In certain scenarios, there is a 5-year rule that must be followed—requiring all assets within an account to be disbursed by the end of a fifth year starting at the original account owner’s death. This scenario applies when the account beneficiary is not an individual, and the original account owner has not started taking their RMDs.
Advisors can work with clients to determine the total of their RMD based on a table provided by the IRS. There’s a learning curve for advisors and clients with any new financial regulations. As we navigate the changed landscape of inherited retirement accounts, meeting these requirements will save clients time and money.
MARKET RECAP
Volatility stormed back into the markets, shaking things up in a week where inflation defiantly outstripped estimates for the third straight month in March, leading investors to substantially slash their expectations for Federal Reserve interest rate cuts.
Geopolitical tensions in the Middle East fueled a surge in commodities like oil and gold. Meanwhile, the start of the earnings season saw major banks slightly surpassing estimates, yet the overall negative sentiment has still triggered a negative response from stocks.
On Friday, the CBOE Volatility Index, or VIX, spiked the most in more than a year, amid rising indications of an imminent Iranian attack on Israeli soil, with President Joe Biden acknowledging it could occur “sooner rather than later.”
Rate Cut Expectations Delayed
Following recent hotter-than-expected inflation data, the likelihood of a June rate cut plummeted from 60% to 20%. Some Wall Street analysts now expect only one rate cut in December.
Mortgage Rates Surge
U.S. mortgage rates are on the rise, with the 30-year fixed rate hitting 6.88%, as recent inflationary pressures raised long-term Treasury yields and weakened expectations for Federal Reserve rate cuts. This surge raises affordability concerns for homebuyers, exacerbating the housing market’s challenges with high prices and low inventory.
Consumer Sentiment Drops
The sentiment among U.S. consumers fell in April, missing economist forecasts, per the University of Michigan. The report underscored the increased economic anxiety that comes with rising inflation expectations.
Confidence In Musk Fades
Wall Street’s confidence in Tesla CEO Elon Musk is declining, as highlighted by CNBC's Jim Cramer. Amid a substantial drop in Tesla’s stock driven by vehicle price cuts and strong competition, Musk faces skepticism about his focus due to his other ventures. In contrast, Warren Buffett‘s Berkshire Hathaway Inc. garners praise for its robust long-term performance.
Ark Bets On OpenAI
Cathie Wood‘s Ark Invest took a stake in OpenAI through its Ark Venture Fund, seeking to capitalize on the growing interest in artificial intelligence technologies. This investment allows Ark’s clients to gain exposure to OpenAI, along with other high-profile companies such as SpaceX and X Holdings.
AI Power Fears
By 2030, artificial intelligence technologies could account for up to 25% of U.S. energy consumption, according to Arm Holdings CEO Rene Haas. This projection emphasized the significant increase in electricity demand driven by artificial intelligence data centers needed for sophisticated AI models like ChatGPT.
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THE WEEK AHEAD
Economic Data
Monday: U.S. retail sales, New York Fed President John Williams TV appearance, Home builder confidence index
Tuesday: Housing starts, Industrial production, Fed Chair Jerome Powell speaks
Wednesday: Fed Beige Book, Cleveland Fed President Loretta Mester speaks, Fed Governor Michelle Bowman speaks
Thursday: Initial jobless claims, U.S. leading economic indicators, Atlanta Fed President Raphael Bostic speaks
Friday: Chicago Fed President Austan Goolsbee speaks
Earnings
Monday: M&T Bank, Charles Schwab
Tuesday: Bank of America, United Airlines, Morgan Stanley
Wednesday: Volvo, US Bancorp, Citizens Financial Group
Thursday: Blackstone Inc, Alaska Air Group
Friday: Western Alliance Bancorp, American Express
Click here for the full calendar of economic data and earnings reports.
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