Bob’s Journal for 4/25

IRA Heirs Can Delay RMDs Another Year, But Should They?

The IRS announced that in 2024, for the fourth consecutive year, IRA beneficiaries don’t have to take the annual required minimum distributions (RMDs) described in the proposed regulations interpreting the 10-year rule of the SECURE Act.

Recall that in late 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted. One of its many provisions was to eliminate the Stretch IRA.

With few exceptions, those who inherit an IRA after 2019 must fully distribute the IRA within 10 years. That applies to both traditional and Roth IRAs.

In early 2022, the IRS proposed regulations that greatly complicated the situation for beneficiaries. Under the regulations, if the deceased IRA owner was taking RMDs, the beneficiary must continue the RMDs for the first nine years after inheriting and then fully distribute the IRA by the end of the 10th year.

That proposed RMD rule would apply only to inherited traditional IRAs, since the original owner of a Roth IRA doesn’t have RMDs.

Of course, the beneficiary can take distributions that exceed the RMDs and distribute the entire IRA anytime within the 10 years.

The IRS hasn’t finalized the proposed regulations, and many tax practitioners have objected that the provision is inconsistent with the wording of the SECURE Act and unnecessarily complicates the process of inheriting traditional IRAs.

In Notice 2024-35, issued last week, the IRS again said it would waive penalties on beneficiaries who fail to take any RMDs mandated in 2024 under the terms of the proposed regulations.

In previous years, the IRS said it would waive penalties for any such RMDs not taken in years 2021-2023. The waivers don’t apply to any other types of RMDs, and the 10-year rule still applies.

In the latest announcement, the IRS said it expected the regulations won’t be effective before 2025.

The waiver doesn’t mean it’s a good idea to delay distributions from an inherited traditional IRA.

The full balance must be distributed by the end of the 10th year, even if the IRS doesn’t finalize the regulations or finalizes them by eliminating the RMDs for years one through nine.

If you don’t take distributions during years one through nine, you’ll have to distribute the entire IRA in year 10, include that amount in gross income and pay income taxes on it. The combination of the IRA distribution and your other sources of taxable income could push you into a higher tax bracket and reduce your after-tax inheritance.

The best strategy after inheriting a traditional IRA is to develop a 10-year plan for distributing the IRA.

Do you want to distribute the entire IRA now? Do you want to take a portion each year for 10 years, spreading out the income and taxes? If your income and deductions fluctuate, you might want to evaluate the situation each year. Or you can let the income and gains compound in the IRA for 10 years and distribute the entire amount in year 10.

Another potential strategy for some beneficiaries is to wait until they turn age 70½ and then take qualified charitable distributions from the inherited IRA. This is feasible if the beneficiary will turn 70½ within the 10-year period and is charitably inclined.

Remember, you still have to follow the 10-year rule when a Roth IRA is inherited. But there are no RMDs during years one through nine for the Roth IRA and the decision of when to take distributions isn’t as complicated because the distributions are tax free.

The Squeeze on Medicare Advantage Plans and Medicare Continues

Government policymakers continue to make changes designed to reduce spending on Medicare, especially Medicare Advantage plans.

Reduced payments to Medicare Advantage sponsors are likely to cause changes in the plans in 2025, such as higher premiums, copayments and deductibles as well as reduced coverage, as I explained earlier this year in the Bob’s Journal entries of Feb.1 and April 4.

Medicare officials also are making tweaks in what the program covers that aren’t widely announced.

For example, the program recently said that in most cases it no longer will pay for blood tests that can detect early signs an organ transplant is being rejected by the patient’s body. Instead, patients have to wait until there are enough symptoms to warrant a biopsy, according to recent editorials in The Wall Street Journal.

Expect more coverage reductions like this.

We’re in the second year of a three-year period in which the Centers for Medicare and Medicaid (CMS) is reducing Medicare spending with special attention directed at lowering Medicare Advantage spending, according to the CEO of UnitedHealth.

During open enrollment this fall, Medicare Advantage plan members should closely scrutinize information from their current plans for details of changes for 2025.

They also should develop backup plans in case the 2025 changes make the plan unattractive. A backup plan could include switching to original Medicare and adding Medicare supplement and Part D prescription drug policies. Another alternative is to review the terms of other Medicare Advantage plans offered in the area.

Stock Markets Are Correcting Excesses

Major stock indexes declined for most of the last few weeks. Investors shouldn’t be surprised or concerned at this point.

Last week, the S&P 500 had its worst week in over a year with a 3.05% loss. The technology sector had been leading the index higher but recently led it lower. The technology sector lost over 6% last week, its worst week since early November 2022.

It was almost inevitable that at some point the steady rise of the stock indexes since late October 2023 would at least partially reverse. Stock prices surged upward regardless of earnings reports, interest rate trends and other factors.

Stock indexes were trading at high valuations, though not record-setting highs.

More importantly, when analyzing short-term trends, the indexes were well above their moving averages and were what technical analysts call overbought.

These trends extended well beyond the United States.

For example, the STOXX 600 index contains major companies throughout Europe. For several months, technical indicators labeled that index as “overbought.”

For example, it traded above its 50-day moving average for the longest period since June 2017. That was only the 11th time it was above the 50-day moving average for more than 100 consecutive days.

But in recent weeks, the STOXX 600 began losing value along with many of the world’s other major indexes.

Most of the major indexes went from “extremely overbought” levels to “oversold” or “extremely oversold” in the last three weeks, according to Bespoke Investment Group.

That’s especially true of the few large companies, mostly in the technology sector, that led the U.S. indexes higher the last couple of years.

Apple (AAPL) was the market leader but recently lagged the indexes, nearing its 52-week low.

Staying above their 50-day moving averages, at least as of last week, were Amazon (AMZN), Alphabet (GOOGL), Meta (META) and NVIDIA (NVDA). But most of them were close to falling below their 50-day moving averages.

Netflix (NFLX) finally dipped below its 50-day moving average after its latest earnings announcement. Microsoft (MSFT) fell below its 50-day moving average a full week before its earnings report.

Though it’s unnerving for investors to see a sharp change in the direction of the stock portion of their portfolios, it’s not unusual. Short-term excesses must be wrung out of the markets from time to time.

The market decline is likely to turn into something more significant only if earnings reports are disappointing or there are signs of widespread weakness in the economy. Global conflicts also could lead to a sustainable market decline.

The Data

The growth rate of the economy slowed a little in the first half of April, according to the mid-month PMI Flash Indexes.

The PMI Manufacturing Flash Index fell to 49.9 in April, a three-month low, from 51.9 at the end of March. The PMI Services Flash Index declined to 50.9 in April, the lowest in five months, from 51.7 in February.

That combination led to a PMI Composite Flash Index of 50.9 in April, the lowest since December, compared to 52.1 at the end of March. The employment component of this index declined for the first time since June 2020.

Durable goods orders increased 2.6% in March after rising 0.7% in February.

Excluding defense and transportation, which is considered a good measure of business investment, durable goods orders rose 0.2% in March and 0.4% in February.

The Leading Economic Indicators Index from The Conference Board decreased by 0.3% in March after increasing 0.2% in February.

The index points to a “fragile outlook” for the U.S. economy but not a recession, according to The Conference Board.

New home sales increased 8.8% in March after declining 5.1% in February. The number of new home sales in March was a six-month high.

Existing home sales fell 4.3% in March, which follows a 9.5% increase in February. The median sale price of an existing home in March was $393,500, 4.8% higher than 12 months earlier.

The Philadelphia Fed Manufacturing Index increased in April to 15.2, its highest level since April 2022. It was 3.2 in March. April was the third consecutive month the index was above 0.0, indicating the sector is expanding.

The Richmond Fed Manufacturing Index improved to negative 7 in April from negative 11 in March.

New unemployment claims were unchanged at 212,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.812 million from 1.810 million.

The Markets

The S&P 500 rose 0.42% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.92%. The Russell 2000 increased 1.80%. The All-Country World Index (excluding U.S. stocks) added 2.07%. Emerging market equities advanced 1.84%.

Long-term treasuries gained 0.83% for the week. Investment-grade bonds increased 0.87%. Treasury Inflation-Protected Securities (TIPS) added 0.51%. High-yield bonds gained 1.36%.

The dollar declined 0.48%.

Energy-based commodities lost 0.31%. Broader-based commodities rose 0.22%. Gold declined 2.81%.

Bob’s News & Updates

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