Bob’s Journal for 7/25

IRS Issues Final Regulations on SECURE Act, Inherited IRAs

The IRS last week issued final regulations on the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in late 2019. The final regs generally follow the proposed regulations issued in 2022.

Despite receiving many requests for change, the IRS kept the most controversial rule from the proposed regulations, its interpretation of the new 10-year rule on inherited IRAs and other retirement accounts.

The SECURE Act eliminated the Stretch IRA for most beneficiaries of IRAs and other retirement accounts. Under previous law, annual required minimum distributions (RMDs) had to be taken by beneficiaries. But the RMDs often could be stretched over a beneficiary’s life expectancy.

The Stretch IRA was replaced by the 10-year rule. For IRAs inherited after 2019, most beneficiaries must fully distribute the IRA within 10 years after it is inherited.

Here’s where the IRS regulations become complicated and controversial.

The regulations divide inherited IRAs into two groups.

The first group is IRAs whose original owners hadn’t yet reached the beginning age for taking RMDs.

A beneficiary of such an IRA can distribute it under any schedule, provided it is fully distributed by the end of the 10 years. The beneficiary can distribute some each year, wait until the end of 10 years to distribute it all, distribute the entire IRA soon after inheriting, or in any other pattern.

The second group is IRAs whose original owners had reached the beginning age for RMDs.

During years one through nine after inheriting, the beneficiaries must at least continue the RMDs under the same schedule the deceased owner was using. Essentially, the beneficiary takes an RMD each year based on the age the deceased owner would have been that year. The entire IRA must be distributed by the end of year 10.

The beneficiaries in the second group can fully distribute the IRA anytime before year 10, which would eliminate future annual RMDs.

The 10-year rule applies to both traditional and Roth accounts.

But original owners of Roth IRAs don’t have to take RMDs, so their beneficiaries don’t have to take RMDs during years one through nine. They only need to distribute the entire Roth IRA by the end of year 10.

Because the requirement to take RMDs in years one through nine was only in proposed regulations and was controversial, the IRS suspended the requirement the last few years by saying any penalties for failing to take those RMDs in 2021-2024 would be waived.

In the final regulations, the IRS said it wouldn’t make the annual RMD mandate retroactive. The annual RMDs don’t have to begin until 2025. But the 10-year rule applies without modification. Most retirement accounts inherited after 2019 must be fully distributed within 10 years after being inherited.

There is more about the SECURE Act in the final regulations (they’re 260 pages), and the IRS issued another set of regulations covering parts of the SECURE Act 2.0 at the same time. I’ll have more details from the regulations in the next issue of Retirement Watch.

Be Glad the Fed’s Moving Slowly

Investors began expecting the Federal Reserve to start slashing interest rates shortly after it first tightened monetary policy in 2022. They should be glad they were wrong, and that the Fed has been slow to reduce rates.

Easier monetary policy and lower interest rates generally are good for stock investors, because rising markets are associated with lower interest rates.

But interest rate reduction cycles aren’t equal.

Historically, stock market rallies don’t begin until after the first Fed interest rate cut following a tightening cycle.

More important, stock market gains are strongest when the Fed eases slowly, making four or fewer interest rate cuts in 12 months, according to Ed Clissold of Ned Davis Research.

When the Fed is easing slowly, stock returns during the first year of the easing cycle have been significantly greater than either when the Fed is easing rapidly or when it isn’t easing, according to Clissold’s research.

While the stock returns of a fast-easing cycle improve during the second year of the cycle, they never catch up to the returns of a slow-easing cycle.

Also, smaller company stocks tend to outperform the major indexes during slow-easing cycles.

Recent economic news and statements by Fed officials indicate the first Fed rate cut this cycle could occur in September.

This cycle is a bit different than most, because stock indexes generally have been rising since the lows of October 2022, though the Fed hasn’t reduced interest rates. But those increases have been concentrated in very few stocks.

Instead of causing a rise in the stock indexes, the Fed’s easing policy this time is likely to cause a shift from a narrow stock market rally to a broad-based rally in which most stocks participate.

We’ve already seen the beginning of that broad rally, as I discussed last week. Expect that to continue.

Beware of Financial Imposters on WhatsApp, Other Social Media

Online imposter scams have been a major problem for years, but the latest scams are a bit different.

In the traditional imposter scam, the crooks pretend to be a government agency or well-known company. They generally use emails, texts, or phone calls to try to induce targets to part with money or sensitive personal information.

In the latest scams, which so far appear to be mostly on WhatsApp, the crooks set up chat rooms that purport to be hosted by legitimate and sometimes well-known financial advisors.

The chat rooms use information from the legitimate advisor’s web site or social media to give it the appearance of the real thing.

After some users are drawn to the chat room, the crooks initially provide mainstream advice and market commentary.

But after a while, they try to draw users into various scams. Trading advice in digital currencies and assets is a major offering. Or users might be asked to pay fees for tailored traditional financial advice. In any case, the services are not legitimate.

Investors should know that regulated financial advisors in the U.S. aren’t allowed to use WhatsApp and similar tools to give advice, promote their services, or solicit clients. They also aren’t allowed to use other social media sites to give specific investment advice to individuals.

The Data

The services sector of the economy improved a bit during the first half of July, according to the PMI Services Index Flash. The index rose to 56.0 at mid-month from 55.3 at the end of June.

But the manufacturing sector contracted in the first weeks of July. The PMI Manufacturing Index Flash dropped to 49.5 from 51.6 at the end of June.

The PMI Composite Index Flash for the economy increased to 55.0 in mid-July from 54.8 at the end of June.

The Philadelphia Fed Manufacturing Index rose to 13.9 in July from 1.3 in June. That’s the highest level in three months and the second-highest level since April 2022.

The forward-looking components of the index forecast continued improvement in the next few months.

The Richmond Fed Manufacturing Index was negative 17 in July, down from negative 10 in June. July is the worst level for this index since May 2020. The index has been positive only twice in the last 12 months.

New home sales dipped another 0.60% in June after declining 14.90% in May. The number of new homes sold in June was the lowest since November 2023 and the second-lowest mark in the last 12 months.

The Leading Economic Indicators index of The Conference Board dropped another 0.2% in June after falling 0.4% in May.

The Conference Board reported the index points to gradually declining growth in coming months but not a recession. The economy should grow about 1% in the third quarter.

Existing home sales tumbled 5.40% in June, the largest monthly decline since 2022, after falling 0.70% in May. Existing home sales have increased only three months in the last 12 months and haven’t increased since February 2024.

The median sale price of an existing home increased to a record high of $426,900.

New unemployment claims increased by 10,000 to 243,000 in the latest week, tying the weekly high for 2024.

Continuing claims, which lag a week behind new claims, increased to 1.867 million from 1.847 million.

The Markets

The S&P 500 lost 1.96% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.46%. The Russell 2000 declined 0.88%. The All-Country World Index (excluding U.S. stocks) tumbled 2.25%. Emerging market equities retreated 3.54%.

Long-term treasuries lost 1.75% for the week. Investment-grade bonds decreased 0.88%. Treasury Inflation-Protected Securities (TIPS) fell 0.60%. High-yield bonds declined 0.01%.

In the currency arena, the U.S. dollar gained 0.38%.

Energy-based commodities retreated 2.01%. Broader-based commodities fell 2.22%. Gold declined 2.51%.

Bob’s News & Updates

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