EVERY JANUARY, if you own an IRA and money must come out of it that year, your custodian writes to you. The letter gives you the amount or offers to work it out. We barely read it, but it is doing more than we notice.Most people never miss a required distribution, and the reason is not diligence. It is that somebody tells them.Inherited IRAs are different. The IRS notice that creates the requirement says reporting is not required for the IRAs of deceased owners, and an inherited IRA is exactly that. No letter is owed to the person who inherits, and in many cases none arrives.When nobody tells us anything needs doing, we assume nothing does. Here that assumption is expensive.The question behind the questionEveryone remembers the 10-year rule. It answers one question: when does the account have to be empty? It does not answer the one that costs money: does something have to come out this year?That turns on a fact about the person who died. Had they reached the age at which their own distributions had to begin? It is 72 for anyone born before 1951, 73 for those born between 1951 and 1959, and 75 for anyone born in 1960 or later.Take the common case, an adult child inheriting a traditional IRA. If the parent died before reaching that age, nothing has to come out until the account is emptied at the end of year 10. If the parent died on or after it, a required minimum distribution, or RMD, is due every year in the meantime, and the account still has to be empty at the end of year 10.That second case is the one people get wrong. The 10-year rule is widely remembered as permission to leave the money alone until year 10, and for a great many people who inherit, it is not.Other beneficiaries have their own timing, among them a disabled or chronically ill beneficiary, a minor child, and anyone less than 10 years younger than the person who died. Inherited Roth IRAs differ again, and a spouse has choices nobody else has. All of it sits in the SECURE Act and its 2022 successor, which is what to search.Take too little and the shortfall carries an excise tax of 25% of what should have come out, or 10% if you correct it promptly. That is on top of the income tax you owe when the money finally comes out.And there are two ways to trigger it. Taking too little in a year is one. The other is reaching the end of year 10 with money still in the account, because whatever is left on that date is treated as a shortfall too.What four quiet years costA widow turns 76 the year after her husband dies. He was 78, well past the age his own distributions had to begin. She has Social Security of $36,000, a pension of $24,000, and his IRA, still titled as an inherited account, holding $480,000.She does not need the money, no reminder arrives from the custodian, and so she takes none of it for four years while the account grows at 5%.Because he had already passed that age, and because she left the account titled as inherited, she owes a distribution in every one of those years.At 76 she should have taken $34,043. At 77, $37,895. At 78, $42,000. At 79, $46,694, by which point the untouched balance has grown to $555,660.She has missed $160,631 of required distributions. At 25%, the excise tax on that is $40,158. Corrected in time it would be $16,063.Now the part I expected to be worse than it is. When she corrects, all four distributions come out in a single year, and I assumed that bunching would be the quiet disaster.Spread across four years, the distributions cost her $37,566 in federal income tax. Bunched into one, $38,783. The difference is $1,216. If you have been told the danger of a missed distribution is the bracket you land in when you fix it, check that against your own numbers before believing it.The bigger surprise came from Medicare.The surcharge nobody seesTake the distributions on time and her Medicare surcharge is zero in all four years. Bunch them into a single return and it is $6,355.That bill does not arrive with the tax. Medicare sets your Part B and Part D premiums from your income two years earlier, so the surcharge turns up long after the correction has been filed and forgotten, attached to something that does not look like a tax at all.Add it up. Four quiet years cost her about $47,700 she need not have spent: $40,158 of excise tax, $1,216 of extra income tax from the bunching, and $6,355 of Medicare surcharge. The $37,566 of income tax on the distributions themselves was never avoidable and was never the problem.In none of those four years did anyone write to her. The first letter came from the IRS, years late, and fixing it by then meant amended returns and a Form 5329 for every year.What actually prevents itNot vigilance. Nobody is vigilant about a rule they have not heard of, and the custodian was never obliged to tell you.If you have already inherited, two facts settle almost all of it. The year the person died, and whether by then they had reached the age their own distributions had to begin.Your custodian can tell you how the account is titled. Nobody but you is going to find that second date.And if you are reading this married, with both of you alive and nothing yet owed, you are in the only position from which this is easy. Work out the year each of you reaches that age. For whichever of you dies first, that is the year deciding whether the survivor owes a distribution the year after the death.Write both years down, with a line saying why they matter, and put them with your trust, your will and the beneficiary designations, where the survivor will actually come across them.The account will not remind anyone that a clock started. The only reliable reminder is the one you write down before you need it.A note of thanksThe shape of this article came from William Perry, who spent his working years preparing returns and described in a comment thread how these cases reach a preparer. His account of the letter arriving to the widow years later convinced me the annual question deserved a piece of its own. ________________________________________________________________________________ John Urban is the founder of RetireSmartIRA, a retirement tax-planning app. Earlier, he founded GT Nexus, a supply-chain software company acquired by Infor in 2015. He lives in Northern California with his wife, Kathy, and enjoys time with family, travel, reading, Bay Area sports, and the occasional deep dive into the fine print of the tax code.
"Great piece, thanks Dan. Once again you've got me thinking. (Your articles always seem to do that....) We all hear repeated calls for teaching financial literacy in schools. I always feel bit lukewarm on such a move. My main concern is that knowing about compounding interest, budgeting, paying yourself first etc. is useless without a mindset to actually put it into practice. I was recently listening to Dr. Laurie Santos on her podcast "The Happiness Lab". She was discussing the "GI Joe Fallacy". As an Australian kid, I never watched GI Joe, but apparently the closing tag-line was "Now you know. And knowing is half the battle". And what researchers find repeatedly is that knowing is not half the battle. Knowing is only a tiny proportion of the battle. Doing is the actual battle. So I think the greater challenge is creating a mindset in young people about delayed gratification, living a simpler life without buying as much stuff, dislike of "bad" debt and taking pride in building future security. Once someone internalises these views, finding some financial advice to actually implement a plan is relatively easy. Thanks for your writing Dan. None of this is criticism, just me going on a bit a rant!"
Make no mistake: Stocks are expensive, with the companies in the S&P 500-index currently at 28 times trailing 12-month reported earnings, offering a dividend…
"Sheila, have you considered a Donor Advised Fund? If you're able, you can donate a "bunched" donation, get tax deduction(s) and have a fund to invest and donate from. I'm using this to help reduce taxes from Roth conversions. There are several services, I use Fidelity Charitable. The additional benefit is it supports my planned financial legacy to have FC as beneficiary on some or all of my accounts to support the DAF until my successor can't manage it and then it's turned into an endowment to provide my little gifts in perpetuity. It was easy to set up, it's easy to use, I'm now also giving friends and family gifts to give, and there are three services to help analyze and find the best charities for causes that you care about."
NATURE ABHORS a vacuum. That’s well known, but when it comes to investing, this poses a particular problem. Why? In the absence of anyone having the ability to predict the future, commentators and prognosticators are happy to step in with stories of their own.The reality, though, is that no matter how rigorous anyone’s analysis might be, no one can know for sure what the future holds, for the economy, for the stock market or for any individual investment.Rationally, we know this, but still it’s an uphill battle, because market commentators have at their disposal an endless library of smart-sounding anecdotes and aphorisms to support their views. And they can be convincing.To see how this works, we can look at some of today’s most frequently debated questions through the lens of these storytellers. The first question on many investors’ minds: Is the stock market skating on thin ice? For some, this question isn’t difficult to answer. They point to the Cyclically-Adjusted Price-to-Earnings ratio (CAPE). Developed by Robert Shiller, a Nobel laureate, the CAPE ratio is a respected measure of market valuation. Today, it’s at its highest level since the market peak in 2000 and much higher even than it was in 1929, just before the crash.Compounding these concerns, there’s worry that traditional valuation methods like the CAPE may even be underestimating market risk. Companies in the AI ecosystem are of particular concern because of the ways in which they’re doing business with each other. Nvidia, for example, has announced an investment of as much as $100 billion into OpenAI at the same time that OpenAI is spending billions on Nvidia’s chips. Nvidia has invested in dozens of other AI-related companies, helping further drive demand for its own chips. This calls into question many companies’ earnings. If they’re passing the same dollars around, to some extent, should those dollars be counted as sustainable revenue, or is it a game of financial musical chairs that may come to an end? It’s an open question, but the optics of these deals buttress the argument that the market is out over its skis.Market bears also like to point to a famous Wall Street anecdote: According to lore, someone once asked J.P. Morgan to share the secret of his success. His reply: “I made all my money selling too early.” Caution, in other words, may be rewarded. Especially in light of the CAPE ratio and other concerns, it sounds like it might be wise advice to take a more conservative tack with one’s investments.But this is where the anecdotes run headlong into the data. According to a 2023 study titled “Selling Fast and Buying Slow,” a key driver of mutual fund underperformance is that fund managers tend to make errors in timing their sales.Perhaps J.P. Morgan did benefit by shrewdly selling before market downturns, but according to the data, that’s not the experience of most professional investors.Who’s right in this debate? My view is that proponents of each argument have a legitimate point. The problem, though, is that what happens in the future can’t be decided on any given set of data. Instead, where things ultimately go will depend on a more complicated interplay among all of the factors out there, from AI to interest rates to elections, geopolitics, and innumerable other factors we may not even be thinking about. For that reason, we shouldn’t put too much stock in definitive-sounding predictions.A similar debate is swirling around U.S. Treasury bonds. In finance textbooks, U.S. government bonds are referred to as the “riskless asset,” owing to the U.S. economy’s status as the largest and most productive in the world. Because of that, the Treasury has historically been able to borrow as much as it needed each year. Indeed, the government’s debt load topped $40 trillion a few months ago, and its nearly flawless credit rating has allowed Congress to continue financing multi-trillion dollar deficits each year.It’s for these reasons that some commentators see it as irrational to worry about the U.S. government’s financial position. One recent book titled The Deficit Myth argued that the government could, more or less, print as much money as it wished.That’s one line of argument. But here too, the stories seem to be in conflict with the data. In the first eight months of this year, the Federal Reserve held rates steady, but despite that, market interest rates rose almost continuously over that period, defying the Fed.Why would market interest rates rise when the Fed hadn’t made any moves at all? One explanation is that bond investors are growing more concerned about the federal government’s fiscal health. In round numbers, the government now spends about $7.5 trillion per year but is only taking in about $5.5 trillion in revenue, and Congress doesn’t seem to be focusing in any serious way on addressing that gap.Taken together, these data points suggest that concerns about deficits are definitely not a myth, and that the notion of a “riskless” asset carries with it no guarantees.As an individual investor, how should you respond to these sorts of debates? This is the simple formula I suggest: First, don’t make changes to your finances in response to any given commentator, since, as we’ve seen here, there often exists an equally articulate, but opposite, point of view on any given question. At the same time, I wouldn’t entirely tune out the prognosticators. Instead, I would take the time to closely examine your own finances and run stress tests to see how your plan might be affected under each of the various scenarios they predict. Then see if there’s a way to diversify your holdings to protect against those potential outcomes. Diversification is probably the simplest rule in personal finance but may be the most valuable.Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossmanand check out his earlier articles.
"Have you thought about asking an AI to build one for you? I asked Gemini, and it said it could create one in Google Sheets. That said, you’d be placing a lot of trust in whatever it produces, so you’d want to check it carefully."
EXPERTS HAVE LATELY been recommending that investors shift some money from short-term bonds—which offer the highest yield these days—to longer-term issues, whose prices are more sensitive to interest rates.
Had I followed this advice—and I almost did—I’d have quickly lost money in what’s supposed to be the safe part of my portfolio. Bonds did indeed rally from their October 2022 lows, but have pulled back since early May. Vanguard Intermediate-Term Treasury ETF (symbol: VGIT) was down 4.2% from its May 4 peak through last Friday, while iShares 20+ Year Treasury Bond ETF (TLT) was off 8.8% during that stretch.
The “smart money” said prepare to profit if interest rates fall, perhaps because the economy slips into a recession. But that’s a big “if.” The flipside: You lose if rates rise.
That’s why I’ve generally preferred short-term Treasurys in my portfolio. That limits my exposure to interest-rate fluctuations and provides a hedge against the risk of falling stock prices. Short-term Treasury prices won’t decline much if rates keep rising, though they also won’t gain much if rates fall from here.
An added bonus: Today, we’re enjoying generous yields on short-term bonds and cash investments, including some guaranteed by the federal government. Indeed, those high rates have lately drawn me to money market funds and certificates of deposit (CDs).
The bond market got a bad case of the willies in August, burning those who hold interest-sensitive assets. Now, Wall Street is gripped by the fear of rising rates. Budget deficits and the national debt really do matter—finally—or so some are saying. On top of that, the U.S. Treasury must issue a lot of new debt at higher rates, while foreign countries are reducing their Treasury holdings. Prepare for interest rates to be “higher for longer,” some experts are predicting.
I prefer not to bet on the direction of interest rates—and I don’t have to. Unlike the stock market, where declines have reliably been followed by greater gains because of growing earnings and dividends, there’s no such natural tendency in the bond market. Yes, higher interest rates lure more buyers, but rates could potentially rise indefinitely. Until 2022, bond and stock investors, as well as homeowners, had enjoyed 40 years of generally falling rates. Who’s to say that trend couldn’t reverse in the decades ahead, and so why take interest-rate risk?
I have a young advisor at Fidelity Investments who had better advice for my situation than the high mucky mucks at other big asset-management firms. He had thoughtfully set up a meeting with me ahead of the Aug. 31 maturing of a Treasury note I bought last year.
He said Fidelity shared the consensus view that interest rates will fall in 2024. But knowing we were talking about my emergency money, his recommendation wasn’t to take interest rate risk, but rather to focus on avoiding reinvestment risk—the danger that rates will be lower when I go to reinvest the money from, say, a maturing bond. He suggested buying a noncallable three- or five-year CD at 5.1%. That way, if rates decline, I don’t have to worry about where to reinvest my cash: I’ve locked in good rates for a few years to come.
Problem is, I can’t commit to tying up any money for three-plus years. I need more liquidity in my emergency fund. I can tie some up for perhaps a year or 18 months. Of course, if rates keep rising, I’d be better off in a money market fund. Last year, I bought that Treasury note with what seemed like a great yield, but it’s now low by today’s standards.
I’ve settled on a plan to gradually purchase CDs between now and year-end to create what’s known as a CD ladder. That is, the CDs will mature at staggered dates, stretching from June 30, 2024, through Sept. 30, 2025. Every three months starting in mid-2024, I’llget cash I can reinvest or spend if needed, such as if I lose my job or to pay for my daughter’s wedding. I recently bought a noncallable CD yielding 5.25% through Sept. 4 of next year. In a month, I’ll look for one maturing in December 2024, then March 2025 and so on.
Moving gradually eases my mind about the possibility that rates could be even more generous in the near future. The lesson I’ve learned from the whole experience: Tune out tactical investment advice—and just be happy when yields in your emergency fund are beating inflation.
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhartand check out his earlier articles.
"For the past 3 years I've been using GasBuddy to check local fuel prices before filling up my diesel truck. Recently diesel prices have become quite volatile, often changing daily or quicker. Finding the lowest local diesel price has become my latest online game."
"I left one of my jobs which had a defined contribution rather than a defined benefit pension. I learned that if I left the balance alone I would receive a 5% minimum return. I’m sure that many would just take the lump sum when they left. I kept the money where it was for 10 years until I turned 65 when no future accrual was a paid out. There was no other investment that I knew of with a guaranteed return."
EVERY JANUARY, if you own an IRA and money must come out of it that year, your custodian writes to you. The letter gives you the amount or offers to work it out. We barely read it, but it is doing more than we notice.Most people never miss a required distribution, and the reason is not diligence. It is that somebody tells them.Inherited IRAs are different. The IRS notice that creates the requirement says reporting is not required for the IRAs of deceased owners, and an inherited IRA is exactly that. No letter is owed to the person who inherits, and in many cases none arrives.When nobody tells us anything needs doing, we assume nothing does. Here that assumption is expensive.The question behind the questionEveryone remembers the 10-year rule. It answers one question: when does the account have to be empty? It does not answer the one that costs money: does something have to come out this year?That turns on a fact about the person who died. Had they reached the age at which their own distributions had to begin? It is 72 for anyone born before 1951, 73 for those born between 1951 and 1959, and 75 for anyone born in 1960 or later.Take the common case, an adult child inheriting a traditional IRA. If the parent died before reaching that age, nothing has to come out until the account is emptied at the end of year 10. If the parent died on or after it, a required minimum distribution, or RMD, is due every year in the meantime, and the account still has to be empty at the end of year 10.That second case is the one people get wrong. The 10-year rule is widely remembered as permission to leave the money alone until year 10, and for a great many people who inherit, it is not.Other beneficiaries have their own timing, among them a disabled or chronically ill beneficiary, a minor child, and anyone less than 10 years younger than the person who died. Inherited Roth IRAs differ again, and a spouse has choices nobody else has. All of it sits in the SECURE Act and its 2022 successor, which is what to search.Take too little and the shortfall carries an excise tax of 25% of what should have come out, or 10% if you correct it promptly. That is on top of the income tax you owe when the money finally comes out.And there are two ways to trigger it. Taking too little in a year is one. The other is reaching the end of year 10 with money still in the account, because whatever is left on that date is treated as a shortfall too.What four quiet years costA widow turns 76 the year after her husband dies. He was 78, well past the age his own distributions had to begin. She has Social Security of $36,000, a pension of $24,000, and his IRA, still titled as an inherited account, holding $480,000.She does not need the money, no reminder arrives from the custodian, and so she takes none of it for four years while the account grows at 5%.Because he had already passed that age, and because she left the account titled as inherited, she owes a distribution in every one of those years.At 76 she should have taken $34,043. At 77, $37,895. At 78, $42,000. At 79, $46,694, by which point the untouched balance has grown to $555,660.She has missed $160,631 of required distributions. At 25%, the excise tax on that is $40,158. Corrected in time it would be $16,063.Now the part I expected to be worse than it is. When she corrects, all four distributions come out in a single year, and I assumed that bunching would be the quiet disaster.Spread across four years, the distributions cost her $37,566 in federal income tax. Bunched into one, $38,783. The difference is $1,216. If you have been told the danger of a missed distribution is the bracket you land in when you fix it, check that against your own numbers before believing it.The bigger surprise came from Medicare.The surcharge nobody seesTake the distributions on time and her Medicare surcharge is zero in all four years. Bunch them into a single return and it is $6,355.That bill does not arrive with the tax. Medicare sets your Part B and Part D premiums from your income two years earlier, so the surcharge turns up long after the correction has been filed and forgotten, attached to something that does not look like a tax at all.Add it up. Four quiet years cost her about $47,700 she need not have spent: $40,158 of excise tax, $1,216 of extra income tax from the bunching, and $6,355 of Medicare surcharge. The $37,566 of income tax on the distributions themselves was never avoidable and was never the problem.In none of those four years did anyone write to her. The first letter came from the IRS, years late, and fixing it by then meant amended returns and a Form 5329 for every year.What actually prevents itNot vigilance. Nobody is vigilant about a rule they have not heard of, and the custodian was never obliged to tell you.If you have already inherited, two facts settle almost all of it. The year the person died, and whether by then they had reached the age their own distributions had to begin.Your custodian can tell you how the account is titled. Nobody but you is going to find that second date.And if you are reading this married, with both of you alive and nothing yet owed, you are in the only position from which this is easy. Work out the year each of you reaches that age. For whichever of you dies first, that is the year deciding whether the surviv
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EXPERTS HAVE LATELY been recommending that investors shift some money from short-term bonds—which offer the highest yield these days—to longer-term issues, whose prices are more sensitive to interest rates.
Had I followed this advice—and I almost did—I’d have quickly lost money in what’s supposed to be the safe part of my portfolio. Bonds did indeed rally from their October 2022 lows, but have pulled back since early May. Vanguard Intermediate-Term Treasury ETF (symbol: VGIT) was down 4.2% from its May 4 peak through last Friday, while iShares 20+ Year Treasury Bond ETF (TLT) was off 8.8% during that stretch.
The “smart money” said prepare to profit if interest rates fall, perhaps because the economy slips into a recession. But that’s a big “if.” The flipside: You lose if rates rise.
That’s why I’ve generally preferred short-term Treasurys in my portfolio. That limits my exposure to interest-rate fluctuations and provides a hedge against the risk of falling stock prices. Short-term Treasury prices won’t decline much if rates keep rising, though they also won’t gain much if rates fall from here.
An added bonus: Today, we’re enjoying generous yields on short-term bonds and cash investments, including some guaranteed by the federal government. Indeed, those high rates have lately drawn me to money market funds and certificates of deposit (CDs).
The bond market got a bad case of the willies in August, burning those who hold interest-sensitive assets. Now, Wall Street is gripped by the fear of rising rates. Budget deficits and the national debt really do matter—finally—or so some are saying. On top of that, the U.S. Treasury must issue a lot of new debt at higher rates, while foreign countries are reducing their Treasury holdings. Prepare for interest rates to be “higher for longer,” some experts are predicting.
I prefer not to bet on the direction of interest rates—and I don’t have to. Unlike the stock market, where declines have reliably been followed by greater gains because of growing earnings and dividends, there’s no such natural tendency in the bond market. Yes, higher interest rates lure more buyers, but rates could potentially rise indefinitely. Until 2022, bond and stock investors, as well as homeowners, had enjoyed 40 years of generally falling rates. Who’s to say that trend couldn’t reverse in the decades ahead, and so why take interest-rate risk?
I have a young advisor at Fidelity Investments who had better advice for my situation than the high mucky mucks at other big asset-management firms. He had thoughtfully set up a meeting with me ahead of the Aug. 31 maturing of a Treasury note I bought last year.
He said Fidelity shared the consensus view that interest rates will fall in 2024. But knowing we were talking about my emergency money, his recommendation wasn’t to take interest rate risk, but rather to focus on avoiding reinvestment risk—the danger that rates will be lower when I go to reinvest the money from, say, a maturing bond. He suggested buying a noncallable three- or five-year CD at 5.1%. That way, if rates decline, I don’t have to worry about where to reinvest my cash: I’ve locked in good rates for a few years to come.
Problem is, I can’t commit to tying up any money for three-plus years. I need more liquidity in my emergency fund. I can tie some up for perhaps a year or 18 months. Of course, if rates keep rising, I’d be better off in a money market fund. Last year, I bought that Treasury note with what seemed like a great yield, but it’s now low by today’s standards.
I’ve settled on a plan to gradually purchase CDs between now and year-end to create what’s known as a CD ladder. That is, the CDs will mature at staggered dates, stretching from June 30, 2024, through Sept. 30, 2025. Every three months starting in mid-2024, I’ll get cash I can reinvest or spend if needed, such as if I lose my job or to pay for my daughter’s wedding. I recently bought a noncallable CD yielding 5.25% through Sept. 4 of next year. In a month, I’ll look for one maturing in December 2024, then March 2025 and so on.
Moving gradually eases my mind about the possibility that rates could be even more generous in the near future. The lesson I’ve learned from the whole experience: Tune out tactical investment advice—and just be happy when yields in your emergency fund are beating inflation.
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