Imber Wealth Advisors

Tuesday, August 17, 2021

Putting Inflation Expectations in Persepective

Historically, inflation has been highly correlated with unemployment levels. When more people were out of a job, inflation was lower. As more people got jobs, inflation increased. From an economic point of view, this makes sense. Jobs increase income, which increases spending, which increases demand — supplies drop and prices rise. The opposite is true when fewer people hold jobs.¹

That’s one thing that makes economic policy so difficult to set. It requires a careful balance of cause and effect, keeping in mind that what’s good for some portions of the population is bad for others. During periods of rising inflation, it’s important to monitor how it might affect us personally, from buying household goods to managing a portfolio. While economists are keeping an eye on the direction and momentum of rising inflation now, you may want to consider adding inflation-protection measures to your investment portfolio at some point. Contact us if you’d like to learn more about allocations to treasury inflation-protected securities (known as TIPS), real-estate investment trusts or commodities to help hedge the effect of rising inflation.²

In April, the inflation rate grew to 4.2%, which drove speculation that the Federal Reserve might reconsider its current stance on interest rates and monetary policy. The consumer price index (CPI) rose significantly for used cars and trucks, food, housing, airline fares, recreation, motor vehicle insurance, household furnishings and operations.

Currently, the federal funds target rate (which serves as the benchmark for bank interest rates) ranges from 0 to 0.25%. Previously, the Fed indicated that it expects to maintain a near-zero interest rate through 2023. The central bank targets an average inflation rate of 2 percent throughout time, so it appears not particularly concerned with the recent spike. In recent comments, Fed chairman Jerome Powell noted that the committee was monitoring “a broad range of financial conditions,” rather than focusing on addressing just one.³

Besides, Fed officials expected inflation to increase as the U.S. economy reopened. The surge in prices is expected to be temporary, as it is simply a matter of a supply crunch after months of pent-up demand. It’s normal that prices for hotel rooms, rental cars, used vehicles, sporting events and restaurants will go back to their pre-pandemic levels. Once jobs, consumerism and inflation reach a level of normalization, the Fed will consider whether it needs to raise the target federal funds rate.⁴

In terms of the investment market response, CNBC’s Jim Cramer observed that people expected high inflation due to stimulus and jobs numbers. As a result, when the numbers were announced the market didn’t panic – thus far it has taken the high inflation number in stride. Cramer went on to note that raising interest rates won’t solve all the problems that occurred last year. In many cases, only time can resolve them.⁵

Likewise, time may resolve the current labor shortage, as restaurants and hotels struggle to find enough workers to fill open jobs. Additionally, the current strong economy could solve for the national minimum wage debate without the need to pass new legislation. For example, retailers Amazon, Costco and Target have all voluntarily increased wages to $15/hr or more to meet demand. This strategy follows the traditional economic principle of supply and demand, in which the only way to stay competitive in the labor market is to increase wages. After all, workers have to keep up with the rising costs of housing, childcare, food and transportation.

Speaking of childcare, after decades of working mothers in the labor market, it will be interesting to see if the rising economy also can address the problem of childcare. During the pandemic, more women than men left their jobs to stay home with children sidelined from schools and childcare centers. This phenomenon may continue until employers — or legislators — come up with a solution. It will be difficult for the American economy to advance while there are millions of unemployed women staying home because of trouble securing child care.

The pandemic also convinced twice the number of Baby Boomers to retire than the previous year. Raising wages and providing more childcare resources, paid parental leave and paid vacation time may be the only way to woo more people back into the labor force.⁶

We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you!

¹ Greg Depersio. Investopedia. Aug. 22, 2020. “What happens when inflation and unemployment are positively correlated?” https://www.investopedia.com/ask/answers/040715/what-happens-when-inflation-and-unemployment-are-positively-correlated.asp. Accessed June 11, 2021.

² Greg Iacurci. CNBC. June 8, 2021. “Gold as an inflation hedge? History suggests otherwise.” https://www.cnbc.com/2021/06/08/gold-as-an-inflation-hedge-history-suggests-otherwise.html. Accessed June 11, 2021.

³ Knowledge@Wharton. June 1, 2021. “Inflation: What Lies Ahead?” https://knowledge.wharton.upenn.edu/article/inflation-what-lies-ahead/. Accessed June 12, 2021.

⁴ Patti Domm. CNBC. June 11, 2021. “Inflation is hotter than expected, but it looks temporary and likely won’t affect Fed policy yet.” https://www.cnbc.com/2021/06/10/inflation-hotter-than-expected-but-transitory-wont-affect-fed-policy.html. Accessed June 11, 2021.

⁵ Tyler Clifford. CNBC. June 10, 2021. “Jim Cramer reacts to red-hot inflation number: ‘The market took it in stride’.” https://www.cnbc.com/video/2021/06/10/jim-cramer-reacts-to-inflation-report-the-market-took-it-in-stride.html. Accessed June 11, 2021.

⁶ Sarah Hansen. Forbes. May 15, 2021. “Could Covid-19 Worker Shortages Create A $15 Minimum Wage—Even Without A New Law?” https://www.forbes.com/sites/sarahhansen/2021/05/15/could-covid-19-worker-shortages-create-a-15-minimum-wage-even-without-a-new-law/?sh=1ae0db234929. Accessed June 11, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser firm. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies

Saturday, August 14, 2021

Retirement Withdrawal Strategies

As hard as retirement saving and investing may seem, that’s the easy part. The real challenge is figuring out how to make your accumulated savings last throughout your and your spouse’s retirements. You need a strategy, and it’s best to have that strategy developed before retirement begins.

Because life expectancy is longer these days, many retirees need to maintain a growth component in their investment portfolio during retirement. That adds an extra challenge to your distribution strategy. The goals for drawing down funds include minimizing market risk to an equity allocation, coping with variable income that may be impacted by market returns, minimizing taxes, and supporting an increase in income needs associated with late-stage medical and long term care. It’s important to understand how these goals and needs interact to customize a retirement distribution strategy, and we can help you with that. Contact us to learn more.

Given that an investment portfolio may need to keep growing even after you retire, it’s important to consider “sequence of returns” risk. This basically means that if you retire around the time of a significant market decline, you can greatly deplete the principal from which you draw retirement income throughout the long term, subsequently having to reduce your retirement lifestyle or risk running out of money. To combat this risk, retirees should remain flexible. For example, continue to work past your planned retirement date if the market has a setback, or even re-enter the workforce post-retirement to help supplement your income and give investments time recover.¹

Once you retire, you can set up a systematic withdrawal plan if you need to supplement your regular household income. If your retirement plan indicates you’ll need more money at different stages, consider the bucket strategy, wherein you allocate certain investments (“buckets”) for different stages so you have new assets to tap as you age. This strategy may also enable you to retain a more aggressive equity allocation in buckets you plan to tap later.²

To help minimize taxes in a retirement portfolio, alternatives could be to first withdraw from taxable assets (e.g., brokerage account), then tax-deferred plans (e.g., 401(k) and traditional IRA) and finally tax-free assets (e.g., Roth IRA). This approach gives your tax-advantaged accounts more time to grow tax-deferred. By planning to tap tax-free assets last, there’s a better chance of leaving tax-free income for your heirs.

However, it’s important to tailor your draw-down strategy for your personal circumstances, taking into account your retirement tax bracket. For example, a moderate-income household with multiple account types may want to draw a combination of tax-free, taxable and tax-deferred assets from the beginning to stay within a lower marginal tax bracket.³

It’s also important to consider the best time to start receiving Social Security benefits. Here, too, conventional wisdom recommends delaying as long as possible; preferably to age 70 for maximum accrual. Wayne Pfau, co-director of the New York Life Center for Retirement Income, would like to see the Social Security Administration extend the age to which additional delayed retirement credits (8% a year starting at full retirement age) accrue on benefits until age 72. This would be an effective way to encourage people to work longer and reward them for doing so. Even if they don’t work longer, investors can draw down income from their taxable accounts to reduce the value of their employer accounts and IRAs. Then, when they do begin drawing their larger Social Security benefit for life, they also benefit from lower required minimum distributions (RMD) to help them stay in a lower income tax bracket.⁴

The key is to customize a retirement distribution strategy for each household’s situation, taking into consideration factors such as health and life expectancy (of both spouses), retirement income needs, where assets are invested, tax bracket management and what assets are best positioned for an inheritance.

¹ BlackRock. 2021. “Will my income last a lifetime?” https://www.blackrock.com/us/individual/insights/retirement-income. Accessed June 4, 2021.

² Curtis V. Cloke. Retirement InSight and Trends. May 4, 2021. “Advanced Annuity and Tax Strategies for Retirement Income.” https://www.retirement-insight.com/advanced-annuity-and-tax-strategies-for-retirement-income/. Accessed June 4, 2021.

³ T. Rowe Price. February 2021. “How to Get More Out of Your Retirement Account Withdrawals.” https://www.troweprice.com/content/dam/iinvestor/resources/insights/pdfs/how-to-get-more-out-your-retirement-account-withdrawals.pdf. Accessed June 4, 2021.

⁴ Ginger Szala. ThinkAdvisor. May 6, 2021. “Wade Pfau Makes Case for Raising Top Social Security Claiming Age to 72.” https://www.thinkadvisor.com/2021/05/06/wade-pfau-makes-case-for-raising-top-social-security-claiming-age-to-72/. Accessed July 7, 2021.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

Monday, August 9, 2021

Midyear Market Outlooks

In its midyear review, market analysts at Charles Schwab say that economic growth in the United States may have peaked in the second quarter of this year, and it believes China experienced its peak in the fourth quarter of 2020. However, Schwab is bullish on Europe’s prospects for the rest of this year. It notes that the rollout of Europe’s largest-ever stimulus plan should aid growth and the region still has some way to go before peaking — meaning eurozone stocks could deliver further gains.1

Consider that, because the overall stock market performed well in the first half of the year while bonds underperformed, it’s possible your asset allocation may be skewed. Feel free to contact us for advice on rebalancing your portfolio midyear. This will enable you to cash in on gains and reassess how to potentially position your equity allocation given market projections for the second half of 2021.

Morgan Stanley is bullish on sustained growth in the U.S., citing three factors that appear to be driving the economy. The first is the high savings and consumer spending rate. Despite job losses throughout 2020, U.S. households were bolstered by stimulus payments and supplemental unemployment benefits. As a result, the average household income has already exceeded its pre-COVID level. Consumer demand fuels corporate prospects, so the money manager expects capital spending to continue here and in other developed countries throughout the globe. And finally, Morgan Stanley economists predict that the nation’s core inflation will rise above 2% by year’s end, but not enough to trigger the Federal Reserve to raise interest rates.2

At JP Morgan, economists believe that robust growth and rising inflation in the U.S. will prompt the Fed to taper bond purchases by the end of this year and begin to raise short-term rates as early as the fourth quarter of 2022. Investors should consider that rising rates will produce higher yields that will increase pressure equity valuations. Furthermore, the falling dollar will benefit international equities. The money manager recommends investors consider higher allocations to international equities and alternatives in the near-term.3

In the fixed income market, Raymond James emphasizes the importance of strategic asset allocation to maintain portfolio balance, regardless of the current interest rate environment. The firm’s fixed income experts believe the 10-year Treasury will end the year in the range of 1.25% to 1.80%. By diversifying assets with a balanced approach, investors can preserve principal and allocate for growth in assets expected in appreciate in price.4

In the stock market, given the reopening of the U.S. economy, Ameriprise Financial expects continued price growth among cyclical value stocks, improving business trends and strong year-over-year profit growth. While stock fundamentals remain strong, they suffer more from investor views that the market isn’t performing as strong as it could be, which can damper enthusiasm. Going forward, Ameriprise analysts caution that share prices may fluctuate due to changes in growth expectations. Given the uncertainties related to higher inflation and supply shortages, they recognize that short-term conditions may be volatile through the summer but, in the long term, the current environment favors stocks.5

1 Charles Schwab. June 15, 2021. “2021 Mid-Year Market Outlook: Peak or Pause?” https://www.schwab.com/resource-center/insights/content/quarterly-market-outlook. Accessed June 16, 2021.

2 Morgan Stanley. June 9, 2021. “2021 Midyear Economic Outlook: A Business Investment Surge Ahead.” https://www.morganstanley.com/ideas/global-economy-midyear-outlook-2021. Accessed June 16, 2021.

3 JP Morgan. 2021. “The Investment Outlook for 2021: A Midyear Review.” https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/investment-outlook-2021-us.pdf. Accessed June 16, 2021.

4 Doug Drabik. Raymond James. June 14, 2021. “Midyear Rate Review: Markets and Investing.” https://www.raymondjames.com/commentary-and-insights/markets-investing/2021/06/14/bond-market-commentary. Accessed June 16, 2021.

5 Anthony Saglimbene. Ameriprise Financial. June 15, 2021. “Midyear market review: What’s ahead for stocks.” https://www.ameriprise.com/financial-news-research/insights/midyear-market-review. Accessed June 16, 2021.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

Wednesday, August 4, 2021

Demographics Differing on Retirement Plans

According to PwC’s recent Retirement in America report, the median retirement savings among people ages 55 to 64 is $120,000. Unfortunately, that likely would provide less than $1,000 per month for a retiree, for only 15 years.¹

There’s an interesting dichotomy among demographics when it comes to retirement planning these days. There are those who believe they will work beyond age 70, or even never retire. Some believe they’ll need to keep working for financial reasons, while others simply want to stay engaged.² But then there’s another cohort (one-third of workers younger than 54) who aspire to retire by age 55, according to a 2020 survey by the research firm Hearts & Wallets.³

Clearly, the pandemic affected some households’ financial situation more than others. But the primary way to successfully fund retirement is to have a plan, and those who want to retire early generally do. Those who think they’ll never be able to stop working may have either failed to plan adequately or circumstances conspired to send those plans awry. Wherever you are in your planning stage, it never hurts to get advice. We’d be happy to review your current finances — and your retirement plan if you already have one — to either get you on track or ensure you’re still on the right path to retiring when and how you want.

Bear in mind that approximately 40 million people do not have the advantage of investing in an employer-sponsored retirement plan because they work for a small business. There appears to be a growing trend to address this situation, as multi-employer and pooled-employer plans (MEP/ PEP) are starting to come on board. These plans are designed to allow small employers to share investment and administrative costs.⁴

A 2019 survey of retirement plan participants by American Century Investments found that the number one regret among retirees was not saving enough money for retirement. Not saving enough could lead to working longer than you wanted or scaling back to a lower-cost retirement lifestyle.⁵

For current retirees or those expecting to retire soon, recognize that the recent rise in inflation is not without its advantages. For example, in April the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased to 4.7% over 12 months ago. This inflation measure is the one that Social Security uses to make annual cost of living adjustments (COLA) to benefits — which means the next COLA increase could reflect that 4.7% increase next year. For context, Social Security benefits rose by only 1.3% in 2021. The actual adjustment will be calculated later this year based on how inflation continues to perform, with the final determination generally announced after the third quarter.⁶

Content prepared by Kara Stefan Communications.

¹ PwC. 2021. “Retirement in America: Time to rethink and retool.” https://www.pwc.com/us/en/industries/asset-wealth-management/library/retirement-in-america.html. Accessed June 15, 2021.

² American Advisors Group. May 6, 2021. “Nearly One in Three Seniors Plan to Work Past 70 or Never Retire, According to AAG Survey.” https://www.prnewswire.com/news-releases/nearly-one-in-three-seniors-plan-to-work-past-70-or-never-retire-according-to-aag-survey-301285256.html. Accessed May 31, 2021.

³ Hearts & Wallets. March 16, 2021. “Retirement Resurgence: Americans Who ‘Aspire to Retire by 55;’ Anticipation of Increasing Number of Income Sources.” https://www.heartsandwallets.com/docs/press/press_release_2021-03-16_Retirement_Resurgence_Americans_Who_Aspire_to_Retire_by_55_Goal_More_Income_Sources.pdf. Accessed June 15, 2021.

⁴ Stephen Miller, CEBS. Nov. 16, 2020. “DOL Final Rule Paves the Way for 2021 Launch of Pooled 401(k) Plans.” https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/dol-final-rule-paves-way-for-2021-launch-of-pooled-401k-plans.aspx. Accessed June 29, 2021.

⁵ Brian Mayfield. American Century Investments. 2021. “4 Reasons to Rethink Cashing Out Your Retirement.” https://www.americancentury.com/content/direct/en/insights/guidance-planning/retirement/saving-for-retirement/rollover-options/cashing-out-retirement-401k-ira-four-considerations.html. Accessed May 31, 2021.

⁶David Payne. Kiplinger. June 28, 2021. “What is the Social Security COLA?” https://www.kiplinger.com/article/retirement/t051-c000-s010-what-is-the-social-security-cola.html. Accessed June 29, 2021.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

Monday, July 26, 2021

How to Help Prevent Aging

There is no magic pill that will keep us from getting older. Trendy fashions, dancing like no one’s watching and laughing with friends can make you feel young and invincible, but it won’t stop the process. Aging is biological, and inevitable.

And yet, something many people fail to learn until they get older is that inflammation is one of the body’s fastest aging processes. In our youth, we may twist an ankle or have some other injury that causes swelling. Acute inflammation is the body’s way of fighting off infection by enabling white blood cells to flood the affected area to protect and heal. Throughout time, however, chronic, low-grade inflammation leads to a plethora of old-age conditions, such as cardiovascular disease, cancer and dementia. Researchers refer to this type of persistent, low-level inflammation associated with aging as “inflammaging.”¹

To make matters worse, chronic inflammation can be exacerbated by bad habits we can pick up as we get older. These behaviors include:

· Smoking

· Poor diet

· Drinking alcohol

· Not getting enough physical activity

· Too much stress

· Weight gain

· Not getting enough sleep

Inflammation can remain in the body long after we start feeling better. Even if you hate taking pills, and don’t necessarily feel the benefits, anti-inflammatories work hard to reduce inflammation in the body. One of the key ways to prevent the ailments of old age is to reduce inflammation on an ongoing basis. It’s like exercising and maintaining a healthy weight – a lifelong effort that only gets tougher as we age. The types of medications physicians often prescribe for inflammatory diseases include corticosteroids, immunosuppressants and biologics.²

However, there are trade-offs that accompany getting older. For all the frustration that comes with physical changes, complicated relationships and money woes, there is wisdom, experience, and, at some point – the lucky ones – start caring more about how they feel than what other people think. Please feel free to contact us if you are looking to expand your horizons for your financial future.

Our internal organs aren’t the only ones affected by inflammaging. Research shows that chronic, low-grade inflammation contributes to the aging of our skin. As we get older, our skin loses epidermal pH, hydration and the permeability barrier that helps retain water and protect against bacteria and other pathogens. This loss of moisture causes the skin to release inflammatory signals that eventually reach the blood. Scientists are looking at ways to use topical creams to reverse age-related skin damage to prevent the development of downstream diseases caused by inflammation.³

Much like our financial situation, there are things we can do to help ward off the effects of inflammaging. Fortunately, many are the same tactics that enable a healthier lifestyle, like aerobic and resistance exercise, which can help reduce weight problems strongly associated with a pro-inflammatory state. Dietary supplements such as amino acids or protein, vitamin D and polyunsaturated fatty acids are known to have anti-inflammatory and antioxidative properties. That age-old advice of adopting the anti-inflammatory Mediterranean diet turns out to be the only behavioral factor that is consistently associated with a lower risk of frailty in old age.⁴

Other components of an anti‑inflammation diet include brightly colored fruits and vegetables, such as cooked tomatoes, carrots, squash and broccoli. They contain substantial amounts of antioxidants, which are believed to reduce the effect of free radicals that damage cells. Other inflammation fighters include high-fiber foods, such as legumes and whole grains (e.g., barley, oats, bran) and fish rich with omega-3 fatty acids (e.g., salmon, mackerel, sardines, tuna).⁵

In short, diet and exercise can help control inflammaging so that our internal organs retain youthful qualities as well as our external appearance.

Content prepared by Kara Stefan Communications.

¹ James Kingsland. Medical News Today. 2021. “Immune aging and how to combat it.” https://www.medicalnewstoday.com/articles/immune-aging-and-how-to-combat-it. Accessed May 17, 2021.

² WebMD. March 18, 2021. “How to Reduce Inflammation as You Age.” https://www.webmd.com/healthy-aging/how-to-reduce-inflammation-as-you-age#1. Accessed May 17, 2021.

³ Dana Smith. University of California at San Francisco. March 13, 2019. “Skin Repair Reduces ‘Inflamm-Aging’ Factors Linked to Chronic Disease.” https://www.ucsf.edu/news/2019/03/413576/skin-repair-eliminates-inflamm-aging-linked-chronic-disease. Accessed May 17, 2021.

⁴ Luigi Ferrucci and Elisa Fabbri. National Institutes of Health. Sept. 20, 2018. “Inflammageing: chronic inflammation in ageing, cardiovascular disease, and frailty.” https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6146930/. Accessed May 17, 2021.

⁵ Harvard Medical School. May 1, 2020. “Quick-start guide to an anti‑inflammation diet.” https://www.health.harvard.edu/staying-healthy/quick-start-guide-to-an-antiinflammation-diet. Accessed May 17, 2021.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

Monday, July 19, 2021

All About RMDs

There really is a purpose behind required minimum distributions (RMD) of tax-advantaged retirement accounts. IRAs and employer-sponsored retirement plans feature tax-deferred income contributions and earnings growth throughout the lifetime of the account. There’s just one catch — when you take money out of that account, it then gets taxed at ordinary income tax rates. Some retirees use that money to pay for their expenses, but others may not need it and would rather let it continue growing, untaxed, and then leave it to heirs.

That means that retirees who need the money are taxed and those who don’t could avoid the tax. Those tax revenues are used to fund government programs, but we are fortunate to have decades of a tax reprieve so gains can accumulate faster.

Retirement investing, and RMDs in particular, can be rather confusing. But just because something is difficult — and ever changing — doesn’t mean we shouldn’t take advantage of the options available. Quite the opposite — tax-deferred investing is a way to optimize the accumulation of wealth, so it’s worth the time and effort to understand how these accounts work.

You can tap the advice of a financial professional to help you manage your retirement accounts, even those that fall under an employer plan. After all, your employer isn’t going to help you manage the rest of your portfolio, so feel free to call us if you have questions about your tax-advantaged accounts and their distribution options.

In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, with several changes regarding RMDs. Prior to the legislation, retirement account owners had to start RMDs at age 70½; the law increased that age to 72 for anyone born after June 30, 1949. Those with a traditional IRA must take their first RMD by April 1 of the year after which they turn age 72, even if they haven’t retired yet. Each year thereafter, they must take an RMD by Dec. 31. Investors with multiple IRAs must calculate the appropriate RMD for each one, but they can take that total amount from just one of the accounts they own. That’s easier to do with traditional IRAs than with multiple prior employer retirement accounts, which require contacting former employers to calculate and send the distributions.¹

There is a penalty for not taking the appropriate RMD: The account owner must pay a 50% excise tax on the amount not distributed each year. Also note that you cannot withdraw a couple’s total RMD from just one spouse’s account or a different type of qualified account.²

The rules for an inherited IRA can be confusing, and they also changed with the recent SECURE Act. Specifically, it is now prohibited for a non-spouse IRA beneficiary to “stretch” out taxable distributions throughout his life expectancy. Starting in January 2020, the named beneficiary is required to withdraw all funds within 10 years of inheriting the account. However, unlike before, the heir can wait the full 10 years before taking distributions, meaning there are no RMDs each year.³

The inherited IRA rules didn’t change for a spouse who inherits a wife’s or husband’s IRA upon death. She also has more options for withdrawals, such as the ability to designate herself as the new account owner, roll it over to her existing IRA or take distributions as a beneficiary.

Be aware that these distribution rules do not apply to a Roth IRA, either directly owned or inherited. Since the Roth is funded with already-taxed income, withdrawals are tax-free in retirement — even the gains accrued over time. The only caveat is that the owner (or original owner, if inherited) must have owned the account for at least five years (the clock starts on Jan. 1 of the year of the first contribution). Contributions withdrawn before that five-year holding period may be taken tax free, but any withdrawn interest is taxable.⁴

Annuities also benefit from tax-deferred growth, but the account owner takes RMDs only if it is classified as a qualified annuity, meaning that it was funded with pre-tax money. Non-qualified annuity contracts are funded with after-tax income and feature tax-deferred earnings, so they do not mandate RMDs and are taxed upon distribution.⁵

Content prepared by Kara Stefan Communications.

¹ Judith Ward. T. Rowe Price. May 11, 2021. “Five Important Things You Should Know About RMDs.” https://www.troweprice.com/personal-investing/resources/insights/five-things-you-should-know-about-rmds.html. Accessed May 21, 2021.

² Denise Appleby. Investopedia. April 21, 2020. “Required Minimum Distributions: Avoid These 4 Mistakes.” https://www.investopedia.com/articles/retirement/04/120604.asp. Accessed May 21, 2021.

³ Fidelity. June 1, 2020. “SECURE Act rewrites the rules on stretch IRAs.” https://www.fidelity.com/learning-center/personal-finance/retirement/secure-act-inherited-iras. Accessed May 21, 2021.

⁴ Barbara Weltman. Investopedia. Feb. 15, 2021. “The Rules on RMDs for Inherited IRA Beneficiaries.” https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp. Accessed May 21, 2021.

⁵ FINRA. 2021. “Required Minimum Distributions—Common Questions About IRA Accounts.” https://www.finra.org/investors/learn-to-invest/types-investments/retirement/rmds-questions-about-ira-accounts. Accessed May 21, 2021.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.