Bob’s Journal for 2/15/23

Key RMD Changes in The SECURE Act 2.0 You Should Know

It is hard for people to keep up with the more than 100 changes the SECURE Act 2.0 made in retirement plans and related tax code provisions.

Here’s a summary of the key changes in required minimum distributions (RMDs) in the law that was enacted at the end of 2022. The beginning age for RMDs of owners of traditional IRAs is transitioning in stages from 70½ (in effect when the original SECURE Act was enacted at the end of 2019) to 75 for those born in 1960 or later.

Anyone who turned 72 in 2022 or earlier follows the old rules. Those who turned 72 in 2022 have to take their first RMD no later than April 1, 2023. If you were taking RMDs before 2022, continue taking RMDs on the schedule you had in place.

Those who turn 72 in 2023 through 2033 (born from 1951 to 1959) have 73 as their RMD starting age. They have to take the first RMD by April 1 of the year after they turn 73. It is usually best to take that first RMD in the year you turn 73 instead of waiting until the following year.

Anyone born in 1960 or later has 75 as the RMD starting age. They will have to take their first RMDs by April 1 of the year after turning 75. But, again, in most cases it will be better to take the first RMD in the year they turn 75.

There is no change in the RMDs for beneficiaries who inherited traditional and Roth IRAs. Most of them follow the 10-year rule created in the original SECURE Act.

A welcome provision in the SECURE Act 2.0 is the significant reduction in the penalty for not taking an RMD. Since 1974, the penalty has been 50% of the amount that should have been distributed but wasn’t.

The penalty is lowered to 25% and can be reduced to 10% if the IRA owner makes up the RMD in a timely manner. The law says this means the full amount is distributed by the earlier of the second year after the RMD was missed or before the IRS assesses a penalty.

The lower penalty applies to all people who have to take RMDs, including those who had to begin RMDs at earlier ages under the old rules.

The IRS was fairly generous in the past in waiving the 50% penalty as long as the distribution eventually was made, and a reasonable excuse was offered for the delay. Reasonable excuses included confusion over the rules, health problems, a death in the family and receiving incorrect advice.

The IRS still can waive the lower penalty when a reasonable excuse is offered, but it’s not clear if the IRS will be as lenient now that the penalty is lower than 50%.

A late RMD is reported and a request for waiver of the penalty is made on Form 5329, which is filed with your income tax return.

The SECURE Act 2.0 also reduces the statute of limitations on the RMD penalty.

Previously, the three-year statute of limitations on the RMD penalty didn’t start running until the IRA owner filed Form 5329. If the taxpayer didn’t file the form, there was no statute of limitations, even if the taxpayer didn’t know about this obligation, the three-year statute of limitations didn’t apply. The taxpayer could be assessed the penalty years after the RMDs was missed, and the IRS did that from time to time.

Under the SECURE Act 2.0, the statute of limitations begins running when the Form 1040 is filed for the year the RMD was supposed to be taken, even if Form 5329 isn’t included with the 1040.

The SECURE Act 2.0 also eliminates the RMD obligation for original owners of Roth 401(k) accounts. Under the old rules, Roth 401(k) account owners had to take RMDs just as the owners of traditional 401(k) accounts do. This was a major difference between Roth IRAs and Roth 401(k)s, because Roth IRA owners never had to take RMDs during their lifetimes.

The elimination of the RMD requirement for Roth 401(k) owners doesn’t take effect until 2024.

Capture Safe, Higher Yields from Brokered CDs

One of the little-known ways to earn high yields on your cash is available through most brokers with only two or three clicks on their websites.

Brokers offer their clients access to CDs. The CDs are issued by FDIC-insured banks across the country, including U.S. divisions of international banks, but the CDs are insured by the Federal Deposit Insurance Corporation (FDIC).

Accessing these CDs is easy on most major brokers’ websites. Under the trading or investment sections of the websites, look for a subsection such as “fixed income” or “bonds and CDs.” On that web page should be a link to “CDs.” When you arrive at the CD page, it should show you the current yields on CDs the broker is offering from different banks around the country.

Recently at one major broker a CD of less than one year was yielding 4.76%. A one- to three-year CD was yielding 4.87%.

The yields were higher than most of those on treasury bonds and AAA-rated corporate bonds.

Know All the Risks of Self-Directed IRAs

A coalition of regulators recently issued warnings about the risks of some self-directed IRAs that many investors do not know.

There are a couple types of self-directed IRAs. Most mutual fund companies and brokers say their IRAs are self-directed. By that, they mean that your IRA can buy any investment on their investment platforms, which usually means all publicly traded securities.

A true self-directed IRA may acquire any asset that IRAs are permitted to own under the tax code. Under the code, an IRA can own anything other than life insurance and collectibles. The list of permissible investments includes non-publicly traded assets, such as real estate, mortgages, small businesses and more.

The warning was directed at owners of the second category of self-directed IRAs.

The point of the warning is that an asset isn’t a good investment simply because the tax code allows an IRA to own it. And the regulators are right on this one.

The custodians of true self-directed IRAs generally don’t evaluate or screen the investments purchased by IRAs. It is up to the IRA owner to be sure the asset is real, it’s owned by and set aside for the IRA, the fees and expenses are reasonable, the price is fair and there eventually will be a market to sell the asset.

The assets purchased in self-directed IRAs often don’t have liquid markets, since they aren’t publicly traded. That means the IRA might not be able to find a buyer for the asset when the IRA owner wants to sell. Or the price a buyer wants to pay might be considerably less than the IRA paid for it, or the owner believes it is worth.

The regulators highlighted that many of these risks are high when the IRA invests in cryptocurrencies.

Perpetrators of Ponzi schemes and other frauds often make self-directed IRAs part of their scams. Some set up their own self-directed custodians (or fake custodians) to receive the deposits. Others refer clients to IRA custodians they know won’t ask questions or closely scrutinize transactions. Ponzi king Bernard Madoff was known for referring potential clients with IRA balances to a particular self-directed IRA custodian.

Fees often are higher on self-directed IRAs, whether the investments are legitimate or not. That’s because the custodian must do more work to make transactions and obtain the value of assets, since they aren’t publicly traded.

A true self-directed IRA can be a valuable financial tool for investors who want to invest in unconventional assets. But successfully using a self-directed IRA requires the IRA owner to be more sophisticated and do more work than when a conventional IRA is used. Be sure you do the extra work before investing your self-directed IRA.

The Data

The Consumer Price Index (CPI) increased 0.5% in January, the highest in three months and above the 0.1% rate in December. Over 12 months, the index increased 6.4%, down slightly from 6.5% in December and the lowest level since October 2021.

The core CPI, which excludes food and energy, rose 0.4% in January, the same as in December. Over 12 months the core CPI was 5.6% in January, down from 5.7% in December.

The Department of Labor revises its seasonal adjustment factors each year in the CPI report for January. The revisions that took effect in this report wiped out a lot of the moderation in the core CPI that was registered in late 2022.

Retail sales increased 3% in January. That’s a big recovery from the 1.1% decline reported in December. Excluding autos and gas, retail sales still increased 2.6% in January, following a 0.4% decline in December.

Over 12 months, retail sales increased 6.4% in January, up from 5.9% in December.

Optimism among small business owners inched higher in January, according to the NFIB Business Optimism Index. The index was 90.3 in January, compared to 89.9 in December.

December’s level was a six-month low. The average over 49 years is 98.

The mid-February reading of the Consumer Sentiment Index from the University of Michigan was 66.4, up from 64.9 at the end of January.

The mid-February reading is the highest in 13 months but less than the level two years ago.

Consumers’ assessments of current conditions improved while expectations for the next six months were slightly more pessimistic than in January.

The Empire State Manufacturing Index improved in February but still indicates the sector is contracting. The index was negative 5.8 in February after being reported at negative 32.9 in January.

Industrial production was unchanged in January after declining 1% in December. Manufacturing production increased 1% in January after declining 1.8% in December.

The outlook of homebuilders improved in February. The Housing Market Index from the National Association of Home Builders (NAHB) was 42 in February, rising from 35 in January.

February’s level is the highest since September 2022, and the increase from January to February was the largest since June 2013. Even so, any reading below 50 is considered negative. The the index was at 81 in February 2022.

New unemployment claims increased 12,000 to 196,000 in the latest week. The previous week’s new claims number was a nine-month low.

Continuing claims, which lag a week behind new claims, increased to 1.688 million from 1.650 million.

The Markets

The S&P 500 fell 0.61% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.11%. The Russell 2000 declined 1.57%. The All-Country World Index (excluding U.S. stocks) added 0.20%. Emerging market equities rose 0.02%.

Long-term treasuries lost 0.99% for the week. Investment-grade bonds fell 1.32%. Treasury Inflation-Protected Securities (TIPS) declined 0.52%. High-yield bonds decreased 1.55%.

On the currency front, the U.S. dollar declined 0.07%.

Energy-based commodities increased 1.51%. Broader-based commodities rose 0.68%. Gold declined 0.79%.

Bob’s News & Updates

My new book is officially published: “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.