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Wednesday, March 27, 2024

RMDs -- What No One Seems To Ever Mention -- 2024 Huge Year For IRAs -- See Why -- Originally Posted January 25, 2024 -- Re-Posted March 27, 2024

Locator: 46855INV.

The US market.

  • S&P 500 closes at 5,248, a new all-time record.
    • AAPL: up $3.60 today; up over 2%. See if you can connect the dots with this one below.
  • This sure doesn't feel like an impending recession. CNBC analysts and talking heads have pushed concerns for a recession out to 2025.

Where's all this money coming from?

  • Covid-19 stimulus money;
  • my favorite chart;
  • IRAs: see below
  • southern surge: a $7 trillion gift
    • (this would require a stand-alone blog -- but elevator speech: federal and state aid; a new agency within the Department of Homeland Security?) 
      • TSA: $11 billion budget; 60,000 employees
      • Citizenship and Immigration: <$1 billion; 4,000 employees

Baby boomer age wave theory: link here.

  • baby boomers: note the size of this demographic at the link;
    • who has all the money? who has all their medical care expenses paid for? whose houses are paid off?
  • birth years: 1946 - 1964
    • ages (2024): 60 years old - 78 years old; mid-range: 69 years old -- today, 2024
  • IRS: RMDs -- about 4% annually
  • ICYMI: in the box above, it's trillion with a "t." That's even more than Elon Musk's bank account.

Addictions:

  • baby boomers: booze, cigarettes, gambling, muscle cars, sports, making money, malls, products,
    • big families, extended families (inherited money diluted to "barely enough to live on"))
  • millennials, Gen Zers: tech, travel, home delivery, services
    • small families (inherited money remains concentrated)

Quick: name a time in the history of the US with the same data points, demographics, and addictions.

Updates

March 27, 2024: one year later ...

  • "Max" chart:

Original Post
January 22, 2023

Key dates to remember with regard to IRAs:

  • 1970
  • 1981
  • 1997

When did IRAs truly start to impact the economy? I would argue, 1995, to some extent, but then took off in 2007:

  • 1970: traditional IRA introduced
  • 1980: folks became comfortable with IRAs
  • 1997: IRAs improved by a huge amount with the introduction of Roth IRAs
  • 2007: another ten years of traditional IRA / Roth IRA growth in popularity

Now, look at this graph:

 Same chart with markers and comments:

Demographics, US:


Look at this, and no one seems to be mentioning this.

Age when one can start taking distributions from one's IRAs: 59.5 years of age.

IRA RMDs by demographic (note, data is somewhat old):

  • silent generation: minimal impact on economy with regard to RMDs
    • those who have IRAs are probably using RMDs for nursing home expenses
  • baby boomers: biggest impact on economy with regard to RMDs
    • those born in 1964: turn 78 years of age this year
    • those born in 1946: turn 60 years of age
    • in other words, every -- repeat, every baby boomer can now take RMDs
    • my wife has been taking distributions before they were required and now RMDs for maybe ten years and despite the withdrawals year-after year, her IRA continues to grow
    • I start taking my first RMDs this year 
    • almost all baby boomers can now tap into their social security benefits
      • almost all baby boomers are covered by Medicare. Medicare benefits got even better in 2024 (thank you, Mr Biden), seniors will spend less money on healthcare (all things being equal)
    • 529s: a lot of baby boomers (GRANDPARENTS) are going to look for tax-advantage accounts to place RMDs they don't need for current expenses
      • 529s have vastly improved starting this year (or last year?) making these investment vehicles look even better -- I'm having trouble finding a better place to re-invest my RMDs
      • interestingly, one can argue that 529s are even better than IRAs
  • generation X: will start to make impact this year but not much, but it will continue to grow every year for the next decade or so
    • those born in 1980: turn 44 years old this year; no impact on economy with regard to RMDs but starting to hit max income / max productive years of their lives
      • the younger Xers, now in the best years of their lives, financially, are now more likely to fund IRAs and that will help set a floor for the equity market; 
    • those born in 1965: turn 59 years old this year!
    • this is the biggie
      • starting this year, generation X folks can start tapping their IRAs; it doesn't mean that they will but it means that if they don't, they have enough other income to offset any need for IRA distribution (meaning strong financial status for those folks)
    • again, this is huge
    • Roth IRAs have been around 27 years and the last 27 years have been great for investors, but
    • even better: the way the market behaved last year and how the market is now behaving in the second half of January, 2024, a lot of folks are getting excited
    • my hunch: a lot of folks are taking some / all of their RMDs this month; if not their entire RMD, taking a fourth to half of their annual RMD
    • only a few more years and Xers will also be able to access social security benefits, also 

On top of all this, this "RMD story" is not going to go away. Year-after-year RMDs will increase in dollar amounts, but whether they increase or not, they will never quit.

And we haven't even begun to talk about "inherited RMDs":

  • "inherited RMDs"? Reminder, oldest baby boomers turn 78 years of age this year -- IRS life expectancy for IRAs tend to trend toward 100 years of age -- taking only minimal RMDs, the vast majority of IRAs will still be funded and growing when their own dies.
  • unlike owners of IRAs who can spread their RMDs over a life expectancy (26 years or longer), beneficiaries (those who inherit IRAs) must deplete those IRAs in ten years.
  • one word: wow. 

14 comments:

  1. RMD's.... the pain that won't go away! In 1979, I started feeding a Keogh plan. In 1996, I rolled it into a traditional IRA. All in all, both were a mistake!! Should have just payed the darned taxes and invested in our personal account. But... I guess we are fortunate. The RMD is low six digits, requiring about a 5% payout even as it earns nearly double that~ Then, the thieving politicians came along and introduced the 10-year payout rule. Proving once again the first rule of boxing... "Always protect yourself".
    And, contrary to where you suggest the money goes, none of our RMD goes to medical/care facilities; even as our medicare/supplement insurances total a tad over $20K a year. It could be worse,

    ReplyDelete
    Replies
    1. The "trick" is to find some financial vehicle in which you can put your RMDs that will continue to grow with a) no taxes; and, b) no "10-year rule."

      One will still pay taxes on that initial RMD distribution, but if you can find that financial vehicle as described, one will never pay taxes on that distribution (or the growth it generates) again. I would love to mention that financial vehicle but I think I've already talked about it before and I've found that whatever solutions I come up with, I get too much push back. Folks have more fun finding these "things" on their own.

      Delete
    2. By the way, that "10-year" rule will also be huge for the market. There are two groups of folks affected by the "10-year" rule: those who hate the rule and those who are unaffected by the rule. The latter group would have taken the money out anyway for any number of reasons. The first group hate the rule because they don't need the money but they will take it out, pay taxes, and re-invest it.

      Delete
    3. But regardless of how these rules affect one personally, the aggregate is a huge, huge deal for the US economy as a whole, and the market specifically.

      Delete
  2. Of course the RMD rules are great for the economy; the 10 year rule just enhanced it. At age 81, and without pondering your "trick" I've concluded that the answer is to give away large sums to our heirs (we'll never use the entire life-time exemption... darn!!) and keep only the amount necessary to keep us off the dole. Strange, but folk my age grew up believing that leaving a large estate to their children would be a great thing. Fact is, it is a mistake because of current life expectancies. Why would one bequeath several million to a child who is age 75? Do it now and watch how they manage/spend/invest. If they diddle it away, well, that is why God created trusts!! You are great to banter with; sorry for getting on my soapbox on this issue.

    ReplyDelete
  3. The importance of this chatter? My hunch? A lot of folks don't even know about the 10-year rule. And again, the importance of making the correct decision to open a traditional IRA or a Roth. Based on the number of websites devoted to this subject suggests a lot of folks really don't know the rules, or the strategies.

    ReplyDelete
  4. Back in the '60s... A lot of folk should have paid attention to the match-book covers that said "Make big money, be an accountant"..... That is why, after starting out in dentistry and discovering that Comparative Anatomy was not about girls, I finally became a CPA.... Dirty mouth or dirty books??? Easy choice.

    ReplyDelete
  5. Those same matchbooks had 1-800 numbers for truck-driving school (CDLs) and teamster truck drivers for the LA ports -- Los Angeles and Long Beach -- probably make more money than any of us. And a lot of those truck drivers have a friend in every truck stop.

    ReplyDelete
  6. I believe ( BRK ) own all flying J and Pilot now. https://finance.yahoo.com/news/berkshire-business-unit-focus-pilot-130001343.html#:~:text=Pilot%20Travel%20Centers%20LLC%20(doing,%3ABP)%20purchased%20the%20company.

    ReplyDelete
    Replies
    1. Yes, I believe that is accurate. I believe BRK and Pilot came to an amicable conclusion / agreement / discussion.

      Delete

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