Every Monday, as I walk into the office to record these video podcasts or draft a blog, the question of the day is always the same: what is going to piss Mark Bertrang off today?
Today, it’s all about the relentless ways people try to squeeze money out of me. Initially, I thought my frustration would solely stem from the new taxation rules on beneficiary IRAs. Most folks know that Traditional IRAs come with tax obligations, but many are surprised to learn that inherited IRAs also have taxes due. The new rule outlines what these taxes will be and when they need to be paid.
So, how does this relate to airline tickets? While researching an article from The Wall Street Journal, published on July 19th, I also needed to book a flight for our Registered Advisory Firm’s annual conference in Scottsdale, AZ. Although I fly regularly, this time I encountered a new and unpleasant surprise. I always travel light to avoid the $50 luggage fee, relying solely on a carry-on bag for trips lasting four days or even four weeks. I’ve mastered the art of packing efficiently.
However, since I avoid luggage fees, airlines have found another way to charge me. After booking my ticket, I discovered I had to pay to select a seat. For a short 40-minute flight from La Crosse to Chicago International Airport, seat prices range from $14 to $55. From O’Hare to Phoenix, it’s between $13 and $91. Returning from Phoenix to O’Hare costs between $11 and $56, and from O’Hare back to La Crosse, it’s $14 to $55. Well done, American Airlines! You’ve found another way to extract more money from me since you couldn’t get my luggage fees.
What does this have to do with the IRS’s new rules on inherited IRAs, as reported in The Wall Street Journal? The rules don’t apply to spouse-to-spouse transfers, which remain tax-deferred until withdrawal. These changes affect inherited IRAs from friends, siblings, parents, etc. Previously, you could liquidate inherited IRAs over your lifetime. A few years ago, that period was reduced to 10 years, with the assumption that withdrawals wouldn’t be mandatory until the 10th year. However, the new IRS regulations have clarified this.
According to the article, "IRS Finalizes Rules for Heirs Inheriting Retirement Accounts":
“The (original) law did not specify whether people had to take out the money each year or if they could just wait till the final year to take out all of their funds. Investors asked the IRS to do away with the minimum annual withdrawals to take advantage of tax savings and allow their money to grow. The IRS’s final rules say money must come out each year for many heirs. The agency said that is what it determined Congress intended. The rules affect most heirs, but not spouses. The new guidance applies to both future inheritors and the many people who have inherited accounts since 2020, who have been in limbo waiting for the rules. Congress, in an effort to raise revenue and to keep the wealthy from shielding money, has been changing the laws governing trillions of dollars in 401Ks and other retirement accounts. It is also likely to keep on doing so. This means individual investors will have to readjust how they plan for retirement and continue to work through the maze of ever-changing new rules.”
The government, in need of tax revenue, decided to expedite the collection process. While previously, non-spouse inherited IRAs could be liquidated over a lifetime, then over 10 years, now the government mandates annual withdrawals over those 10 years. Failure to comply results in penalties.
Just like my airline experience, many believe 401Ks and IRAs are straightforward retirement vehicles. However, the biggest expenses might not be the fees and charges inside these accounts, but the taxes due upon withdrawal. Reflecting on my seat charge and considering 401Ks/IRAs, you might also be surprised by the hidden costs in your retirement plan, akin to the unexpected seat fee on my flight.
The key takeaway from this article is Congress’s ongoing efforts to raise revenue by changing laws governing trillions of dollars in retirement accounts. These changes will likely continue, impacting how individuals plan for retirement.
If the cost of retirement concerns you as you plan for your financial future, perhaps it’s time to schedule your Financialoscopy®.
Reference:
Ebeling, A. (2024). IRS Finalizes Rules for Heirs Inheriting Retirement Accounts. The Wall Street Journal.
