Investing

YOUR GUIDE TO NAVIGATING YOUR FINANCIAL FUTURE

No one — not even professional investors, with all the resources behind them — knows for sure how any individual stock will perform going forward.  
There are ways to mitigate the risk of striking out with any one individual stock: Buy many stocks or even the whole stock market.
It’s the same idea as buying whole sets of baseball cards to get that one future All-Star.

DETROIT, MI – APRIL 29: A fan trades a baseball card on the trade wall during the 2023 Topps Truck Tour promotion outside of Comerica Park during game one of a doubleheader between the Baltimore Orioles and the Detroit Tigers at Comerica Park on April 29, 2023 in Detroit, Michigan. The Tigers defeated the Orioles 7-4. (Photo by Mark Cunningham/MLB Photos via Getty Images)
Mark Cunningham | Getty Images Sport | Getty Images

When I was a kid, I collected baseball cards with the money I earned from mowing lawns. It was fun to open a pack of cards not knowing which ones you’d get. I sometimes bought a bunch of cards of a particular rookie, in hopes he would one day become an All-Star. Most of the time, however, I ended up striking out. I learned the only way to make sure that you owned a future star was to diversify by buying every card in the set.  
There are parallels to investing.

Many folks try to find the next Amazon or Nvidia. But let’s face it, no one — not even professional investors, with all the resources behind them — knows for sure how any individual stock will perform going forward.  

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Here’s a look at more stories on how to manage, grow and protect your money for the years ahead.

But there are ways to mitigate the risk of striking out with any one individual stock — buy many stocks or even the whole stock market. It’s the same idea as buying whole sets of baseball cards to get that one future All-Star. Jack Bogle, the founder of Vanguard, used a different analogy to convey the same idea: “Don’t try to find the needle, buy the haystack.”
By haystack, he was talking about buying the entire stock market through a broad-based index fund instead of trying to find those few winning individual stocks. However, some may argue that just a handful of stocks have a disproportionate weighting in the index, so a U.S. equity index fund may not be as diversified as you may think.

The roster of stars keeps changing

Over the years, pundits have come up with interesting names to describe the largest or most-coveted stocks, such as the Nifty Fifty, FAANG and the Magnificent Seven. The latter, as of year-end 2023, were the most valuable U.S. companies, making up more than a quarter of the S&P 500 Index’s market capitalization. True, some of today’s winners will end up being tomorrow’s losers, but many will continue to become tomorrow’s winners as well. And some modest-size stocks will grow into behemoths.
For example, Apple, Microsoft and Google were among the five largest U.S. stocks in March 2014 and they remain so 10 years later. Exxon Mobil and Berkshire Hathaway rounded out the top five in March 2014, but were replaced by Amazon and Nvidia. Back then, Amazon was worth roughly $150 billion, while Nvidia was valued at a relatively modest $10 billion. Both stocks were included in broadly diversified U.S. stock indexes in 2014 and grew into top-five stocks today.

You never know which names will be the future All-Stars 10 years from now, so diversification is key. And diversification can be gained across three levels:
Diversify within each asset class. As mentioned, the easiest means of diversification is through a broad-based index fund or ETF. However, you do not have to stick strictly with index funds. If you go with actively managed funds to complement a core holding of index funds, make sure that your collective portfolio is adequately diversified and keep your costs like expense ratios and other fees low.
Diversify across asset classes. Diversifying across equities, bonds and cash further reduces risk. Make sure your allocation is appropriate for your time horizon, risk tolerance, and financial goals.
Diversify across time. In most cases, investing in a lump sum leads to higher returns. On the other hand, while dollar-cost averaging — regularly investing a fixed amount over time — doesn’t guarantee a profit or protect against a market downturn, it does mitigate the risk of bad market timing. And if you set it up as automated investments, it has the added benefit of being a set-it-and-forget-it approach. As time passes, regularly revisit your plan to make sure it still matches your current circumstances. Life happens, things change and so can your target allocation.
I’ll state the obvious: All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss; and no particular asset allocation can guarantee you will meet your goals.
That said, if you diversify, you’ll have some share of the potential All-Stars in your investment lineup.
— By James Martielli, head of investment and trading services at Vanguard. More

Some college students protesting Israel’s war in Gaza have faced disciplinary action in recent weeks, including being suspended or expelled.
The consequences of these temporary or permanent bans from campus “may also involve financial setbacks,” said higher education expert Mark Kantrowitz.
Those include the loss of scholarships, previously paid tuition, and access to meal plans and even housing.

Pro-Palestine protesters on the Massachusetts Institute of Technology campus lock arms after several demonstrators knocked fences down and reopened an encampment. Rallies and protest camps persist at MIT as student demonstrators demand divestment from Israeli military ties. President Sally Kornbluth set a deadline for encampment removal by May 6, 2024, threatening suspension.
Vincent Ricci | Lightrocket | Getty Images

Some college students protesting Israel’s war in Gaza have faced disciplinary action in recent weeks, with universities handing down suspensions and expulsions.
The consequences of these temporary or permanent bans from campus “may also involve financial setbacks,” said higher education expert Mark Kantrowitz. Depending on the college and disciplinary action taken, those can include the loss of scholarships, previously paid tuition, and access to meal plans and even on-campus housing.

“Students who are suspended do not get tuition refunds,” Kantrowitz said.
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More than 100 students have been suspended across the U.S. in recent weeks, according to Kantrowitz, who made a rough calculation from news reports. The real number is likely much higher, but a federal regulation curbs how much colleges can publicly disclose about student suspensions.
The protests emerged in response to Israel’s offensive in Gaza, which it launched after a Hamas attack on Oct. 7 that Israel says killed 1,200 people. Israel’s retaliatory attacks on Gaza have killed more than 34,000 people, including more than 14,000 children, according to local officials and the United Nations.
Here’s what to know about the financial risks for suspended and expelled student protesters.

Students can lose housing and more

According to an email reviewed by CNBC from Massachusetts Institute of Technology President Sally Kornbluth to the MIT community on Monday, students in encampments were notified they could face a range of punishments, from a written warning to an “immediate interim full suspension.” The email says those consequences depended on factors such as whether the students agreed to voluntarily leave the encampment on Kresge Lawn and whether they already had a pending case or sanction on their record from the campus discipline committee.
Those who are handed the harsher penalty will not be allowed to reside in their assigned residence hall or to use MIT dining halls, although they will continue to have access to health services, the email said.
MIT did not immediately respond to a request for comment.
“It’s devastating for students who are denied those basic services,” said Martin Stolar, a lawyer in New York who has defended protesters for decades.
Beyond the risk of losing their housing, suspended college students across the country may not be able to complete their courses and get credit for them, Kantrowitz said, and likely won’t receive tuition refunds.

It’s devastating for students who are denied those basic services.

Martin Stolar
a lawyer in New York

It’s uncertain whether suspended or expelled students will be refunded any leftover money on their meal plans, he said.
“Some colleges issue a refund of leftover balances when a student is no longer at the college, whether due to graduation, expulsion or some other reason,” he said. “Some colleges roll over the credit balance to the next year. Other colleges do neither, so the student loses the balance.”

Charges of disruption, vandalism

In recent weeks, students have been disciplined on charges that they maintained unauthorized encampments that disrupt college life and infringe on the rights of their fellow students. Some students are facing allegations of vandalism and destruction of property.
“There is a dire humanitarian crisis occurring in Gaza that must be addressed, and I am personally grief-stricken by the suffering and loss of innocent lives occurring on both sides of this conflict,” George Washington University President Ellen Granberg wrote in a statement on Sunday.
“However, what is currently happening at GW is not a peaceful protest protected by the First Amendment or our university’s policies,” she said. “The demonstration, like many around the country, has grown into what can only be classified as an illegal and potentially dangerous occupation of GW property.”

But there’s disagreement over when protesters overstep their rights.
The American Civil Liberties Union of Indiana filed a lawsuit against Indiana University this month, accusing the college of violating the First Amendment rights of three plaintiffs facing a 1-year ban from campus for their participation in the political protests, including a tenured professor.
A spokesperson from Indiana University said it does not comment on pending litigation.

Federal loan bills could come earlier

Suspended or expelled students may also get their federal student loan bills sooner than they expected, Kantrowitz said.
“Generally, if a student drops below half-time enrollment for at least six months, their student loans will enter repayment,” he said.
Those who can’t make their payments have the option of putting their loans into deferment or forbearance, he added. However, pausing loan payments can cause interest to accrue and borrowers’ balances to grow.
If a suspension ends and a student returns to college before six months, their grace period should reset, Kantrowitz said.
The U.S. Department of Education did not immediately respond to a request for comment on how it was notifying student protesters of any financial impacts, including the possibility of an early start to their loan payments.

It’s possible that a suspension or expulsion will be marked on a student’s transcript, which could make it harder for them to transfer to other colleges, get into a graduate school and land jobs, Kantrowitz said.
However, this particular disciplinary action might not be looked at the same way as other academic or conduct charges, Stolar said.
“We’re talking about people involved in protest activity, which is very different than something on your permanent record saying that you cheated on an exam or assaulted another student,” he said.

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Married couples can shield up to $500,000 in home sale profits from capital gains, and single filers can exempt up to $250,000.
In 2023, nearly 8% of U.S. home sales yielded profits exceeding $500,000, compared with about 3% in 2019, according to a new report.
If your home sale profit exceeds the limit, you can reduce it by adding to the “basis” or original purchase price with capital improvements.

The Good Brigade | Digitalvision | Getty Images

More Americans are paying capital gains taxes on home sale profits amid soaring property values — but there are ways to reduce your bill, experts say.
In 2023, nearly 8% of U.S. home sales yielded profits exceeding $500,000, compared with about 3% in 2019, according to an April report from real estate data firm CoreLogic.

There’s a reason the report called out that threshold.
It’s key for a special tax break for homeowners who make a profit when selling a primary residence. Married couples filing together can make up to $500,000 on the sale without owing capital gains taxes. The threshold for single filers is $250,000.
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Those capital gains exemption thresholds haven’t been indexed for inflation since 1997, said certified financial planner Jaime Quinones with Stockade Wealth Management in Marlboro, New Jersey.
“With the recent rise in home values, more sellers have been facing a capital gains tax hit,” Quinones said.

Home sale profits above the $250,000 or $500,000 thresholds incur capital gains taxes of 0%, 15% or 20%, depending on your income.
Capital gains taxes on a home sale are more common in high-cost areas. In 2023, the percentage of home sales that had profits exceeding $500,000 hit double digits in Colorado, Massachusetts, New Jersey, New York and Washington, the CoreLogic report found.

How to qualify for the capital gains exemption

The IRS has strict rules for qualifying for the $250,000 or $500,000 capital gains exemption, according to the IRS. To that point, you must own the home for at least two of the past five years before your home sale to satisfy the “ownership test.”
The “residence test” says the home must be your primary residence for any 24 months of the five years before the sale, with some exceptions. The 24 months don’t need to be consecutive.

How to reduce your capital gains tax bill

If you’ve lived in a home long enough to exceed the capital gains exemptions, there’s a “high probability” you’ve made improvements to the home, said Falls Church, Virginia-based CFP Parker Trasborg, senior financial advisor at CJM Wealth Advisers.
You can use those improvements to increase your home’s “basis,” or original purchase price, which reduces your profit, he said.
But routine maintenance and repairs don’t count. For example, you can increase your home’s basis by adding the cost of a new roof or addition. But fixes to leaky pipes won’t qualify.
After selling a home, the IRS receives Form 1099-S, which shows your closing date and gross proceeds. But you’ll need paperwork to prove any changes to your home’s basis in the case of an IRS audit.

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True to its name, a 30-year fixed-rate mortgage spreads out repayment over 30 years, with an interest rate that remains the same for the life of the loan. 
It’s “a uniquely American construct,” said Greg McBride, chief financial analyst for Bankrate.

monkeybusinessimages | Getty

Most U.S. homebuyers taking out a mortgage opt for a 30-year fixed-rate option — but they may not realize how unusual that offering is.
“The 30-year fixed-rate mortgage is a uniquely American construct,” said Greg McBride, chief financial analyst for Bankrate.

True to its name, a 30-year fixed-rate mortgage spreads out repayment over 30 years, with an interest rate that remains the same for the life of the loan. 
As long as you do not refinance or sell your house, the rate you get at the start of your mortgage won’t change, said Jacob Channel, a senior economist at LendingTree. “You’ll have the exact same rate, regardless of what the broader market is doing,” Channel said.
In 2022, 89% of homebuyers applied for a 30-year mortgage, according to government data analyzed by Homebuyer.com.
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The 30-year fixed-rate mortgage can exist in the U.S. due to the country’s deep financial markets, experts say.

“If we did not have the dominance of the fixed-rate mortgage in the U.S. residential mortgage market, we would see a much higher level of stress among existing homeowners,” McBride said.

The ‘whole reason’ for the 30-year fixed-rate mortgage

The secondary market for mortgage-backed securities in the U.S. is the “whole reason” for the existence of the 30-year fixed-rate mortgage, McBride explained.
About half of all mortgages originated in the U.S. will end up packaged into a mortgage-backed security and sold to bond investors, he said.
While mortgage-backed securities were at the heart of the financial crisis and Great Recession, improvements have been made to avoid the risk. Lenders, for example, strengthened mortgage origination processes and improved underwriting standards and collateral assessment, and there are now other guardrails that did not exist over a decade ago.
Mortgage-backed securities are attractive to investors in the U.S. and across the globe because their government sponsorship makes them safe investments over long periods of time. They also provide a fixed payout, said Daryl Fairweather, chief economist at Redfin, a real estate brokerage site.
The rate on the 30-year fixed-rate mortgage tracks closely to 10-year Treasurys because “U.S. real estate is almost as good an investment as a U.S. Treasury bond,” she said.

However, mortgage-backed securities are “only part of the story,” according to Enrique Martínez García, an economic policy advisor of the Federal Reserve Bank of Dallas.
“There are two institutions in the U.S. mortgage market that are very specific to the U.S.: Fannie Mae and Freddie Mac,” Martínez García said.
The insurance Fannie and Freddie provide is essential to why lenders are willing to take on the risk associated with interest rate movements, Martínez García explained.
“In most other countries, [that risk] gets passed through to the households, the buyers,” he said.
Even in countries where fixed-rate mortgages are prevalent, they usually span shorter periods of time. That’s because such countries lack both the path toward securitization and institutions that take on the long-term risk, Martínez García said.
“That’s what’s missing in many other countries,” he said.

Foreign homebuyers typically get variable rates

While homebuyers in other countries can typically get long-term mortgages or fixed-rate loans, the U.S. is unusual in its combination of those attributes.
In Canada, for example, homeowners might get a mortgage that spans 25 years, but they are expected to refinance every five years or so, Channel said.
In the U.K., homeowners might get fixed-rate mortgages, but such loans only span up to five years.
“Every few years, you’re nonetheless doing something that causes your rate to change,” Channel said. 
The difference between fixed-rate and variable mortgage rates lies in who bears the risk of fluctuating rates, Martínez García said. With fixed-rate loans, financial institutions bear the risk. With variable-rate loans, consumers do.

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Studies show a disconnect between how much adult children expect to inherit and how much their aging parents plan on leaving them.
Longer life expectancies, rising healthcare costs, growing financial insecurity and changing views about inheritance are all partly responsible.

There’s a massive wealth transfer underway.
“It has started and it’s only going to accelerate,” said Liz Koehler, head of advisor engagement for BlackRock’s wealth advisory business.

Baby boomers are set to pass more than $68 trillion on to their children. And yet, some millennials and Generation Z may not be inheriting as much as they think.
Recent reports show a growing disconnect between how much the next generation expects to receive in the “great wealth transfer” and how much their aging parents plan on leaving them.
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To that point, 68%, of millennials and Gen Zers have received or expect to receive an inheritance of nearly $320,000, on average, USA Today Blueprint found. Additionally, 52% of millennials think they’ll get even more — at least $350,000 — according to a separate survey by Alliant Credit Union.
However, 55% of baby boomers who plan to leave behind an inheritance said they will pass on less than $250,000, Alliant found.

Further, just one-third of white families and about one in every 10 Black families receive any inheritance at all, and more than half of those inheritances will amount to less than $50,000, according to a separate study by Federal Reserve Bank of Boston.
Part of the discrepancy is because “parents are just not communicating well with their adult children about financial topics,” said Isabel Barrow, director of financial planning at Edelman Financial Engines.
Tack on inflation, high healthcare costs and longer life expectancies, and boomers suddenly may be feeling less secure about their financial standing — and less generous when it comes to giving money away.
Overall, fewer Americans are feeling financially confident these days, a report by Edelman Financial Engines found, and just 14% would consider themselves wealthy.

Millennials may be ‘richest generation in history’

Still, over the next decade this intergenerational transfer could make millennials “the richest generation in history,” according to the annual Wealth Report by global real estate consultancy Knight Frank.
These funds come at a time when millennials and Gen Zers are having a harder time making it on their own.
In addition to soaring food and housing costs, today’s young adults face other financial challenges their parents did not at that age. Not only are their wages lower than their parents’ earnings when they were in their 20s and 30s, after adjusting for inflation, but they are also carrying larger student loan balances, recent reports show.
With so much at stake, “there is so much missing that needs to be discussed with our adult children when it comes to what happens with our money,” Barrow said.

Boomers need to map out a plan

At the same time, views of inherited wealth are changing, according to BlackRock’s Koehler. Parents want to feel confident that the next generation is going to have the same value system around building wealth.
“Firms and advisors who are doing this well are finding ways to open up the conversation so it is clear and transparent and setting common family values and expectations around philanthropic endeavors,” she said.
The failure to create such a strategy is a major issue, the Edelman report found: 90% of parents intend to leave an inheritance to their children but 48% do not have a specific plan in place.
That makes it even more important to map out how that money will be handed down as well as exactly how much will change hands, Barrow said, in addition to discussing it as a family.
“It’s not only what are you getting but how you are getting it — all of this needs to be part of a big-picture financial plan,” she said.
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Entry-level jobs are typically thought of as positions requiring little to no prior experience or skills. But it’s a longstanding gripe among job seekers on social media that job listings’ requirements are more ambitious.
“When you apply for an entry level marketing job and they ask for: 2+ years of experience, a degree, experiences in graphic design, SEO, copywriting and a viral TikTok account on the side,” one TikTok user offered as an example.

“Companies listing ‘Masters preferred’ for entry level office positions,” posted another.
There’s truth to the meme.
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Almost half (42%) of employees said they felt excluded from job opportunities due to a lack of formal qualifications or experience, according to a 2023 report from TestGorilla. In a 2022 report from McKinsey & Company, the second-most-cited barrier to employment was a lack of experience, relevant skills, credentials or education.
“There has been a shift over the past few years towards skills-based hiring, with employers far more concerned about employees’ experience and skills than even their degrees,” said Julia Pollak, chief economist at ZipRecruiter.

That shows up in hiring trends. Less than 61% of human resources leaders said in 2023 that they are hiring for entry-level and less-specialized positions, down from 79% in 2022, according to a PwC survey.

One of the biggest barriers at play is a gap in skills and training. But for many workers, getting training on the job has been tricky.
Employers are “not developing talent internally,” said Peter Cappelli, a professor of management with the Wharton School at the University of Pennsylvania. “They’re looking outside to hire people rather than to promote them from within.”
To build skills, job seekers could enroll in one of the growing number of “cheap, affordable, convenient and accessible online training programs, many of which have a large practical component,” Pollak suggests. Freelance work, or volunteer or internship experiences can also provide opportunities to gain credentials and experience.
Watch the video above to learn more about why job requirements have become increasingly demanding and how to prepare for the workforce. More

A brighter economic outlook has helped push Social Security’s projected trust fund depletion date to one year later.
Experts still say now is the time for Congress to take action and prevent a looming shortfall.

People leave a Social Security Administration building in Burbank, California. 
Valerie Macon | Afp | Getty Images

The trust funds the Social Security Administration relies on to pay benefits are now projected to run out in 2035, one year later than previously projected, according to the annual trustees’ report released Monday.
On the projected depletion date, 83% of benefits will be payable if Congress does not act sooner to prevent that shortfall.

The Social Security trustees credited the slightly improved outlook to more people contributing to the program amid a strong economy, low unemployment and higher job and wage growth. Last year, the trustees projected the program’s funds would last through 2034, when 80% of benefits would be payable.
“This year’s report is a measure of good news for the millions of Americans who depend on Social Security, including the roughly 50% of seniors for whom Social Security is the difference between poverty and living in dignity — any potential benefit reduction event has been pushed off from 2034 to 2035,” Social Security Commissioner Martin O’Malley said in a statement.

O’Malley, who was sworn in to lead the agency in December, also urged Congress to extend the trust fund’s solvency “as it did in the past on a bipartisan basis.”
“Eliminating the shortfall will bring peace of mind to Social Security’s 70 million-plus beneficiaries, the 180 million workers and their families who contribute to Social Security, and the entire nation,” O’Malley said.

What reports reveal about Social Security, Medicare

Social Security’s new 2035 depletion date applies to its combined trust funds.

The trust funds help pay for benefits when more money is needed beyond what is coming in through payroll taxes. Currently, 6.2% of workers’ pay is taxed for Social Security, while an additional 1.45% is taxed for Medicare. The total 7.65% is typically matched by employers. High earners may have an additional 0.9% withheld for Medicare.
While the combined depletion date for Social Security’s trust funds is typically used to gauge the program’s solvency, the funds cannot actually be combined based on current law.
Social Security’s two trust funds have distinct projected depletion dates.
The fund used to pay retired workers, their spouses and children, and survivors — formally known as the Old-Age and Survivors Insurance Trust Fund — is projected to last until 2033, which is unchanged from last year. At that time, 79% of those scheduled benefits may be payable.
The fund used to pay disability benefits — known as the Disability Insurance Trust Fund — will be able to pay full benefits until at least 2098, the last year of the projection period.

Also on Monday, the government updated its projections for Medicare. For most older Americans, the program is their primary or only source of health care, according to the AARP.
Medicare solvency is typically measured by the ability of the trust fund to make up for a shortfall in payroll taxes used to fund Part A hospital insurance.
The Medicare Hospital Insurance trust fund — used to fund Part A benefits — saw the biggest improvement in this year’s trustees report. Its depletion date is now pushed to 2036 — five years later than was projected last year — due in part to higher payroll tax income and lower-than-projected 2023 expenditures.
At that time, 89% of scheduled benefits may be payable.
Medicare’s Supplemental Medical Insurance Trust Fund — which covers voluntary Part B coverage for physician services and medical supplies and Part D prescription drug coverage — is financed for the indefinite future, since it relies on beneficiary premiums and Treasury Department contributions that are automatically adjusted each year. 

Why experts say now is the time to act

While the new projected depletion dates show lawmakers have slightly more wiggle room, experts say the solvency of both Social Security and Medicare should be addressed sooner rather than later.
The issue is a top concern for AARP members ages 50 and up, said Bill Sweeney, the organization’s senior vice president of government affairs. About 40% of families who are 65 and older rely on Social Security for at least half of their income, and about 20% of families rely on it for all of their income, he said.
For any reductions to be on the horizon for Social Security benefits, or for that to even be talked about, is “really scary for people,” Sweeney said.
“Congress has a responsibility to sit down and work this out in a bipartisan way,” Sweeney said. “And the sooner they do it, the better.”
The new projected depletion dates put Social Security and Medicare on a more similar timeline than previous estimates. That may offer the opportunity for a unified one-step reform for the programs, he suggested.

“In order to make these trust funds whole for the future, some tough choices are going to need to be made,” Sweeney said.
Prospective changes may include tax increases, benefit cuts or a combination of both.
The status of Social Security’s trust funds has worsened compared with what was projected when the last major reforms were enacted in 1983, senior Treasury officials said Monday. Between 1983 and 2000, the top 6% of earners saw faster increases in pay versus the remaining 94%. Social Security does not necessarily benefit from high earners’ wage gains, since high earners stop paying taxes into the program each year after they reach a maximum annual earnings threshold.
Democrats have proposed addressing those inequities with tax increases on the wealthy, while also making benefits more generous.
Republicans have advocated for forming bipartisan commissions to address the programs’ solvency issues.
While updates on the status of Social Security and Medicare are released annually, Congress has yet to act.
“We’re driving straight into this mess despite all the warning bells and alarms that the trustees and others have been ringing for decades now,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in a statement.
“Every year we get closer to the deadline, we seem to get further away from the solutions,” she said. More

Inherited individual retirement accounts can be a financial boost for heirs, but the windfall can trigger tax issues, experts say.
Since 2020, certain heirs, including most adult children, must deplete inherited IRAs within 10 years, known as the “10-year rule.”
You can minimize the tax hit by spreading out withdrawals or taking the money during lower-income years.

Laylabird | E+ | Getty Images

Inherited individual retirement accounts can be a financial boost for heirs, but the windfall can trigger tax issues, experts say.
Withdrawals from pretax inherited IRAs incur regular income taxes. Since 2020, certain heirs can no longer “stretch” retirement account distributions over their lifetime to reduce yearly taxes.

Now, certain heirs, including most adult children, must deplete inherited accounts within 10 years, known as the “10-year rule.” The rule applies to heirs who aren’t a spouse, minor child, disabled or chronically ill. It may also apply to certain trusts.
Ideally, you should smooth out your yearly tax liability “so you don’t get hammered by the end of the 10th year,” said individual retirement account expert and certified public accountant Ed Slott.  
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The IRS in 2022 proposed mandatory yearly withdrawals from inherited IRAs if the original account owner had already started distributions. However, the IRS has waived the penalty for missed required minimum distributions amid confusion — and extended that relief for 2024 in April.
Slott said there’s widespread confusion about the rules, but the relief only condenses the 10-year window for taxable IRA withdrawals.

“They’re just pushing off the inevitable,” said JoAnn May, a Berwyn, Illinois-based certified financial planner at Forest Asset Management. She is also a certified public accountant.
While only about 20% of May’s clients have inherited IRAs, she expects more heirs to face the tax-planning issue as baby boomers age.

Bigger inherited IRA withdrawals can significantly boost adjusted gross income, which can have “unintended consequences,” such as higher Medicare Part B and Part D premiums for retirees, May explained.
Younger heirs could be affected by higher income too. For example, they could face college-funding issues when submitting the Free Application for Federal Student Aid, or FAFSA.
Plus, there are income phaseouts for Roth IRA contributions, as well as for tax breaks like the child tax credit, student loan interest deduction and more.

How to plan for inherited IRA withdrawals

Typically, May runs multiple-year projections to help clients decide the best years to take withdrawals from inherited IRAs.
“Tax planning is very important,” she said.
Advisors may leverage a lower-income year — say, after a job layoff, retirement or other life changes affecting income — to take more income and reduce future withdrawals.   
Typically, they try to take enough income to fill a tax bracket without spilling into the next one with a higher rate.

There are also tax-planning opportunities for the original IRA owner, CFP Karl Schwartz, principal and senior financial advisor at Team Hewins in Boca Raton, Florida, previously told CNBC.
For example, the original owner may consider so-called Roth IRA conversions. The move triggers upfront tax and after the conversion, the balance grows tax-free. Heirs would still face the 10-year rule, but withdrawals wouldn’t incur levies.
“It would probably make sense if they’re in a tax bracket that’s lower than their beneficiaries,” Schwartz said.  

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