Month: January 2023

In late December 2022, SECURE 2.0 Act was signed into law. You’ve likely heard about the sweeping changes that impact everyone from those nearing retirement to those just starting out. Below, we help break down a few key provisions—of the more than 90—that are designed to help strengthen the retirement system and better prepare Americans for retirement. 

For Those Nearing Retirement

  • Sweeping changes to Required Minimum Distributions (RMDs)
    • The required age to begin taking RMDs increases to age 73 from age 72. In 2033, the required age will increase to 75.
      • Note: If you turned 72 in 2022 or before, you will continue taking RMDs as scheduled. If you turn 72 in 2023 and have already scheduled your withdrawal, it may be time to update your plan.  
    • The penalty for not taking an RMD is reduced to 25% of the amount required to be withdrawn. The amount will be reduced to 10% if corrected within two years. 
      • Currently, the penalty for not taking an RMD is 50% of the amount required to be withdrawn. 
    • Roth accounts in employer retirement plans are exempt from RMD requirements starting in 2024.
  • Higher catch-up contributions (post-tax or “Roth” basis)
    • Starting this year, participants ages 50 and up can contribute an extra $7,500 per year into their 401(k) account. In 2025, this amount will increase to $10,000 per year for participants ages 60-63 to account for inflation. 
      • Note: Individuals ages 50 and older who earn more than $145,000 annually, will have catch-up contributions made on a Roth basis.
  • Roth matching 
    • Employers can offer employees the option to receive vested matching contributions to a Roth account
      • Prior, matching contributions in employer-sponsored plans were made on a pre-tax basis. Contributions to a Roth account are made after-tax, meaning earnings may grow tax-free.
      • IMPORTANT NOTE: RMDs from an employer-sponsored plan are required for Roth accounts until the 2024 tax year (unlike Roth IRAs).
  • Qualified Charitable Distributions (QCDs)
    • Starting this year, anyone age 70½ and older may elect a one-time gift up to $50,000 (adjusted annually for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. 
      • Note: Gifts must come directly from your IRA by the end of the calendar year to be eligible.

 

For Those Just Starting Out

  • Automatic employee enrollment and automatic escalation
    • In 2025, businesses will be required to automatically enroll eligible employees in new 401(k) and 403(b) plans starting at a 3% contribution rate (minimum). 
    • Again beginning in 2025 for new retirement plans started after December 29, 2022, contributions will automatically increase by one percent on the first day of each plan year following a completed year of service, until the escalation reaches 10%, or no more than 15% of eligible wages. 
      • Exceptions for businesses with 10 or fewer employees and employers that have been in business for less than three years will apply. 
  • Emergency expense withdrawals from retirement account
    • Previously, a 10% tax applied to early distributions (or withdrawals) from tax-preferred retirement accounts (like your 401(k)) plan. In 2024, certain distributions will be exempt for emergency expenses. Further guidance about types of qualifying expenses is expected for this provision.
      • We often say that life happens here at SBC. This provision will be one option to cover expenses during an unforeseen personal or family events.  
      • Only one distribution of $1,000 per year is permitted, and the taxpayer has the option to repay the withdrawal within three years. No other distributions can be taken during the three-year repayment period until all amounts previously taken have been repaid. 
  • Student loan debt
    • Beginning in 2024, employers can “match” employee student payments to a retirement account
      • The desire is to give workers more incentive to save while paying off their education debt. 
  • 529 Plan
    • A 529 Plan, or education savings plan, can be rolled over to a Roth IRA after 15 years for the beneficiary. 
      • Note this is subject to annual Roth contribution limits and a lifetime limit of $35,000.

These are just a few of the many provisions that went into effect with the SECURE 2.0 Act. With legislation the size and scope of SECURE 2.0 Act, we expect additional guidance on certain provisions where the legislative text may be subject to further interpretation.

We understand that following the ever-changing legislative landscape can be hard to follow and even harder to understand. If you have any questions or want more details about how you may specifically be impacted by these changes, please reach out to your financial advisor today at sbcwealth.com/contact.

We’re here for you. 

I believe it goes without saying that putting 2022 in the rear-view mirror could not have come quick enough. Difficulty in financial markets, the economy as well as geopolitical tensions have weighed heavy on the minds of many over the last 12 months. 

The S&P 500 Index was down over 18% and bonds, which typically do well when equities decline, were also down over 12% for the year due mostly to the Federal Reserve hiking interest rates to combat inflation. There were few places to hide from declining asset prices and rising consumer costs in 2022. 

Fortunately, inflation as measured by the headline Consumer Price Index (CPI), which peaked at close to 9% year-over-year in June of 2022, has been in a downtrend and finished the year at 6.4%. 

Further, these year-over-year CPI figures are somewhat misleading as they still contain the readings for the high inflation months of early last year. This is what is referred to as “base effects” and, as the high inflation months fall off the year-over-year readings, you should expect to see the headline CPI data begin to moderate downward toward the Federal Reserve’s target of around 2%. It should be noted though, that we may not reach the Fed’s desired target until 2024 or later. 

Looking forward to 2023, I am somewhat optimistic that stocks and bonds are in a position to recoup some of the losses from 2022. I say this in spite of the fact that I believe we will likely have a recession here in the US in 2023.  

First, with the yield on the Bloomberg Barclays US Aggregate Bond Index (the Agg) currently over 4.6% and the Federal Reserve presumably closer to the end of hiking rates, we should be able to generate some decent income on bonds moving forward. As a reference, the yield on the Agg index at the start of last year was 1.75%. Additionally, investors typically move to the relative safety of bonds relative to stocks when the economy softens. 

As far as stocks in 2023, we’re off to a decent start, up over 6% year-to-date as of January 30th. While this is welcome news for investors, I believe we will experience some choppiness in the markets for the near-term. 

As mentioned previously, inflation appears headed in the right direction and the Fed is closer to the end of rate hikes after raising interest rates a total of 7 times in 2022, but if these don’t continue in the right direction we could see some more volatility and drawdowns in the stock market. 

The Fed is also in a precarious position in that they are trying to tame inflation by slowing the economy, but they also run the risk of tightening economic conditions too much and causing a painful recession. As of now, the general market consensus is for a short and shallow recession sometime in 2023, but there is still a risk that if conditions deteriorate faster than the Fed anticipates, we could see something more severe than that consensus scenario. 

The good news for stocks though is that they typically bottom and begin to rise before the end of a recession. As forward-looking mechanisms, markets fall in advance of deteriorating economic conditions and begin to rebound once the extent of the economic damage is done. This is also the reason why, historically, the best time(s) to invest have been when the economy feels the worst in real time. 

With that said, we don’t attempt to time these inflection points in markets when investing on behalf of our clients. Attempting to do so has proven to be statistically a near impossibility with the risk of hurting investment returns by doing so. 

Instead, we stick to our time-tested approach of thoughtfully allocating and diversifying into asset classes and investments with a history of appreciation and a focus on the long-term.  We believe this consistent approach gives our advisors the ability to confidently guide our clients to and through retirement. 

Here’s to hoping 2023 is a prosperous one!