By Srbo Radisavljevic, CFP®
Whether you reached your personal goals last year or faced challenges, a new year brings new opportunities and a fresh start.
Let’s jump right in. The Setting Every Community Up for Retirement Enhancement Act of 2019, popularly known as the SECURE Act, was signed into law in late 2019. Now called SECURE Act 1.0, it includes provisions that raised the age requirement for required mandatory distributions (RMDs) from retirement accounts and increased access to retirement accounts.
But it did not take long for Congress to build on the landmark bill that was enacted barely three years ago.
The just-passed 4,155-page, $1.7 trillion spending SECURE Act 2.0 contains plenty of positive changes, including another overhaul of the nation’s retirement laws. The SECURE Act 2.0 enjoyed widespread bipartisan support in Congress and builds on SECURE Act 1.0 by strengthening the financial safety net by encouraging Americans to save for retirement.
Six Key Takeaways on SECURE Act 2.0
- Increase the starting age for RMDs. The Act increased the starting age for taking required minimum distributionsto 73.If you turned 72 in 2022, you will remain on the prior schedule. If you turn 72 in 2023, you may delay your first RMD until 2024, when you turn 73. Or, you may push back your first RMD to 2025, which will require you to take two RMDs that year, one no later than April 1 and the second no later than December 31. Starting in 2033, the age for the RMD will rise again to 75. If you are currently enrolled in a Roth 401(k), starting in 2024, no RMD will be required.
- Increased catch-up provisions. In 2025, 2.0 increases the catch-up provision for those between 60 and 63 from $6,500 in 2022 ($7,500 in 2023 if 50 or older) to $10,000 (the greater of $10,000 or 50% more than the regular catch-up amount). The amount is indexed to inflation. Catch-up dollars are required to be made into a Roth IRA unless your wages are under $145,000.
- Charitable contributions. Starting in 2023, 2.0 allows a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. One must be 70½ or older to take advantage of this provision. The $50,000 limit counts toward the year’s RMD. It also indexes an annual IRA charitable distribution limit of $100,000, known as a qualified charitable distribution, or QCD, beginning in 2023.
- Back-door student loan relief. Starting in 2024, employers are allowed to match student loan payments made by their employees. The employer’s match must be directed into a retirement account, but it is an added incentive to sock away funds for retirement.
- Disaster relief. You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Withdrawals can be repaid to the retirement account.
- Rollover of 529 plans. Starting in 2024 and subject to annual Roth contribution limits, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary and the 529 plan must be at least 15 years old.
In the past, families may have hesitated fully funding 529s amid fear the plan would become overfunded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns.
What we have provided here is a high-level overview of the SECURE Act 2.0. Keep in mind that it is not exhaustive.
We are always here to assist you, answer your questions, and tailor any advice to your needs. Additionally, feel free to reach out to your tax advisor with any tax-related questions.
Insights and a Numerical Overview
The year 2022 was an unpleasant one for most investors. The S&P500 peaked as the year began and the Fed’s response to inflation resulted in the fastest series of rate hikes since 1980, according to data from the St. Louis Federal Reserve.
In other words, the favorable economic fundamentals we enjoyed to in the 2010s—low interest rates, low inflation, and economic growth—shifted dramatically last year. The economy expanded, but interest rates and inflation environment overwhelmed any tailwinds from economic and profit growth.
In recent years, uncertainty in equities has aided bonds, as investors sought safety in fixed income. Last year was a notable exception.
Inflation is the root of the problem. A year ago, the Fed belatedly recognized that 2021’s surging inflation was not “transitory” and began the sharp rate hikes. This caused the yield on the 10-year Treasury bond to rise from 1.63% at the beginning of the year to 3.88% by year-end, which pushed bond prices down.
Per the U.S. Bureau of Labor Statistics, the annual Consumer Price Index was running at 7.0% in December 2021; it peaked at 9.1% in June, and moderated to a still-high 7.1% by November, the last available reading. This recent slowdown in inflation is welcome, but a couple of months of lower readings do not make a trend in the Fed’s eyes.
While the Fed appears set to slow the pace of rate increases in 2023, it has signaled that the eventual peak of interest rates is still ahead of us, as it attempts to bring the demand for goods, services, and labor into alignment with supply.
Despite chatter in some corners that we are already in a recession, a 3.7% jobless rate coupled with robust job growth is signaling that the economy is expanding.
The Conference Board’s Leading Economic Index is far from a household name, but it is a closely watched index designed to foreshadow a recession. It is not a good timing tool, nor should it be used to forecast the depth of a recession. But it has never failed to peak in front of a recession (data back to 1960). Through November, the index has fallen for nine-straight months, according to the Conference Board.
In addition, per the WSJ, more than two-thirds of the economists at 23 large financial institutions expect the U.S. will slide into recession this year.
That said, a recession is not a foregone conclusion. A resilient labor market and consumers, with borrowing power and some pandemic cash still in the bank, could support economic growth this year.
Ultimately, we counsel that you must control what you can. We cannot control the stock market or the economy, neither domestic nor global. But we can control our financial plan.
A financial place is not set in concrete; it is a roadmap rather than a blueprint. We encourage adjustments as life unfolds. And while we caution against making frequent changes based on day-to-day market changes, we do ask if your tolerance for risk has changed considering the recent volatility. If so, let’s talk.
I hope you have found this review to be educational and helpful. Once again, let me remind you that before making decisions that may impact your taxes, it is best to consult with your tax advisor.
If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.
It is our pleasure to service your accounts and we greatly appreciate your business.
