In light of October being national financial planning awareness month, we thought it would be appropriate to review the potential changes to SECURE act.
In late 2019, the president signed the SECURE (Setting Every Community Up for Retirement Enhancement) Act into law.
Required minimum distributions (RMDs) for employer-sponsored plans and IRA accounts were raised from 70 ½ years to 72 years old. It was a welcome change. The act also included smaller changes that aided workers in saving for retirement.
But the SECURE Act also changed the rules which govern inherited IRAs, or so-called stretch IRAs. The change in this provision was more controversial because it required faster distributions, at least in most cases.
Although the changes are recent, Congress is already considering what many are calling SECURE Act 2.0. As the bill winds its way through Congress, there is no guarantee of passage. But it enjoys widespread bipartisan support, and both the Senate and the House have drafted similar bills.
The devil is always in the details, but we are monitoring progress and believe now is a good time to provide a high-level overview.
Please feel free to check in with your tax advisor on tax-related matters
- Easing the RMD bite, again. As already mentioned, an RMD from a traditional IRA isn’t required until age 72. SECURE Act 2.0 would raise the RMD to age 73 beginning in 2022, age 74 in 2029, and age 75 in 2032.
- Taking your first distribution from a tax-deferred retirement account will depend on many factors, but if the funds are not needed, it is usually a good idea to defer withdrawals until required.By delaying a withdrawal, the investments maintain their tax-exempt status. Or, if you need cash before RMDs are required, you decide how much to withdraw. You are not bound by an arbitrary rule.
- A more favorable catch-up provision. If Secure Act 2.0 is passed into law, employees 50 and older can make extra catch-up contributions to a 401(k) or similar plan. The limit for 2021 is $6,500, which is indexed to inflation.
As proposed, Secure 2.0 maintains the catch-up limits for those aged 50 but increases the annual catch-up provision to $10,000 for participants ages 62 through 64. The new limit begins in 2023. This new maximum is indexed to inflation.However, all catch-up contributions must be placed in a Roth IRA, which would disallow a tax deduction. Starting in 2022, all catch-up contributions must be made into a Roth IRA.Presumably, it’s a way for the government to capture revenue. Nonetheless, ROTH IRAs are not subject to RMDs, and withdrawals are exempt from federal income taxes.
- Student loan matching. SECURE Act 2.0 would permit employers to make matching contributions to their 401(k) plans tied to the employee’s student loan payments. The goal: encourage younger employees to save for retirement.It would also help employers pass nondiscrimination tests that prevent plans from favoring higher-income employers.While we recognize this provision will probably complicate the administration of a 401(k) plan, we applaud the proposal simply because we know that the sooner one begins saving for retirement, the sooner one may enjoy the power of compounded returns. As we always counsel, it’s never too early to start saving.
The proposed changes discussed are the more important components of the proposed act, in our view. But we also wanted to briefly mention some of the additional provisions
SECURE Act 2.0 would also:
- Allow Roth contributions to SEP and SIMPLE plans
- Accelerate part-time workers’ participation in 401(k) plans
- Extend to 403(b) retirement plans some of the features of 401(k) plans
- Require the Treasury secretary to increase awareness of the Retirement Savings Contributions Credit (also known as the saver’s credit), which is available to low and moderate-income workers
- Eliminate some impediments to offering lifetime income annuities as a retirement plan investment option
It would also place limits on employers who attempt to capture excess plan payments from a participant.
SECURE Act 2.0 may pass as proposed, changes could be made, or the bill could run into unforeseen obstacles that prevent it from being enacted into law
As we have already said, the review is a high-level peek at what is being proposed. Any advice we may provide will be tailored to your individual circumstances
We suspect changes to the proposed law will probably be made, but odds favor passage. We are happy to entertain any questions.
Market Update – What is it about September?
September has historically been the worst month for stocks, according to St. Louis Federal Reserve data measuring monthly S&P 500 performance over the last 50 years. If you are wondering whether the trend has abated in recent years, the answer is no, it hasn’t. Over the last 10 years, September performance has been substandard.
While analysts have offered various explanations, no one has pinpointed the reason we sometimes see seasonal weakness as summer concludes.
Look no further than the table of Key Index Returns. The S&P 500 Index fell 4.8% in September. It was the first monthly decline since January and the worst decline since March 2020 when the lockdowns began.
Key Index Returns
Peaking at a new record on September 2, the broad-based S&P 500 Index began a pullback that can be tied to a number of factors.
Before we continue, a 4.8% drop is modest by market standards. In fact, we’ve yet to shed 10% since the bull market began in late March 2020, which would be considered a “correction” by analysts.
So, what’s behind the sell-off last month?
The economy is not contracting, and a moderation was expected after Q2’s 6.7% annualized growth rate (U.S. BEA), but the slowdown has been more pronounced than expected.
The Atlanta Fed’s GDPNow model, which incorporates economic data that impacts GDP, suggests that Q3 growth is tracking at just 2.3%. This would include Q3 data released through October 1. That means all of July, most of August and none of September’s data have been inputted into the model.
While profit growth has soared coming out of the lockdowns, per Refinitiv, a more pronounced moderation in profit growth may be on tap.
Next question, why is Q3 disappointing on the economic front? Well, the spike in Covid cases is causing some hesitation in industries that are dependent on face-to-face transactions. But there is good news on this front. The CDC says cases have slowed recently. We’ll see how this continues to play out later in the fall. While bank deposit data from the St. Louis Federal Reserve suggest consumers have plenty of spendable cash in reserve, the influx of new stimulus money has dwindled, and spending has slowed. We’re also seeing stubbornly high inflation in some industries, as supply chain bottlenecks aren’t fixing themselves.
Consider the title of this Wall Street Journal story from late August:
Why Is the Supply Chain Still So Snarled? We Explain, With a Hot Tub.
Utah manufacturer Bullfrog Spas depends on a complicated network to bring materials from across continents and oceans. The pandemic put it out of whack.
That sums up the problem for many manufacturers.
As Fed Chief Jerome Powell noted at the end of September, bottlenecks and shortages of key raw materials are “not getting better—in fact at the margins (they are) apparently getting a little bit worse.”
Like severe labor shortages, supply chain problems are crimping profitability, limiting sales, raising prices and hampering economic growth. Investors are taking note.
An uptick in bond yields near the end of September also dampened sentiment. While yields remain quite low, they ticked higher after the Federal Reserve took on a slightly more hawkish tone at the September 22 meeting.
These are probably the biggest reasons for the pullback last month.
Not to be a downer, but let’s look at a few more.
The debate over the debt ceiling is in full swing. The U.S. Treasury has said it will run up against the current debt ceiling on October 18. There was a temporary short-term extension through December 3rd which eased market sentiment for a moment. That means it can no longer borrow to fund operations, and the U.S. would default on its debt unless Congress extends the ceiling. Needless to say, this will be a December to remember.
As Moody’s Analytics recently noted, “The debt ceiling will be raised. Not doing so would be catastrophic for the economy, so this is an extremely low probability event.”
We’ve seen this drama play out before, and lawmakers avoided sailing into uncharted waters. Still, it’s causing some headline anxiety.
China’s largest and most indebted property developer is on the brink of bankruptcy. While Western financial exposure is likely limited, a disorderly default could create big problems for the world’s second-largest economy.
Finally, an energy crisis is brewing in Europe, while natural gas prices hit new highs in Asia. They are running about six times what we see at home (Reuters).
The U.S. isn’t directly affected, but these are costs that may get added to manufactured goods or could restrict output, adding to supply chain woes.
We’re overdue for at least a 10% correction. We know they tend to be unpleasant, but they are
part of the investment landscape.
With all but the most aggressive and risk tolerant investors, we recommend a healthy portion of
fixed income and other low market-correlated investments. Adding a mix of bonds, real estate,
and alternative investments into the portfolio tends to smooth out returns. We don’t see the
extreme highs when stocks are rising but mixing in other investments can reduce your risk on
the downside when equities turn lower.
As we’ve said in the past, stocks tend to take the stairs up and the elevator down. If we are
headed toward an overdue correction, pullbacks tend to be short lived.
I trust you’ve found this review to be educational and informative.
Let us emphasize that it is our job to assist you. If you have any questions or would like to
discuss any matters, please feel free to give our team a call.
As always, we’re honored and humbled that you have given us the opportunity to serve as your