Some time ago, we wrote a series of posts called “Questions You Were Afraid to Ask.”  Each one answered a common question many investors have but feel uncomfortable asking. 

When we were young, we were taught that “The only bad question is the one left unasked.”  As financial advisors, we’ve found that statement to be true!  Every day, our clients ask us questions about the markets, taxes, their personal finances, you name it.  Over the course of our careers, we have never thought, “That’s a stupid question.”  Not once. That’s because stupid questions simply don’t exist! 

Lately, several friends and acquaintances who were also receiving our articles asked us to start the series up again.  Since we love helping people in our communities learn more about how finance works, we’re happy to do it.  So, without further ado, let’s answer:

Questions You Were Afraid to Ask #7:
What’s the difference between all these types of bonds?

When you buy a bond, you are lending money to the issuer – generally a company or government.  In return, the issuer promises to pay you a specified rate of interest on a regular basis, and then repay the principal when the bond matures after a set period of time. 

As you know, the markets had a very up-and-down year in 2022.  Whenever that happens, many investors start showing renewed interest in bonds, because they tend to be less volatile than stocks.  This interest may continue in 2023. But there are several types of bonds to choose from, each with different characteristics.  All those options can be confusing, so we figured now would be a good time to give people a brief overview of the main types that investors have to choose from.  Let’s start with:

Corporate Bonds

Corporate bonds are issued by both public and private corporations. Companies use the proceeds of these bonds to buy new equipment, invest in new research, and expand into new markets, among other reasons. These bonds are usually evaluated by credit rating agencies based on the risk of the company defaulting on its debt. 

Corporate bonds can be broken down into two sub-categories: Investment-grade and High-Yield.  Investment-grade bonds come with a higher credit rating, implying less risk for the lender.  They’re also considered more likely to make interest payments on time than non-investment grade bonds. 

High-yield bonds have a lower credit rating, implying higher risk for the investor.  These are typically issued by companies that already have more debt to repay than the average business or are contending with financial issues.  Newer companies may also issue high-yield bonds, because they simply don’t have the track record yet to garner a high credit rating. 

In return for this added risk, high-yield bonds typically pay higher interest rates than investment-grade bonds.  In short, investment-grade implies lower risk for a lower return; high-yield implies higher risk for a higher return. 

Muni-Bonds

Municipal bonds, or “munis”, are issued by states, cities, counties, and other government entities so that entity can raise funds.  Sometimes these funds are to pay for daily operations like maintaining roads, sewers, and other public services.  Sometimes the funds are to finance a new project, like the building of a new school or highway. 

Muni-bonds can also be broken down into two sub-categories: Revenue bonds and general-obligation bonds.  The former are backed by the revenues from a specific project, such as highway tolls.  The latter are not secured by any asset but are instead backed by the “full faith and credit” of the issuer, which has the power to tax residents in order to pay bondholders, should that ever be necessary. 

In other respects, muni-bonds work similarly to corporate bonds in that the holder receives regular interest payments and the return of their original investment.  But they do come with one additional advantage, in that the interest on muni-bonds is exempt from federal income tax.  (It may also be exempt from state and/or local taxes if the holder resides in the community where the bond is issued.)  However, muni-bonds often pay lower interest rates than corporate bonds do. 

U.S. Treasuries

Treasury bonds are the type of bonds you usually hear about in the news.  As the name suggests, these are issued by the U.S. Department of Treasury on behalf of the federal government.  They carry the full faith and credit of the government, which has historically made them a very stable and popular investment.  In fact, U.S. treasuries tend to be so stable that economists often use them as a bellwether for the overall health of the entire economy. 

There are several types of U.S. Treasury bonds.  Treasury Bills are short-term bonds that mature in a few days to 52 weeks.  Treasury Notes are longer-term securities that mature in terms of 2, 3, 5, 7, or 10 years.  Finally, actual U.S. Treasury Bonds typically mature every 20 or 30 years.  Both Notes and Bonds pay interest every six months. 

Finally, we have Treasury-Inflation-Protected Securities, or TIPS.  These are notes and bonds whose principal is adjusted based on changes in the Consumer Price Index, which tracks inflation. Interest payments are made every six months and are calculated based on the inflation-adjusted principal. That means if inflation goes up, so too does the principal in the bond…thereby increasing the amount of interest that is paid. However, if inflation goes down, the principal does too, thereby decreasing the interest rate.

Bonds are an important subject that all investors should know about, so we hope this overview was helpful!  In our next post, we’ll break down some of the terms you will often see associated with bonds that many investors find confusing.  In the meantime, happy spring! 

Volatility in the banking industry almost always means volatility in the markets, and there was a lot of both last week.

As you know, Silicon Valley Bank (SVB) was seized by federal regulators on Friday, March 10. It was not the first bank to collapse this month, nor was it the last. Two days earlier, Silvergate Bank, another California institution, announced it would liquidate its assets and wind down operations. And two days after the SVB collapse, regulators closed a third bank. This was Signature Bank, based out of New York.

What do these banks have in common, besides sharing a similar fate? Well, all three were hit by bank runs in the days prior to their collapse. All three had made ill-timed investments in recent years. For Silvergate and SVB, this was in the form of overexposure to government bonds, which dropped in value as interest rates skyrocketed. For Signature – and Silvergate, too – the trouble really started when the price of bitcoin and other cryptocurrencies plummeted in 2022.

Over the weekend, investors, not to mention the many companies with their deposits on hold, waited with bated breath to see what the government’s response would be. After all, everyone still remembers what happened in 2008. Back then, panic spread across the entire banking industry – and from there to the overall economy. Unfortunately, some of that panic came because the government stepped in and then didn’t, which left investors with uncertainty.

“Contagion” is a very real thing when it comes to banking, and no one wants a repeat of the financial crisis. In recent days, other banks that have not collapsed, have strong balance sheets, and are not necessarily in danger, still saw their stock prices fall dramatically. This partly came due to how connected individual stocks are with index fund trading and partly because investors run if they catch even a whiff of financial instability.

As it turns out, Washington moved swiftly and decisively to stamp out uncertainty. On March 12, the Federal Reserve created the Bank Term Funding Program. This program will provide emergency loans for up to one year to safeguard 100% of deposits to any bank or credit union that needs it.1 (Normally, only the first $250,000 of an account’s deposits were insured against loss. Most of the organizations doing business with these three banks stood to lose much, much more than that.) In return, these banks must put up any Treasuries or highly rated debt they own as collateral and pay a modest interest rate.

The idea here is to stabilize all the regional banks around the country by assuring customers their money is safe. Furthermore, the program is designed to make it easier for banks to get needed liquidity instead of selling their assets off in a fire-sale.

A couple things to note about this program:

First, this is not a “bank bailout” in the traditional sense. The banks themselves are not being saved or spun off to other, larger banks. Furthermore, both bond- and stockholders of these banks will still likely experience a loss in the short term. This program is designed solely to protect depositors. (Of course, the exact definition of a “bailout,” and whether one is justified or not, is a topic best left to politicians.)

Second, to pay for all this, the government will draw from the Deposit Insurance Fund. This fund comes from quarterly fees levied on financial institutions. Public taxes will not be used.2

So, what does all this mean for the future? What does it mean for us?

There are several things we as investors need to be aware of:

1. More volatility. The government’s actions temporarily stabilized the markets early in the week. But the major indices dropped again on Wednesday when an important European bank was found to be in financial difficulty, albeit for different reasons and has been in decline long before these failings. In the short term, investors will be hypersensitive to any banking instability. That means volatility is still very much in the cards.
2. Politicization. Right now, politicians and pundits on both sides of the aisle are trying to turn this issue into the latest political football. As investors, we must avoid getting caught up in all that and remain focused on keeping to our investment strategy.
3. Interest rates. There’s a lot of chatter on Wall Street right now that this issue will cause the Federal Reserve to delay more interest rate hikes. If that happens, it’s quite possible the markets will go up. But we do not make guesses about which way the markets will go or what the Fed will do. In fact, you can make an argument that doing so is partly why SVB got into so much trouble.

So, that’s where things stand right now. Obviously, there’s a lot our team will be monitoring in the coming weeks. In the meantime, our advice to you is to enjoy the start of Spring! Whenever anything changes, we’ll let you know immediately. And as always, do let us know if you have any questions or concerns.

If you haven’t already contributed to an IRA (Individual Retirement Account), there’s still time to do so. Many people don’t know that the 2022 contribution deadline is April 18, 2023.¹ However, if you do decide to contribute, you must designate the year you are contributing for. (In this case, 2022.) Your tax preparer should be able to help you fill out the necessary forms, but please feel free to contact us if you have any questions or need help.

For 2022, the maximum amount you can contribute is $6,000. Or, $7,000 for those over the age of 50.² This applies to both traditional and Roth IRAs. If you’re unsure whether to contribute, remember:

• Contributions to traditional IRAs are often tax-deductible. And while distributions from IRAs are taxed as income, your tax rate after retirement could possibly be lower than it is now, lessening the impact.
• Contributions to a Roth IRA, on the other hand, are made with after-tax assets. However, the advantage of a Roth IRA is that withdrawals are usually tax-free.
• Whichever type you use, IRAs provide a great, tax-advantaged way to save for retirement.

If you have yet to set up an IRA for 2022, you can still do that. The deadline to establish an IRA is also April 18th. In other words, if you want to take advantage of the benefits an IRA has to offer, there’s still time to do so, either by contributing to an existing account or by establishing a new one.

If you have any questions about IRAs – whether one is right for you, how it should be managed, or anything else – please give our team a call. We’d be happy to help you.

1 “IRA Year-End Reminders,” Internal Revenue Service, https://www.irs.gov/retirement-plans/ira-year-end-reminders

2 “IRA Contribution Limits,” Internal Revenue Service, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

Simple question: How’s the economy doing?

Answer: It’s complicated.

After the Federal Reserve hiked interest rates again (but less than last time) and all the market volatility, it’s a good time to talk about the economy.¹

Inflation has been falling since summer

Inflation fell for the sixth straight month in December, bolstering evidence that it may have peaked last June at 9.1%.²

However, inflation is still very high, and its impact is being felt across the economy.

The jobs market is still very strong

The latest January jobs report was a blowout, coming in ahead of the data that Fed economists expected. The economy added over 500,000 new jobs and the unemployment rate fell to the lowest level since 1969.³

You can see in the chart above that most industries are still actively hiring, suggesting that Fed actions still haven’t slowed the desire for workers.⁴

The economy shrugged off recession worries in Q4

Despite all the recession doom and gloom, the economy grew 2.9% in the last three months of 2022.⁵

However, consumer spending weakened slightly, indicating that Americans might be trimming expenses. Since consumer spending accounts for 70% of economic growth in the U.S., it’s a potential warning sign we’re keeping tabs on.

I see a few takeaways about the current state of the economy

But, before we dive into them, we want to point out two important caveats about economic data:

1. Much of the initial data we see in the headlines is based on incomplete estimates that get revised later as more data is processed. These big data bureaus try to balance releasing data quickly enough to be useful and getting the complete picture.
2. Data is often impacted by seasonal trends that can cause spikes or “noise” in the data. That’s why we look for trends rather than single data points.

Here’s what we see:

Despite tech layoffs and gloomy headlines, many sectors seem to still be going strong, job-wise.

Interest rate hikes aren’t slowing down growth as much as the Fed hoped, though inflation is definitely showing a downward trend.

While recession fears are definitely real and based on solid concerns, it doesn’t look like the economy has hit the skids yet.

What does all this mean for future Fed interest rate moves?

That’s the trillion-dollar question, isn’t it?

We don’t have a crystal ball, but we’ll give it a shot.

It’s possible that more interest rate hikes are coming.

We think folks expecting a quick pivot away from increases are going to be disappointed.

But any future rate hikes may be smaller and slower paced as the Fed takes stock of what the data is showing and works to keep us out of a recession.

Federal Reserve chair Jerome Powell has admitted that inflation has begun to fall but he wants to see “substantially more evidence” of a declining trend before changing policy.¹

With inflation still three times above the Fed’s 2% target, there’s still a long way to go before we’re out of the woods and back on the path.²

What could happen with markets?

We expect a lot of volatility ahead as markets digest every shred of information about the economy and the direction of interest rate policy.

We don’t have a crystal ball here, either, but we think it’ll be a rocky spring. So, we’re watching markets, we’re reading analyses and reports, and we’re looking for opportunities.

Do you have any questions? Would you like to talk anything over? Contact us and we’ll find a time to talk.

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Sources

1. https://www.cnbc.com/2023/02/01/fed-rate-decision-february-2023-quarter-point-hike.html
2. https://tradingeconomics.com/united-states/inflation-cpi
3. https://www.reuters.com/markets/rates-bonds/feds-kashkari-says-hes-sticking-54-rate-hike-view-after-surprising-jobs-report-2023-02-07/
4. https://www.bls.gov/charts/employment-situation/employment-by-industry-monthly-changes.htm
5. https://www.cnbc.com/2023/01/26/gdp-q4-2022-us-gdp-rose-2point9percent-in-the-fourth-quarter-more-than-expected-even-as-recession-fears-loom.html

Happy Presidents’ Day! 

As you know, this holiday was originally set aside to honor George Washington’s birthday. But as Abraham Lincoln’s birthday is also around this time of year, many states began celebrating the two dates together. More recently, the day has become dedicated to all presidents.

Recently, we came across a speech about Abraham Lincoln given by a man named Phillips Brooks. But this was no ordinary address. It was, in fact, a eulogy for our sixteenth president.

Lincoln was assassinated on April 14, 1865. Most people don’t realize this was Good Friday – an important holiday for many people. It was also the start of the Easter weekend, a time when churches around the country would fill to capacity. But on that weekend, religious leaders were suddenly faced with a dilemma: How to comfort thousands of grieving, bewildered people. People mourning the sudden, unthinkable death of their president.

Phillips Brooks was one of these leaders. As the rector of one of the largest churches in Philadelphia, he wrote down his thoughts about Lincoln for a eulogy that he delivered the following weekend. The same weekend when Lincoln’s body passed through Philadelphia on its way back to Illinois.

In honor of the holiday, we thought we would share a few excerpts with you. While Presidents’ Day is not as celebrated as, say, July 4 or Memorial Day, we think Brooks’ words perfectly illustrate why it still matters. They also illustrate why we were so lucky to have a man like Abraham Lincoln as president of the United States.

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The Life and Death of Abraham Lincoln
by the Reverend Phillips Brooks¹

While I speak to you today, the body of the President who ruled this people is lying honored and loved in our City.  It is impossible for me to stand and speak of the ordinary topics which occupy the pulpit.  I must speak of him today; and I therefore…invite you to study with me the character of Abraham Lincoln, the impulses of his life, and the causes of his death.  I know how hard it is to do it rightly, how impossible it is to do it worthily.  But I shall speak with confidence because I speak to those who love him.

We take it for granted, first of all, that there is an essential connection between Mr. Lincoln’s character and his death.  It is no accident, no arbitrary decree of Providence.  He lived as he did, and he died as he did, because he was what he was. 

In him was vindicated the greatness of real goodness and the goodness of real greatness.  The twain were one flesh.  Not one of all the multitudes who stood and looked up to him for direction with such a loving and implicit trust can tell you today whether the wise judgements that he gave came most from a strong head or a sound heart.  If you ask them they are puzzled.  There are men as good as he, but they do bad things. There are men as intelligent as he, but they do foolish things.  In him goodness and intelligence combined and made their best result of wisdom. 

Mr. Lincoln’s character [was] the true result of our free life and institutions.  Nowhere else could have come forth that genuine love of people, which in him no one could suspect of being either the cheap flattery of the demagogue or the abstract philanthropy of the philosopher, which made our President, while he lived, the center of a great land, and when he died so cruelly, made every humblest household thrill with a sense of personal bereavement which the death of rulers is not apt to bring.  Nowhere else than out of the life of freedom could have come that personal unselfishness and generosity which made so gracious a part of this good man’s character. 

How many soldiers feel yet the pressure of a strong hand that clasped theirs once as they lay sick and weak in the dreary hospital.  How many ears will never lose the thrill of some kind word he spoke – he who could speak so kindly to promise a kindness that always matched his word.  How often he surprised the land with a clemency which made even those who questioned his policy love him the more; seeing how the man in whom most embodied the discipline of Freedom not only could not be a slave, but could not be a tyrant.  In all, it was a character such as only Freedom knows how to make. 

[Now], the new American nature must supplant the old.  We must grow like our President in his truth, his independence, his wide humanity.  Then the character by which he died shall be in us, and by it we shall live.  Then Peace shall come that knows no War, and Law that knows no Treason, and full of his spirit, a grateful land shall gather round his grave and give thanks for his Life and Death. 

He stood once on the battlefield of our own State, and said of the brave men who had saved it words as noble as any countryman of ours ever spoke.  Let us stand in the country he has saved, and which is to be his grave and monument, and say of Abraham Lincoln what he said of the soldiers who had died at Gettysburg: ‘That we here highly resolve that these dead shall not have died in vain; that this nation, under God, shall have a new birth of freedom, and that Government of the people, by the people, and for the people, shall not perish from the earth.’ 

May God make us worthy of the memory of Abraham Lincoln. 

We hope you enjoyed reading these words as much as we did. We wish you a very happy Presidents’ Day! 

¹ “The Life and Death of Abraham Lincoln,” by the Rev. Phillips Brooks, April 23, 1865.  http://name.umdl.umich.edu/ACK8574.0001.001

Tax season is upon us and a new year means new tax changes.  While Congress didn’t pass any major tax reform last year, there are still updated tax provisions that could affect how much money you keep and how much goes to Uncle Sam.  That’s because Congress did pass the Inflation Reduction Act and SECURE 2.0 Act.  Both bills contain tax implications, even if that wasn’t their primary focus.  

In this post, we’ve included some of the most significant changes for investors and retirees. Our suggestion: Look over the material below and highlight anything you have questions about.  Then, feel free to share this post with your tax professional!  He or she should be able to answer any questions you have.  

As always, if there’s anything our team can do to be of assistance, please let us know.  Have a great day!          

Tax-Related Updates for 2023

CHANGES TO THE FILING DEADLINE

One thing to note before we get into the nitty-gritty: This year’s filing date is April 18 instead of the usual April 15.¹ Technically, this isn’t an actual change, as we saw the same date in 2022. But since April 15 is on a Saturday – and because April 17 is a holiday in Washington, D.C. – taxpayers will again get a few extra days to file. (Remember, though, that filing as early as you can is almost always better than filing last minute. That’s because it eliminates the stress of procrastination. Plus, you may get any tax refund back sooner!). Keep in mind it takes time to gather in all the tax information from your various holdings. We will have your tax documents to you as soon as possible. If you have any questions about that, please let us know.

CHANGES TO FEDERAL TAX BRACKETS²

As it often does, the IRS has adjusted the 2022 tax brackets based on inflation. These adjustments are even greater than usual this year thanks to the historic inflation we’ve seen lately. That’s good news for those whose wages have gone up to keep pace with the rise in prices, because it means you can earn more before getting bumped to a higher bracket. And some people may even find themselves dropping down a level, even if their pay stayed the same.

The new brackets are as follows:

Tax Rate	Single	Single Married, filing jointly	Head of Household
10%	0 to $10,275	0 to $20,550	0 to $14,650
12%	$10,276 to $41,775	$20,551 to $83,550	$14,651 to $55,900
22%	$41,776 to $89,075	$83,551 to $178,150	$55,901 to $89,050
24%	$89,076 to $170,050	$178,151 to $340,100	$89,051 to $170,050
32%	$170,051 to $215,950	$340,100 to $431,900	$170,051 to $215,950
35%	$215,951 to $539,900	$431,900 to $647,850	$215,951 to $539,900
37%	$539,901 and up	$647,850 and up	$539,901 and up

CHANGES TO CAPITAL GAINS³

The income threshold for long-term capital gains rates has also gone up due to inflation.

Tax Rate	Single	Married, filing jointly	Head of Household
0%	0 to $41,675	0 to $83,350	0 to $55,800
15%	$41,676 to $459,750	$83,351 to $517,200	$55,801 to $488,500
20%	$459,751 and up	$517,201 and up	$488,501 and up

CHANGES TO DEDUCTIONS²

As you know, when you file your taxes, you can either claim a standard deduction or dive into the details and itemize your deductions. (Since the passing of the Tax Cuts and Jobs Act back in 2017, most people choose the former.) Per the IRS, the standard deduction is “a specific dollar amount that reduces the amount of income on which you’ve been taxed.”⁴

The IRS has increased the standard deduction for your 2022 taxes. For singles, the standard deduction is now $12,950, up from $12,550. For married couples filing jointly, it is $25,900 up from $25,100. For heads of households, the standard deduction is $19,400, up from $19,000.²

Remember, you can’t take the standard deduction if you also itemize deductions. And for married couples filing separately, both spouses must take the same type of deduction. So, if one spouse chooses to itemize, the other spouse must as well.

CHILD TAX CREDIT²

The Child Tax Credit (CTC) is returning to pre-pandemic levels this year. That means taxpayers who claim this type of credit will receive a smaller refund. Parents who received $3,600 per dependent for 2021 will now get $2,000 for 2022. That’s a reduction of $1,600.

CHANGES TO ALTERNATIVE MINIMUM TAX (AMT) EXEMPTION LEVELS²

Due to the Tax Cuts and Jobs Act, the number of Americans who owe the AMT has been drastically reduced. But in case you fall under this category, the exemption levels for 2022 are as follows:

Single	Married, filing jointly
0 to $75,900	0 to $118,100

These exemption levels begin to phase out at $539,900 for single individuals, and $1,079,800 for married couples filing jointly.

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We hope you found this information helpful. Obviously, it’s not an exhaustive list of every tax change for the year. But it is an overview of some of the most important ones. If you have any questions or concerns, please let us know. Our door is always open!

Sources

1 “IRS sets January 23 as official start to 2023 tax filing season,” Internal Revenue Service, https://www.irs.gov/newsroom/irs-sets-january-23-as-official-start-to-2023-tax-filing-season-more-help-available-for-taxpayers-this-year

2 “IRS provides tax inflation adjustments for tax year 2022,” Internal Revenue Service, https://www.irs.gov/pub/irs-drop/rp-21-45.pdf

3 “5 tax and investment changes that could boost your finances in 2023,” CNBC, https://www.cnbc.com/2022/12/31/5-tax-investment-changes-that-could-boost-your-finances-in-2023.html

4 “Standard Deduction,” Internal Revenue Service, https://www.irs.gov/taxtopics/tc551

On December 23, Congress passed the Consolidated Appropriations Act of 2023.  This is what’s known as an “omnibus spending bill”.  (The word omnibus means that multiple measures were packaged into a single document.)  The bill authorizes $1.7 trillion in government spending on everything from disaster relief to supporting Ukraine to workplace protections for pregnant mothers.¹  On December 29, President Biden signed the bill into law.¹

As you can imagine, this was a massive bill.  In fact, it contained over four thousand pages.  That’s because, as an omnibus, it’s multiple bills combined into one.  Among those many bills is one that will have a profound impact on retirement called SECURE Act 2.0.    

Back in 2019, Congress passed a law known as the Setting Every Community Up for Retirement Act.  This was the original SECURE Act.  The law made important changes to IRAs and 401(k)s, among other things, and was designed to help more Americans save for retirement. 

SECURE Act 2.0 widens the scope of several provisions from the original law.  It also comes with a variety of new ones.  To help you understand this law and how it may affect your finances, we’ve written this special letter.  Now, as you’ve probably guessed, we’ve sent the following information to all our clients.  So, while some of the information you’re about to read may not apply to you right now, it could apply to members of your family.  If so, feel free to share this letter with them!

There’s a lot to unpack here, so please take a few minutes to read about these new provisions.  Most are simple, and we’ve done our best to explain them all in plain English.  But if you have any questions or concerns, please let us know.   

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Important Provisions of the SECURE Act

Before we dive in, understand that SECURE Act 2.0 is over 20,000 words long.  That means there isn’t room to cover every aspect of the law, and many won’t apply to you anyway.  So, what follows is a brief overview of the provisions that could affect your finances.

Are you ready?  Then take a deep breath as we go over…    

Changes to RMDs²

One of the most notable changes from the original SECURE Act was raising the age at which retirees need to take required minimum distributions or RMDs.  SECURE Act 2.0 raises the age again.  Beginning on January 1 of this year, retirees may now wait until age 73 (up from age 72).  This is important because it gives retirees an additional year to benefit from the tax advantages that come with IRAs before making mandatory withdrawals.  (Note that anyone who turned 72 last year will still need to continue taking RMDs as previously scheduled.)

Finally, the law eliminates the need to take RMDs for Roth IRAs that are inside qualified employer plans.  What does that mean in English?  It means that if a retiree owns a Roth IRA through their old employer, they need never make mandatory withdrawals during their lifetime.  This change begins in 2024. 

Note, of course, that regular Roth IRAs that are not part of an employer plan were never subject to RMDs to begin with, so this change does not apply.)   

Changes to Catch-Up Contributions²

Under current law, employees aged fifty or older can make extra “catch-up” contributions of up to $7,500 per year to their 401(k) or 403(b).  Beginning in 2025, individuals aged 60 through 63 will be able to contribute up to $10,000 annually.  Furthermore, that amount will be indexed to inflation, meaning it will go up as inflation does. 

For people who are 50 or older – but not between the ages of 60-63 – the catch-up limit will remain $7,500 per year. 

People aged 50 and older who own IRAs can also make catch-up contributions, albeit at a smaller amount.  Currently, the catch-up contribution limit for IRAs is $1,000 per year.  In 2024, that number will be indexed to inflation, too.  Again, that means the limit could increase each year as cost-of-living expenses rise. 

Changes for Businesses²

Beginning in 2025, the law requires businesses to automatically enroll employees in any new 401(k) or 403(b).  Furthermore, unless the employee opts out or elects to contribute a different amount, they would automatically contribute 3% of their pay. 

Another change: Starting in 2024, employers can help workers with their student loan payments!  Because it can be so difficult to both save for retirement and pay off college debt at the same time, employers can “match” an employee’s loan payment with an equal contribution to their retirement account.  This is a great option for younger investors, so if this provision applies to you or a loved one, make sure to inquire whether your employer plans to take advantage of it! And business owners around the country will be looking to use this provision to compete and retain top talent.

Other Provisions to Note²

Here’s an interesting provision: Starting in 2024, individuals may transfer money from a 529 plan into a Roth IRA.  This could be useful if you own a 529 plan that has more funds than you or your loved one needs to pay for an education.  Think of it as a way to add more flexibility to your long-term finances. 

It’s important to note, however, that this provision comes with a lot of terms and conditions.  For example, the Roth IRA must be in the same name as the beneficiary of the 529 plan.  Furthermore, no transfers can be made until the 529 plan has been maintained for at least fifteen years.  There are also very specific limits on how much money can be rolled over.  So, if you ever intend to make use of this provision, my advice is to talk to me first so my team can help you through the process.  

Let’s move on to another interesting provision.  As financial advisors, we’ve long recommended that all investors have a Rainy-Day Fund.  But sometimes, even this isn’t enough to handle unexpected expenses, like a health crisis or loss of income.  Under SECURE Act 2.0, it’s now easier to make use of your retirement savings in an emergency.  Previously, there was a 10% penalty for withdrawing money from a retirement account prior to reaching age 59½.  (This was to prevent people from using their retirement savings for something other than retirement.)  However, there are some exceptions, such as when you need the money to pay for certain medical expenses.  The new law has expanded the list of exceptions.  Here are some examples where the 10% penalty no longer applies:

• Recovering from a natural disaster, like an earthquake or hurricane
• Dealing with a terminal illness
• Being the victim of domestic abuse

The law also allows for emergency withdrawals for any taxpayer who needs to meet “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”²  Now, what the law does not do is specify what situations qualify as an emergency.  Instead, the law states that “the administrator of an…eligible retirement plan may rely on an employee’s written certification that the employee satisfies the conditions of the preceding sentence in determining whether any distribution is an emergency personal expense distribution.”² 

We know – that sentence is Washington legalese at its finest.  Basically, this means people just need to be reasonable at determining for themselves what qualifies as an emergency.  For example, if a loved one has been injured in an accident?  That’s an emergency.  Desperately want to buy the newest PlayStation before it goes out of stock?  Not an emergency. 

Hopefully, you will never have to make use of this provision.  But it’s nice to know that it’s there in case you ever do!

The final provision we want to address in this letter involves qualified charitable distributions or QCDs.  A QCD is a direct transfer of funds from your IRA to a qualified charity.  They are a popular tool for retirees who want to contribute to a worthy cause because QCDs also double as RMDs in most situations. 

Under SECURE Act 2.0, people age 70½ and older may use a QCD to gift up to $50,000 to a beneficiary.  This is a one-time deal, and several conditions must be met.  So, again, if you want to take advantage of this provision, talk to me and my team first so we can help you navigate the rules and restrictions. 

Lastly, the law also links the maximum annual QCD amount to inflation rather than capping it at $100,000 like before.

Conclusion

As you can see, SECURE Act 2.0 is loaded with provisions for those saving for retirement.  So, again, if you have any questions or concerns, please don’t hesitate to contact us! 

Of course, our team will continue pouring over these changes.  If there is anything else we feel you need to know, we’ll reach out to you, or go over them with you during our next review. 

In the meantime, remember that we’re here to help you work toward your financial goals.  Please let us know if there’s ever anything we can do – in 2023 and beyond.

Sources

¹ “Here’s what’s in the $1.7 trillion spending law,” CNN, December 29, 2022.
² Text of “Consolidated Appropriations Act of 2023,” (beginning page 817), Congress.gov.  https://www.congress.gov/117/bills/hr2617/BILLS-117hr2617enr.pdf

Finances get tight, especially now as prices seem to continue to go up.

Increased costs out of pocket mean less money to invest in saving for your goals.

So, how do you handle saving for long-term goals, let alone short-term goals, plus maintaining retirement savings without going broke?

Follow these simple steps:

• Start with a budget. Make sure you are covering the cost of living, i.e. mortgage/rent, food, utilities, and any other essentials such as transportation.
• Next, you have to make sure you set money aside for emergency funds, rainy day funds, and of course, retirement.
• Once you have those bases covered, you need to prioritize your goals: First by long-term, midterm, and short-term. Then by importance. Saving for college may outweigh that cross-country European adventure.
• With priorities set and savings goals determined, you need to figure out how to divide up the money you have left over. The key here is to make sure the things that are necessities are funded consistently, without exception. Decide what amount of money you can afford each paycheck and have it automatically put into a high-yield savings account.

Speaking with a financial professional can help you work through the math of longer-term, higher-ticket items. They can help you budget and map out a plan that works for you and your family.

If you need help, please reach out, we love being able to assist people with reaching their financial dreams.

As the New Year approaches…

Every year millions of people set new year’s resolutions.  However, very few can stick to their resolutions long-term.  A study done by the University of Scranton found that 23% of people quit their resolution after 1 week.  Only 19% stick to their resolution for at least 2 years.

As advisors, we want to help you succeed, not just financially, but with everything in life.  So here are some tips for sticking to your resolutions.

Know Your “Why”.  Many people set a goal but their why is “just because”.  If you don’t know why you are doing something, and that why is not a driving force, you are less likely to do it.  An example of a resolution with a good why is: I want to lose weight and be in shape so that I can play with my kids/grandkids without being out of breath quickly.  Your kids/grandkids are now motivating factors in your goal, and you are more likely to do it for them.

Setup Accountability.  In our experience, you are more likely to succeed at anything if someone, or something, is there to hold your feet to the fire.  Partner with a family member or friend that can help nudge and push you to your goal.

Plan, Plan, Plan.  We can all agree that one of the biggest reasons for not reaching a goal is that we don’t plan how to get the goal.  We want to lose weight, but don’t have a diet and exercise plan.  We want to go on a big vacation, but don’t plan how to save up for it.  Take the time to plan out the details of how to reach your goal.

We wish you all a Happy New Year and may we all be in the 19% to accomplish our resolutions.