Retirement Gets a Boost – 9 Key Takeaways on SECURE Act 2.0

January 24, 2023
Retirement, SECURE Act

The end of 2022 was wild! I watched my beloved Georgia Bulldogs squeak out a College Playoff semi-final win over Ohio State just as the clock struck midnight in an epic comeback that may have taken several years off my life. It was a fantastic way for me to say goodbye to 2022 and hello to 2023. The Bulldogs weren’t the only ones squeaking out wins in the final hours of 2022 though. Congress finally came together to pass the much-anticipated SECURE Act 2.0 that had been rumored for the last year.

A little rusty on SECURE Act 1.0? A lot of life has happened since it was passed including living in the midst of a pandemic! At the end of 2019, The Setting Every Community Up for Retirement Enhancement Act of 2019, popularly known as the SECURE Act, was signed into law. Now called SECURE Act 1.0, it included provisions that raised the requirement for mandatory distributions from retirement accounts and increased access to retirement accounts.

Two of the most notable provisions from SECURE Act 1.0 was the increase of the Required Minimum Distribution (RMD) age from 70 ½ to 72 and that many Inherited IRAs had to begin using the 10-year distribution rule. While we’ve been busy updating financial and estate plans over the last few years, Congress has been increasingly focused on trying to enhance the original landmark bill that was enacted barely three years ago.

Tucked inside a just-passed 4,155-page, $1.7 trillion spending bill are plenty of goodies, including another overhaul of the nation’s retirement laws.

[[https://images.thinkadvisor.com/contrib/content/uploads/documents/415/479719/GA_SECURE-2.0-Act-of-2022_Section-by-Section-Summary-FINAL.pdf Dubbed SECURE Act 2.0]], the bill enjoys widespread bi–partisan support and builds on SECURE Act 1.0 by strengthening the financial safety net by encouraging Americans to save for retirement.

Let’s review 9 key takeaways from SECURE Act 2.0.

9 key takeaways on SECURE Act 2.0

1.RMD Age will rise to 73 then 75.

As we reviewed earlier, 1.0 increased the age for taking the required minimum distribution, or RMD,to 72 years from 70½. 2.0 brings an increase again from 72 to 73 then to 75 by 2033.

If you turn 72 this year, the age required for taking your RMD rises to 73 with 2.0.If you turned 72 in 2022, you’ll remain on the prior schedule.

If you turn 72 in 2023, you may delay your RMD until 2024, when you turn 73. Or you may push back your first RMD to April 1, 2025. Just be aware that you will be required to take two RMDs in 2025, one no later than April 1 and the second no later than December 31.

Starting in 2033, the age for the RMD will rise to 75.

Employees enrolled in a Roth 401(k) won’t be required to take RMDs from their Roth 401(k). That begins in 2024.

The new rules recognize that Americans are living and working longer.

2. RMD penalty relief.

Beginning this year, the penalty for missing an RMD is reduced to 25% from 50%. And 2.0 goes one step further. If the RMD that was missed is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to 10%.

But let’s be clear, while the penalty has been reduced, you’ll still pay a penalty for missing your RMD.

3. A shot in the arm for employer-sponsored plans.

Too many Americans do not have access to employer plans or simply don’t participate. Starting in 2025, companies that set up new 401(k) or 403(b) plans will be required to automatically enroll employees at a rate between 3% and 10% of their salary.

Automatic escalation will also be required for these new plans starting in 2025. Contribution percentages must automatically increase by one percent on the first day of each plan year following completion of a year of service until the contribution is at least 10 percent, but no more than 15 percent of eligible wages.

The new legislation also allows for automatic portability, which will encourage folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out.

To encourage employees to sign up, employers may offer gift cards or small cash payments. Think of it as a signing bonus. Employees may opt out of the employer-sponsored plan.

4. Increased 401(k) (and similar plans) catchup provisions.

In 2023, if you’re 50 or older and participating in a 401(k) plan, you’re allowed to make additional catch-up contributions to your retirement accounts. Currently, those catch-up contributions are limited to $7,500 for most workplace plans and $1,000 for Roth and traditional IRAs.

In 2025, 2.0 increases the catch-up provision for those between 60 and 63 from $7,500 in 2023 to $10,000, (the greater of $10,000 or 50% more than the regular catch-up amount).

Starting in 2024, Catch-up dollars are required to be made in Roth dollars if your wages are over $145,000.

5. Emergency Savings Accounts Linked to Retirement Plans.

Beginning in 2024, retirement plans may offer linked “emergency savings accounts” that permit non-highly compensated employees to make Roth (after-tax) contributions to a savings account within the retirement plan. Employers must match contributions as if they were deferrals made to the employer plan (employer match goes into the retirement plan). Assets must be held in cash or similar investments. Participants must have monthly access to the funds and the first four distributions must be at no cost to the employee. The distribution will be penalty [MB1] [AK2] free.

Upon termination of employment, any emergency savings account can be converted to another Roth account within the plan or can be distributed to the participant.

6. 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.

7. Help for survivors.

Victims of abuse may need funds for various reasons, including cash to extricate themselves from a difficult situation. 2.0 allows a victim of domestic violence to withdraw the lesser of 50% of an account or $10,000 penalty-free.

8. Student loan payments will qualify for 401(k) match.

Starting next year, 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. For those torn between whether they should pay down student loan debt or contribute to a 401(k) plan to receive the company match, this is a welcomed relief.

9. 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. The 529 plan must be at least 15 years old.

In the past, families may have hesitated in fully funding 529s amid fears the plan could wind up being overfunded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns.

Whew! That is a very highly level recap of 9 key takeaways of SECURE Act 2.0. Keep in mind that the bill is voluminous and had approximately 90 changes!

What Does it All Mean for You?

This bill reminds us that the only constant thing in life is change. With so many changes over a variety of years, there is a great deal to keep up with in the coming years. As with most bills, I anticipate we will see additional guidance on various provisions. Some of the items are immediate while others will be implemented years down the road.

If you are still working and have an employer sponsored retirement plan like a 401(k), pay close attention to the communication your employer provides. It will take some time for retirement plan Recordkeepers such as Empower, Principal and Fidelity to update their technology platforms to implement the provisions such as the Emergency Savings Accounts and the Student Loan Match. The good news is that these provisions have been rumored for awhile and many of the key players in the retirement industry have been working diligently as they anticipated they would eventually become law.

For those of you that are transitioning to retirement soon, the catch-up provisions will be particularly important to you. It will vary by current age and timing of the law.

Finally, for retirees, the changes to RMD age may create additional planning opportunities as well as some relief if your RMD is not taken in a timely manner.

Regardless of your life stage, it’s more important than ever to be in close communication with your Financial Advisor.

Final thoughts

With so many major changes, providing only 9 key takeaways for the Secure Act 2.0 may seem inadequate. I promise that providing many more would be overwhelming – like trying to drink from a water hose.

The one thing I know for sure is that many Americans lack adequate savings, and the just-enacted bill helps address some of the challenges many Americans face as they march toward retirement. It’s a step in the right direction and encouraging to see Congress working together to further help Americans retire with dignity.

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.

by: Jennifer Fensley, CFP®, CRPS®

WP-WSJ-0000441889 The 401(k) and IRA Changes to Consider After Congress Revised Many Retirement Laws]]

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results. This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

401k Participant Update: Q & A with a 401k Advisor

December 29, 2022
401(k)

By: ANTHONY MCCALLISTER, AIF®, J.D., Senior VP, Wealth Advisor

We have held many 401(k) group meetings, one-on-one meetings, and phone calls with 401k participants this year. Understandably, participants are concerned with the markets and their 401(k) accounts. What follows are a couple of the common questions we’ve been asked and our general responses.

Question:

I am tired of contributing to my 401k and seeing it decline in value. Should I stop funding my 401k until the market stabilizes?

Answer:

We generally believe it best to continue contributing to your 401k to take advantage of dollar cost averaging. Contributing consistently is an important step in preparing for your retirement. You control your payroll deductions directly from your paycheck, helping to make this a simple and effortless process. Coupled with the principle of dollar cost averaging, this consistent payroll deducted contribution into your 401k throughout your working career can help you reach your retirement goals. Dollar cost averaging is the investment of equal amounts of money at standardized points over time, regardless of the price of the underlying securities. This can lower the impact of price volatility, as we are experiencing currently, and can lower the average cost of the investments being held.

Question:

My account has declined in value this year. Should I move my account into something safe (i.e., the money market, stable value, guaranteed account, or other cash equivalent) until I see the market rebound and I feel better about it?

Answer:

While everyone’s situation is different, we do not recommend trying to time the market; we believe it is better to focus instead on long-term investing. Timing the market includes when an investor moves some or all of their stock investments to cash in an attempt to avoid a market decline and with the hope of later reinvesting into a market rebound. While this sounds like a good strategy, this requires a participant to make two correct decisions: when to sell and when to buy. In the previous 12 bear markets of the S&P 500 Index, the index had positive returns a year following entering the bear market in all instances but three. The average one-year return was 23.9%. But reviewing each of these 12 bear markets individually on a one-month, three-month, six-month, and one-year basis, the returns they experienced differ significantly, making timing when to enter back into the market very difficult. (https://www.wsj.com/livecoverage/stock-market-today-dow-jones-bitcoin-fed-rates-06-14-2022/card/how-the-s-p-500-performs-after-closing-in-a-bear-market-yBwgfJwW8HGSNJaKg6LB).

It is very difficult to time when to leave the market to avoid market declines. It is equally as difficult to determine when to reinvest an account at the opportune time in order to experience any market rebound. We believe the best course of action is to maintain an appropriate, diversified mix of stocks and bonds, investing for the long-term in light of a dynamic plan for reaching your retirement goals.

In these difficult markets, we recommend holding fast to investment principles of resisting the urge to sell equities into declining markets, not attempting to time the market, focusing on investing with a long-term financial plan in mind, and continuing saving through dollar cost averaging. Do not hesitate to contact your CapSouth Financial Advisor to schedule a time to discuss your individual situation and to review your accounts.

(See: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/is-market-timing-worth-it-during-periods-of-intense-volatility/).

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. Any opinions expressed in the material are those of the author and are not presented as facts. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results. The S&P 500 Index is an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. This article contains links to third party content (content hosted on sites unaffiliated with CapSouth Partners). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

Three Things to Consider in a Bear Market

October 19, 2022
Economy, Investing, Investment Updates, Stock Market

I’d like to address the elephant in the room. This year has been incredibly volatile for the stock market, and we’ve experienced some steep declines. It can be frustrating, confusing, and even frightening. Currently, we are in a bear market. Perhaps you have heard the term before and understand the feeling associated with a bear market but aren’t exactly sure what it is (besides scary). A bear market is when a market experiences a prolonged drop in investment prices. This is typically referenced when a broad market index falls by 20% or more from its recent high. There is tremendous noise in the media. Many investors are anxiously looking at account balances more frequently, particularly after experiencing a long run for the bull market. Experiences with past down-market events may be triggering strong feelings of concern. One of my greatest strengths is being able to stay calm in difficult situations and it serves me well as an Advisor. To help you tackle a difficult situation head on in hopes of instilling some calm in the chaos, I’ll discuss three things to consider in a bear market

Communication with your Advisor is Critical

I love talking to my clients. They share their dreams and lives with me. They trust me enough to delegate a large amount of their financial life to me. It’s very difficult to do my job well without clear and consistent communication from clients. It’s also difficult to plan for clients without truly understanding how they feel about risk, how they view money and even some of the personal biases they may have in their approach due to previous experiences. Some of my clients have never worked with an Advisor before working with me while others have unfortunately had very negative experiences working with an Advisor which is why they sought a change. For some, I serve as a sounding board and for others I offer trusted advice and guidance. The one unofficial role I never knew I would take on is counselor.

We often think of money as transactional. Most of our money exchanges are even labeled as transactions. We use labels such as “good” and “bad” to describe debt, investments, and even Advisors. We spend a great deal of time thinking about what we want to do with our money as well as thinking about what our money is doing in the markets. We don’t often talk about how we feel about money or our life experiences with money. This is ironic as the field of Behavioral Finance is growing. Research consistently indicates that client behavior is also a key indicator of financial success. One of the leading organizations in the financial planning industry, FPA, recently announced a new partnership to offer its members a Psychology of Financial Planning Specialist program. Covered in the program are topics such as Behavior Finance for Financial Planners, Counseling in Financial Planning Practice, and Implementing Financial Psychology into Practice. The industry has recognized what we as individuals may not be able to see right in front of us – dealing with money comes with a lot of emotion. It’s time we start talking about it.

While I believe communication is always important, communicating with your Advisor during a bear market about how you are feeling is crucial. A client recently shared that this was the first time they have ever felt uneasy. We had a long conversation about why they felt uneasy. We had reviewed the financial plan and were well in the confidence zone. There was plenty of cash to fund their needs for an extended period. We began to peel back the layers and have the hard conversations around emotions. Throughout the conversation I learned that when I said “everything is fine” the client perceived that as being dismissive. While that was never my intent, their honesty and vulnerability allowed me to clear the air and lean into even deeper conversation. I decided to ask the client a very tough question – are you uneasy because you have lost trust in me? Thankfully, they had not. After a while, they shared that they felt uneasy because it was the first time that they were experiencing a bear market while in retirement. It was scary to see the losses while on a fixed income. The client’s vulnerability in sharing those feelings took courage. We walked back through their financial plan, discussed “what ifs” and discussed how we might address them in the future. We didn’t abandon the plan and we didn’t make any sudden investment changes that were out of scope of the plan.

During this bear market, if you find yourself dealing with emotions that are new or ones you haven’t experienced in a while about your money, please tell your CapSouth Advisor. We truly care about you and we are here to listen. It is our responsibility to coach and guide you through the emotions so that we can limit behavioral influences. There is an adage that says, “the only people that get hurt on a roller coaster are the ones who jump off”. Advisors often use this to explain how behavioral changes impact money such as selling when the market is declining. We understand the emotions and we will spend the time needed to address concerns. Let us serve as the safety bar to keep you locked into the seat while we ride this roller coaster together.

Your Financial Plan Has a Long-Term Outlook

One of the things I love most about CapSouth is our dedication to Financial Planning. For most of my life, I only thought of a Financial Advisor as someone who manages money. My experience with them had been limited to those that work in the Broker world as an investment manager. Unfortunately, our industry has limited regulation on how the title Financial Advisor is used. I have had many new clients come to CapSouth with the same limited viewpoint. When I explain that we view investment management as a commodity and that our real value comes in planning, it can be a true mindset shift. Perhaps you had a similar experience when starting to work with us. We ask a lot of questions! We ask for a lot of information. For those that are just starting to work with us, it can be overwhelming although we do our best to make the onboarding process enjoyable. With all the information provided we then craft a financial plan and begin working with you to implement it. We review the financial plan every year in meetings and are consistently adjusting it because life happens. We start to focus more on the Confidence Score to answer the question “am I going to be, okay?”

Like the Wizard of Oz, I’m going to give you a peek behind the Advisor curtain. The Confidence Score is generated through a process called Monte Carlo simulation. So, what is it and why does it matter? Surprisingly, it’s not unique to the financial industry. It’s also used in physics and engineering. In our financial plans, we don’t have the certainty of knowing what the future holds. That includes knowing what the average rate of return will be for your plan. Therefore, the Monte Carlo simulation runs 1,000 trials of your plan using 1,000 different return possibilities to calculate the probability your plan will be successful. While you may not have considered worst case scenarios or bad returns, your financial plan already has.

When we dig into these simulations and look at the 1,000 Trials detail, we can get an even better understanding of the numbers. We can see year data in 5 year increments (Year 5, Year 10, etc.). We can also see End of Plan Dollars and The Year Your Money Goes to $0. These time frames are charted out by Trial Percentile. They include 1%, 25%, 50%, 75% and 99%. My personal plan has a Confidence Score at 88% (at time of writing this). When I look at these trials, I can see that in the very best scenario my plan would end with more money than my husband and I would know what to do with and would need a fantastic estate plan. I can also see that in the very worst scenario, we would run out of money in the year 2049. Does that scare me? Not at all. The reason? It’s an extremely unlikely scenario just like the one that looks amazing. The most realistic scenario is somewhere in between, and it’s why my Confidence Score is reassuring. (Friendly reminder here: This is not like school where the highest score is the best score. If my score is in the blue zone, it is considered an overfunded plan, and I need to ensure my estate plan is in order because I will likely be leaving money to heirs).

We don’t often get into these types of details in meetings because it can be data overload. The key takeaway right now during a bear market is that your financial plan is not surprised by a down market with negative returns. Neither is your Advisor. We take a long-range approach and understand that markets go down just like they go up. Historical charts show that the markets have always recovered. While history is not a predictor of the future, it does give us data to consider. While it can be difficult to zoom out when emotions are high it is important to remember the decisions made together with your Advisor when times were not as tumultuous.

It’s Not All Doom and Gloom

When we set the fear and frustration of a bear market aside for a moment, we can turn our focus to the bright spots in this market. No, I’m not talking about a “sweet deal” a friend is telling you about or even buying treasuries at 4%. I’m talking about the planning opportunities that present themselves during a bear market.

If you are still working or have cash on the sidelines, it’s an excellent opportunity to dollar-cost average new money into the market. If you are participating in a company retirement plan, it’s likely that you are already using this approach. Each time you contribute to your 401(k) you are investing new money. This may be weekly, bi-weekly, or twice a month depending on how your payroll is processed. It’s a great buying opportunity. I like to say we’re buying on sale and it’s an opportunity we haven’t had in a long time due to high market prices. We may only know that the bottom of the market has occurred when we are able to look back, so trying to time cash into the market isn’t a great approach. By leveraging dollar-cost averaging, you smooth out your investment purchases and remove market timing.

Now is also a great time to consider a Roth IRA conversion. Roth conversions are a part of our normal consideration process for clients with IRAs, but they are particularly appealing when markets are in decline and your portfolio value may be lower. Conversions now may increase the likelihood of tax free growth as the market recovers. You may even be able to save on the tax bill you are paying now for that conversion due to the lower portfolio value. Less taxes and increased potential of tax free growth? That sounds like a great opportunity to be considering in a bear market.

A bear market also presents you with the opportunity to revisit your market risk tolerance. Are you feeling different now than how you felt when you originally discussed your risk tolerance with your Advisor? Perhaps you overestimated how much risk you could tolerate and need to evaluate dialing back market risk long term. The opposite could also be true. You may have always feared the worst and now, faced with a bear market, you aren’t as bothered as you thought you would be. These are valuable, real-time insights that can help you and your Advisor plan for the long term.

Above all else, remember that you are not alone. You are a part of the CapSouth family, and we value our long-term relationships with clients. We are here in the good times and in the bad. Do not hesitate to reach out to your Advisor at any time.

To discuss this article further or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or call 800.929.1001 to schedule an appointment to speak with an advisor.

by: Jennifer Fensley, CFP®️,CRPS®️

Investment advisory services are offered through CapSouth Partners, Inc, dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice.

Retirement Gets a Boost – 9 Key Takeaways on SECURE Act 2.0

401k Participant Update: Q & A with a 401k Advisor

Three Things to Consider in a Bear Market

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