Tag: 401(k)

Secure in your 401(K)?

March 6, 2023
401(k)

As is customary with our family, we had a (mandatory) New Year’s Day dinner celebration. It’s a wonderful time when the six of us (are forced to) share highlights and lowlights of the prior year and share our hopes and dreams for the year ahead. It went something like this,

Billy: “Okay, welcome to the 2023 McCarthy Family New Year’s Dinner!

First, I’d like to thank you all for…” [Interrupted by son #4]

#4: “Hey dad, let me guess, you’re going to get in shape, eat better, and sleep more.

Please pass the meat.”

I took the liberty of removing the distraction of food from son #4’s personal space and allowed him to listen to the rest of the family’s plans for 2023 unincumbered, that is, until I was over-ridden. And while I might resemble his remarks, he left out at least one important component. The part where I learn from my mistakes.

Over committing on resolutions isn’t uncommon and underperforming on them likely isn’t either. Missteps with your finances, however, can run the gamut from inconsequential to nearly catastrophic. Anybody relate? Hopefully, you have more experience with the former. But life happens. We all make mistakes and sometimes they’re expensive. So what housekeeping tips would we offer for 2023 that may keep you from making costly decisions? And what’s new for 2023 and beyond that you should be aware of? Let’s start the year off with a little Retirement Account Housekeeping, shall we? (We’ll substitute Retirement Account with 401(k) for simplicity’s sake.)

401(k) Housekeeping Tip #1:

Max the Match. If you’re currently participating in a retirement plan that has an employer matching contribution component, whereby they’ll match a percentage of your contribution up to a certain percentage of your compensation, I’d encourage you to capitalize on this benefit and max the match. Here’s how it works: Maybe your employer matches 50% of your contribution up to 6% of your compensation. If you contribute 6% of your compensation, you’ll be maxing the match , as they say. By putting in 6% of your compensation into your 401(k), you’ll receive a 3% match from your employer (50% of 6% = 3%). There’s a technical term we use in the advisory world for that. It’s called: free money [from the Latin freebieus cashus]. And if you’re maxing the match, that means you’ll be getting all the free money that’s available to you. Check with your administrator today on what your plan may provide for.

The mistake to learn from: Jack didn’t max the match and missed out on free money.

401(k) Housekeeping Tip #2:

If your plan allows you to contribute a percentage or a fixed dollar amount, contribute a percentage. Why so? Okay work with me: Let’s say that throughout your career, you’ve made a good impression on the right folks and have found yourself making a good deal more money than when you started. And let’s say you chose to have a fixed dollar amount deposited each pay period. Anybody see the problem? (I’ll wait.) The amount you’re saving isn’t increasing along with your income is it? No. The fixed dollar amount is – fixed. You’re putting in the same dollar amount at with an income of $150,000 that you were putting in when you earned $50,000. Had you put in a percentage of your pay, your contributions would be increasing relative to your income. That means more money with more time in the market. And that’s not even considering an employer match. If you’re fortunate enough to have employer contributions being made on your behalf, maxing the match may allow for an even greater amount of savings. Use a percentage, not a fixed dollar amount.

The mistake to learn from: Jack used a fixed dollar amount and missed out on increased retirement savings and the potential for additional compounding returns.

401(k) Housekeeping Tip #3:

If you have an old 401(k), 403(b) 457(b) or other employer sponsored retirement account, you may be able to transfer that account into your existing plan. Ask your plan administrator about your specific situation. You may even consider rolling that old balance into an IRA to take advantage of different investment options and services. Sure, why not, right? What you don’t want to do, is leave it somewhere and forget about it. I’m willing to venture that some of you have old retirement accounts out there, somewhere, and you’re unaware of the balance and of how it’s invested. Am I right? And of course, you don’t want to just “cash it out” without very careful consideration. While you may feast on an immediate influx of cash, you may also enjoy a side of premature distribution and the accompanying 10% penalty if you’re under 59.5. And any pre-tax distribution made will be added to your taxable income for the year in which it was taken. Speak with your advisor or tax preparer about your particular situation if you’re considering a cash distribution.

The mistake to learn from: Jack didn’t do anything with his old account and eventually forgot he had one. Lots of potential for missed opportunity.

401(k) Housekeeping Tip #4:

Let’s talk about your beneficiary. Do you know who your beneficiary is for your 401(k)? If you paused for even half a second, you need to check. Make sure you know who you’ve listed as the primary beneficiary of your 401(k). Here’s why. The beneficiary designation on your 401(k) is the last will and testament for what one day, could be your single largest asset. And once you’re gone – as in dead – it’s too late to change it. And that goes for insurance policies, too. So check your insurance policy beneficiaries while you’re at it. Go ahead. I’ll wait. It’s that important. Maybe even the most important aspect of your 401(k).

The mistake to learn from: Jack never checked his beneficiary after his divorce. Jack died. Jack’s ex-wife soon bought a new car…and a new garage to put it in…that came with a new house.

401(k) Housekeeping Tip #5:

Be aware of changes that could affect your retirement. A new bill was signed into law at the end of last year that you should be familiar with. It’s the Secure Act 2.0. Yes, it does sound familiar, doesn’t it? That’s because the first SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law in 2019. Hence, the need for its clever surname – 2.0.

While there are over 90 new retirement plan provisions, I’ll not cover them all. In fact, I’m just going to mention a few published online earlier this year by Investopedia, titled Secure Act 2.0 Act of 2022. Some will take effect in 2023, of course, while others not until 2024, 2025 and even 2033.

401(k) Auto Enroll:

Beginning in 2025, Section 101 of the act requires employers to automatically enroll eligible employees into 401(k) or 403(b) plans with a minimum participation amount of 3% but no more than 10%. The percentage will increase 1% per year up to a minimum participation amount of 10% and a maximum of 15%. That said, employees will be able to opt out of the plan if they wish, or select a different contribution percentage. This auto-enroll requirement only applies to new plans in 2025 – not existing 401(k) plans. There are some businesses that are exempt from this provision. (Small businesses with 10 or fewer employees, new business (less than 3 years old), church and government plans. (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 1.)

RMD Age Change: Section 107 increases the RMD age from 72 to 73. This change takes effect on January 1, 2023. The RMD age will change again in 2033 to 75. (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 2.)

Pre-Death RMD: Section 325 eliminates the pre-death RMD for the owner of a Roth-designated account in an employer 401(k) or other retirement plan. Under current law, required minimum distributions are not required to begin prior to the death of the owner of a Roth IRA, although pre-death distributions are required in the case of the owner of a Roth-designated account in an employer retirement plan. This provision takes effect for taxable years beginning after December 31, 2023. (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 13.)

Catch-Up Contributions: Section 108 indexes the $1,000 catch-up contribution for savers age 50 and above to the IRS cost-of-living-adjustment (COLA). This provision is effective January of 2024 (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 2.)

Catch-Up Contributions for those aged 60 to 63: Section 109 substantially increases catch-up limits for 401(k), 403(b), and 457 plan participants aged 60 to 63 to the greater of $10,000 or 150% of the “standard” catch-up amount for that year, beginning January, 2025. (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 2.)

Catch-Up Contributions for those making more than $145,000 per year: Section 603 requires that beginning in January of 2024, catch-up contributions to your plan must be made with Roth (after-tax) dollars. (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 18.)

Other: The Act also has provisions for natural disasters, domestic abuse, a Roth emergency savings account, and even a once per year, penalty free withdrawal up to $1,000 for personal or family emergency expenses.

For more information on how these provisions may apply to you, contact your 401(k)-plan administrator.

The mistake to learn from: Jack didn’t keep up with his benefits and missed out on opportunities to better his retirement.

One of the better quotes on mistakes comes from artist, Bob Ross, who said, “There are no mistakes, just happy accidents.” Sure, that may be true if you’re trying to paint a tree. And since Bob Ross isn’t your financial advisor, let’s go with this one, “Mistakes are much less painful when you learn from someone else having made them.”

Moral of the story when it comes to your retirement: Don’t be a Jack.

To learn more about CapSouth Wealth Management visit our website at capsouthwm.com/what-we-do/ or Connect With Us to learn more about our process.

By: Billy McCarthy, Wealth Manager

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.

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®

Sources: [[https://images.thinkadvisor.com/contrib/content/uploads/documents/415/479719/GA_SECURE-2.0-Act-of-2022_Section-by-Section-Summary-FINAL.pdf Secure Act 2.0 Act of 2022]]; [[https://www.fidelity.com/learning-center/personal-finance/secure-act-2 SECURE 2.0: Rethinking Rretirement Ssavings]]; [[https://www.schwab.com/learn/story/congress-passes-major-boost-to-retirement-savings Congress Passes Major Boost to Retirement Ssavings]]; [[https://www.wsj.com/articles/WP-WSJ-0000441889 The 401(k) and IRA Changes to Consider After Congress Revised Many Retirement Laws]]

IRA Strategy #1

March 10, 2022
Uncategorized

The 50/50 Minimum Strategy: Maintain 50% of your 401(k) and IRA money in Roth accounts

Why pay taxes today when you can postpone them until years later? The obvious answer is to delay paying taxes as long as possible. But sometimes the obvious answer is not the best answer. Let’s consider several assumptions that support the 50/50 Minimum Strategy.

First, if one invests the money that would have gone to taxes, it should compound over time and the total investments, less the eventual taxes to be paid, would potentially be greater than the amount of the Roth conversion, plus earnings. The problem with this is most people will not diligently invest the money that would have gone to pay the tax. It is more easily spent in the normal household budget. And even if it were invested, the potential to keep it invested over a long period of time is dependent on many variables.

Second is the assumption that a person’s income will be lower in retirement. This is true for many taxpayers. However, many of our clients remain in a high tax bracket after retirement. This is especially true if one has large IRA balances that require minimum distributions combined with large investment accounts that create capital gains.

Third is the assumption that tax rates will remain relatively stable over time. This is the most dangerous assumption. Congress has the power to change the tax rates at any time and with the skyrocketing budget and related government debt, it appears likely that tax rates will be higher in the future. So, even if one’s income is lower, the tax rate could be higher.

How high could tax rates go? The following chart provides a history of the highest marginal tax rate for 1944 through 2022 for married couples filing jointly:

Years Highest Marginal Rate# Taxable Income Over#

1944 through 1951 91% $200,000 (1950)

1952 through 1953 92% $300,000 (1953)

1954 through 1963 91% $300,000 (1958)

1964 77% $200,000 (1964)

1965 through 1981 70% $180,000 (1974)

1982 through 1986 50% $108,300 (1984)

1987 38.5% $80,000 (1987)

1988 through 1990 28% (Bubble Rate 33%) $78,400 (1988)

1991 through 1992 31% $70,450 (1991)

1993 through 2000 39.6% $288,350 (2000)

2001 39.1% $297,350 (2001)

2002 38.6%$ $307,050(2002)

2003 through 2012 35% $388,350 (2012)

2013 through 2017 39.6% $444,550 (2017)

2018 through 2022 37.0% $647,850 (2022)

# Rate for Married Couples Filing Jointly

Information provided by The Tax Foundation, Washington, DC. 20005

The strategy that we have continued to recommend to most of our clients is to approach retirement with a minimum of 50% of their IRA and 401(k) assets held in Roth accounts. With this approach, an investor takes a balanced approach to the payment of taxes. Pay taxes at the rates in effect now on the Roth contributions and conversion amounts while delaying the taxes on the non-Roth portion of their deferrals or contributions. If we err on one side or the other, we prefer to convert more of the retirement assets and pay the taxes at today’s rates as opposed to leaving these assets subject to whatever future rate Congress enacts.

If a client is charitably minded, we do not recommend converting ALL your IRA assets. The preferred use of a portion of your IRA assets is to process Qualified Charitable Distributions (QCD) with the pre-tax IRA assets. After age 70.5, taxpayers may donate money directly from their IRA to qualified charities utilizing the QCD provisions. The annual limit on QCD donations is currently $100,000.

ACTION: Consider adopting the strategy of working towards a minimum Roth balance of 50% of your total retirement assets by your retirement date. Work with your financial advisor to determine if you should convert a higher percentage.

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: Donald P. Bolden, CFP®, CLU & Lewis Robinson, CPA

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. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Tag: 401(k)

Secure in your 401(K)?

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

IRA Strategy #1

Help us keep you informed!

You have Successfully Subscribed!