Secure 2.0: How the new legislation will impact retirement savings for all generation
The Secure Act was passed at the end of 2019 and took effect in 2020. The legislation contained a number of important provisions. Perhaps the most notable was the provision that raised the age to commence required minimum distributions from IRAs and other retirement accounts from 70 ½ to 72. The other highly publicized change arising from the original Secure Act legislation was the elimination of the “stretch IRA” for many beneficiaries of inherited IRAs. The recently passed Secure Act 2.0 legislation will bring a number of new changes for retirement savers that will impact current and future retirees. Changes the Secure Act 2.0 will Bring to Retirement Here is a look at some of the changes that will come about as part of Secure 2.0. Required minimum distributions In 2023, the age to commence RMDs increases to age 73 for those who were born in the years 1951 through 1959. Starting in 2033, the age to commence RMDs increases to 75. This will impact those born in 1960 or later. There are a number of potential planning implications related to this change. It provides those saving for retirement a longer period of time to allow their retirement savings to grow tax deferred. A negative cited by some is that this will compress the time that many people have to take their RMDs, resulting in larger distributions and larger potential tax bills. There are a number of planning options to avoid these larger RMDs, including Roth IRA conversions in the years leading up to your required beginning date for RMDs. For those who are charitably inclined and who can afford to forgo some of the income from their RMDs, qualified charitable deductions (QCDs) might be an option to reduce future RMDs as well. Catch-up Contributions Secure Act 2.0 made several changes to the catch-up contributions for those age 50 or over in terms of both employer-sponsored retirement plans such as a 401(k), as well as for IRA accounts. Currently those who are age 50 or over can make a catch-up contribution of $7,500 to their 401(k), 403(b) or other employer-sponsored retirement plan in 2023. This is in addition to the annual limit of $22,500 in place for 2023. Beginning in 2025, the qualified plan catch-up contribution level for those aged 60 to 63 will increase to $10,000. Beginning in 2024, the catch-up level for those who are 50 or over will be indexed for inflation from the current $1,000 level for IRA accounts. Another change also commencing in 2024 pertains to taxpayers with incomes of $145,000 or higher. These taxpayers will be required to make their catch-up contributions to a designated Roth account inside of the plan – regardless of whether or not their other contributions are made to a Roth option. As a whole, the increased catch-up limits are a positive for those saving for retirement. The Roth restriction for higher earners in a 401(k) plan could increase their taxable income as these catch-up contributions would be pre-tax. This would impact those planning to contribute to a traditional IRA. Another impact of the mandated Roth catch-up contributions is that if the plan does not allow these employees to make catch-up contributions to a Roth account, then this could limit the ability of all employees to make a catch-up contribution even if they earn less than the $145,000 limit. Roth 401(k) matching Currently, all employer matches must be made into a pre-tax traditional 401(k) account. This applies to 403(b) plans and other qualified plans as well. This is the case even if the employee makes some or all of their salary deferral contributions to a Roth account. Effective immediately, employers are permitted to make matching contributions to a Roth account for these employees. As a practical matter, it may take some plan sponsors and administrators a bit of time to revise their systems and plans to accommodate this. This is in line with a number of other provisions in the legislation that offer added ways for those saving for retirement to increase their balances in Roth accounts. One potential downside here: these matching contributions to a Roth account would be taxable to the employee. Emergency 401(k) and IRA Withdrawals Beginning in 2024, one emergency withdrawal of $1,000 per year can be taken from a 401(k) or similar plan, or from an IRA account. Taxpayers would self-certify that they are taking the distribution for a hardship situation; there is no proof required. The 10% penalty on early withdrawals would be waived. Plans cannot allow participants to take an additional emergency withdrawal until the earliest of: Repayment of prior distributions Since the emergency withdrawal, regular deferrals and employee contributions to the plan total at least as much as the emergency withdrawal At least three years have elapsed since the prior emergency withdrawal While the ability to take an emergency withdrawal penalty free prior to age 59 ½ is a good thing, the low limit on the amount of the withdrawal will mean that most participants who find themselves in an emergency situation will need to tap other sources as well to meet their needs. 401(k) Automatic Enrollment Currently employers have the option to auto enroll employees into their 401(k), 403(b) or similar retirement plans. Beginning in 2025, automatic enrollment of all employees into the plan will be required of most plan sponsors. The deferral amount can range from 3% to 10% of the employee’s income. Employees who wish to opt out may do so. Companies with 10 or fewer workers and those who have been in business for less than three years are among those who will be exempt from this requirement. Auto-enrollment has helped increase the participation rate in workplace qualified plans and the hope is that these added requirements will further increase retirement savings among workers. Student Loan Payment Match Beginning in 2024, a provision of Secure 2.0 allows employers to make matching contributions into the accounts of employees who are making student loan payments up to the amount
Outlook for Bonds 2023
Bonds are issued by corporations, the Treasury, federal agencies and state and local governments. Bonds are a means for the issuer to borrow money on which they pay interest. Unlike with stocks, investors in bonds have no ownership interest in the issuer; they are simply lending them money. Besides the interest paid, investors in bonds can realize a gain or a loss based on the price movement in bonds. The price of bonds in the secondary market fluctuates inversely with the direction of interest rates. Bonds can be purchased directly from the issuer when offered, and can be bought and sold in the secondary market. Additionally, there are mutual funds and ETFs that invest in bonds. These funds offer professionally managed portfolios of bonds. Holding bonds versus trading them If you buy a bond and hold it until maturity, you will receive the face value of the bond when redeemed plus any interest payments during the holding period. Interest is generally paid semi-annually. If you buy a bond on the secondary market, you will receive the face value of the bond at maturity regardless of how much you paid for the bond. Bonds can be traded as well. When trading bonds, investors are focused on the potential movement in the bond’s price. The direction of interest rates is the prime factor in the direction of the price, but other factors such as the bond’s rating by various agencies and the time to maturity can also play a role. Pros: If held to maturity, investors benefit from regular interest payments and do not have to worry about price fluctuations. Bonds generally are lower risk and vary less in price than stocks. This can help offset the volatility in stocks. Cons: Bond prices will decline during periods of rising interest rates. Bonds will generally underperform during periods of high inflation. Bond Performance in 2022 Bond performance in 2022 was among the worst in decades. The bond market faced a number of headwinds including: The highest levels of inflation in years. High interest rates as the Fed continued to raise rates to combat inflation. More restrictive monetary policy from the Fed. A slowing economy. While the rise in interest rates hurt prices for holders of existing bonds and investors in bond mutual funds and ETFs, rising rates led to higher yields on newly issued bonds in 2022. Additionally, rising rates served to push down prices of bonds in the secondary market offering opportunities for investors to purchase bonds at a reduced price. Over time, this could result in a profit should they sell after rates have dropped, in addition to being able to collect interest payments while they wait. The Outlook for Bonds in 2023 How bonds perform in 2023 will depend on a number of factors, including what the Fed does in terms of continued interest rate hikes during the year. By some measures, inflation has stopped its rise and is subsiding, which is a positive for bond investors. One factor in bonds’ favor is that bond yields are now at a level that can help retirees seeking income support a 4% retirement withdrawal rate. Beyond this, both individual bonds and bond funds could benefit if interest rates stabilize or decline. The latter could occur if the Fed decides that inflation is under control. One potential challenge for bonds is the recession that some are predicting. A recession could put a damper on the performance of corporate bonds. Many experts feel that 2023 will bring many opportunities for bond investors. They feel that the Fed is nearing the end of their rate hikes and tightening monetary policy. A recession could certainly put a halt to both Fed tactics. This would aid bonds significantly. As rates level off or decline, this might prompt investors to reach out to the longer end of the yield curve. Higher rates here could add value for investors looking for a more stable source of income over time. Consult your Wedbush financial advisor to discuss the role that bonds can play in your portfolio. They can advise as to the types of bonds that are right for you and the right level of allocation to bonds for your portfolio in light of your risk tolerance and financial goals. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Estate Planning: A Guide to Trusts and Estate
Estate planning is a key concern for most of us, but it is complex and can be confusing. One powerful estate planning tool is a trust. Here is a look at a number of trust types that may be right for you. Revocable Living Trust A revocable living trust is a trust that is created by the grantor during their lifetime. The grantor can modify or revoke the trust during their lifetime as well. Revocable living trusts allow the grantor to retain control over their assets during their lifetime and to some extent after their death. Pros: A revocable living trust avoids probate, allowing the grantor and the beneficiaries to protect their privacy. A revocable living trust can help minimize estate taxes. This type of trust allows for a trustee or successor trustee to manage the trust’s assets if the grantor becomes incapacitated. Allows the grantor to determine when and in what fashion trust beneficiaries receive the trust assets. These trusts are relatively inexpensive to establish. Cons: Revocable living trusts do not provide asset protection since the trust assets remain available to the grantor’s creditors. A revocable living trust may cause problems for the grantor when applying for Social Security or Medicare benefits due to the potential income generated from the trust’s assets. Irrevocable Trusts An irrevocable trust can be created during the grantor’s lifetime or upon their death as part of their estate planning. As the name implies, an irrevocable trust does not allow the grantor to remove the assets from the trust once they have been given to the trust. Pros: Assets in an irrevocable trust are exempt from probate and offer the grantor and their heirs a degree of privacy. They can reduce or eliminate the cost of transferring assets such as probate costs, estate taxes and gift taxes. The assets in an irrevocable trust are beyond the control of the grantor and as such are out of the reach of the grantor’s creditors. The grantor can control when and in what format the beneficiaries receive their inheritance. In community property states, an irrevocable trust can be structured to not become community property if the grantor so wishes. Cons: Once the trust is implemented, it cannot be changed. This includes the beneficiaries and the terms of the trust. The assets in the trust cannot be accessed by the grantor if needed later on. An irrevocable trust can be costly to create and generally requires legal help. Charitable Trusts Charitable trusts can be established during the grantor’s lifetime or upon their death. Charitable trusts benefit one or more charitable organizations and can also benefit the grantor or their heirs. They can also be a solid alternative to those who are charitably inclined and who are looking for tax benefits as well. There are two main types of charitable trusts. Charitable Remainder Trusts (CRT) A CRT provides the donor or their beneficiaries with income from the investments of the trust assets during their lifetime. The CRT can be structured as charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). With a CRAT, the donor receives a fixed annuitized payment, whereas with a CRUT, the payments can vary as a percentage of the trust principal. Upon the donor’s death, the remaining assets are donated to the public charity or private foundation for which the trust was established. A CRT can be funded with cash or a gift of securities. This can be a good way to donate appreciated securities to avoid the capital gains taxes on those assets. Donations may be eligible for a partial tax deduction. Charitable Lead Trust A charitable lead trust works in the opposite fashion to a CRT. The money in the trust first goes to benefit the charitable organization(s) designated in the trust, with the rest reverting to the donor and/or their beneficiaries after the passage of a designated period of time. Depending upon the structure of the charitable lead trust, donors may be able to take a partial tax deduction when funding the trust. These trusts are taxable and are irrevocable once established. Marital Trusts There are a number of marital trusts that can be established depending upon the needs of the grantor. AB trust This is a separate marital trust. The “A” portion of the trust is a trust established for the surviving spouse. The “B” portion is a bypass trust that will transfer assets to non-spousal beneficiaries. The surviving spouse may have limited access to the B portion during their lifetime, and upon their death any assets left in the A portion as well as in the B portion pass onto the beneficiaries named in the trust. Qualified Terminable Interest Property (QTIP) trust A QTIP trust is similar to an AB trust in that it provides for both a surviving spouse and the couple’s heirs. A QTIP is common when the grantor spouse has children from a prior marriage that they want to benefit from their assets. With a QTIP, the surviving spouse receives income from the trust with the balance of the assets in the trust held for the non-spousal heirs upon the surviving spouse’s death. Joint Marital Trust This is a single trust covering both spouses. This type of trust can provide a degree of simplicity upon the death or incapacitation of one of the spouses. A joint trust works well if both spouses are in agreement as to the beneficiaries of the trust. It may not work as well in the case of a second marriage or if it is anticipated that one spouse may have issues with creditors. How a financial advisor can help Your financial advisor can help you identify your estate planning goals and any issues you might have as far as structuring an estate plan. In many cases, they will work in conjunction with an estate planning attorney to help advise you in establishing an estate plan. This