SECURE ACT 2.0 - What you need to know

In the final days of 2022, Congress passed a new set of rules designed to make it easier to contribute to retirement plans and access those funds earmarked for retirement.

SECURE 2.0 builds upon its predecessor, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in 2019.

The sweeping legislation has dozens of significant provisions. To help see what changes may affect you, the major provisions of the new law are broken down into four sections below.

New Distribution Rules

The RMD age will rise to 73 in 2023. By far, one of the most critical changes was increasing the age at which owners of various retirement accounts MUST begin taking required minimum distributions (RMDs). Starting in 2033, RMDs must begin at age 75. If you turned age 72 before January 1, 2023, you must continue taking distributions under the prior rules. But if you are turning 72 in 2023 and have already scheduled your withdrawal, we may want to revisit your plan.1

Reduction in the RMD Excise Tax.  Previously a 50% excise tax was imposed if you missed taking an RMD by the deadline. Starting in 2023, if you miss an RMD for any reason, the penalty tax drops to 25%. If you fix the mistake promptly, the penalty may drop to 10%.2

New Accumulation Rules

401(k) and Employer-sponsored Plan Catch-Up Contributions. Starting January 1, 2025, employees aged 60 through 63 can make catch-up contributions equal to the greater of $10,000 (indexed annually for inflation) or 150% of the regular catch-up limit to workplace retirement plans. Also, the catch-up amount for people aged 50 and older in 2023 has increased to $7,500.  However, beginning in 2024, all catch-up contributions for those earning more than $145,000 in a particular year will have to be (taxable) Roth contributions.3 

Traditional and Roth Catch-Up Contributions. Currently, individuals aged 50 or older can make an additional catch-up contribution to a Traditional or Roth IRA up to $1,000 per year. In 2024, the $1,000 amount will be indexed for inflation on an annual basis.

Automatic Enrollment. Beginning in 2025, the Act requires employers in newly-established plans to enroll employees into workplace plans automatically at a 3% contribution rate. The contribution rate automatically increases by 1% per year until the employee is contributing at least 10%.  However, employees can choose to opt-out.4

Student Loan Matching. In 2024, companies can match employees’ student loan payments with retirement contributions. The rule change offers workers an opportunity to receive employer-funded retirement plan contributions while paying off their student loans.5

Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, individuals can roll a 529 education savings plan into a Roth IRA. If your child gets a scholarship, goes to a less expensive school, or doesn't go to school, the money can get repositioned into a retirement account. Individuals will be able to roll over up to a total of $35,000 from 529 plans to a Roth IRA for the same beneficiary, provided 529 accounts have been held for at least 15 years. The annual rollover amounts will be subject to the annual Roth IRA contribution limit, but not the Roth IRA income limits. Any contributions to a 529 plan within the last 5 years (and the earnings on those contributions) are ineligible to be moved a Roth IRA.6

SIMPLE and SEP. From 2023 onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions.7

Employer Matching Roth Contributions. Previously, employer matching contributions were required to be deposited into each employee’s pre-tax account in the retirement plan. The new legislation allows employer matches to the Roth portion of the account for electing employees.  Note, however, that electing a Roth match will subject the employee to taxation on the matching amount contributed to the plan by the employer.

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth Individual Retirement Account (IRA) rules. Effective January 1, 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans.8

Act Highlights

Support for Small Businesses. Beginning January 1, 2023, the new law will increase the credit to help defray the administrative costs of setting up a retirement plan. The credit increases to 100% (from 50%) for businesses with less than 50 employees. By boosting this credit, lawmakers hope to remove one of the most significant barriers to small businesses offering a workplace plan.9

Qualified Charitable Donations (QCD). From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is at least 70½ years old can make a QCD as long as it remains under the limit (currently $100,000 per taxpayer per year).9  Individuals will also be able to make a one-time distribution of up to $50,000 to a charitable remainder trust or charitable gift annuity. 10

New Exceptions to the 10% early-withdrawal penalty. Generally, distributions from a retirement savings account before age 59½ are subject to an early withdrawal penalty unless an exception applies. The new legislation provides several new exceptions to the penalty, including terminal illness, domestic abuse, payment of long-term care insurance premiums, to recover from a federally declared disaster area, and an emergency personal expense.  

Retirement Savings Lost and Found. The Act intends to establish a searchable database for lost 401(k) plan accounts within two years of the legislation’s enactment.

Saver’s Credit transitioning to a Saver’s Match. Currently, low- and moderate-income taxpayers receive a credit up to $1,000 for retirement savings. Starting in 2027, the credit transitions into a match that will be contributed to the individual’s retirement account.

Other Highlights

There are several additional provisions in the new SECURE Act 2.0 legislation. A few examples include providing credits for enrolling military spouses immediately in employer plans, expansion of lifetime income products in retirement plans, improved retirement plan coverage for part-time workers, S-Corporation ESOP opportunities, and several other provisions.

The provisions listed above summarize only a portion of the Secure Act 2.0. The Gilbert & Cook Team looks forward to analyzing the impact the changes have on your financial situation to best understand how to assist you in Living a Life of Abundance. 

Also, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It is not intended as a substitute for real-life advice. If changes are appropriate, we will outline an approach and work with your tax and legal professionals, if applicable.

Sincerely,

Gilbert & Cook Team

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The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Citations:

1. Fidelity.com, December 23, 2022

2. Fidelity.com, December 22, 2022

3. Fidelity.com, December 22, 2022

4. Paychex.com, December 30, 2022

5. PlanSponsor.com, December 27, 2022

6. CNBC.com, December 23, 2022

7. Forbes.com, January 5, 2023

8. Forbes.com, January 5, 2023

9. Paychex.com, December 30, 2022

10. FidelityCharitable.org, December 29, 2022

Market Insight - March 2020

Brandon Grimm, MBA, CFA

Brandon Grimm, Portfolio Manager at Gilbert & Cook provides insights on recession concerns, recent market volatility, and the importance of re-balancing.

There has been much discussion and debate over where we are in this economic cycle. From our perspective, we remain in the latter stages but believe the modest-growth/modest-inflation/low-interest rate environment we have been living with has a good chance of continuing over the course of at least this year. While the probability of a recession occurring at some point in 2020 is not zero, we do believe it is low. However, as I will discuss later, the chances of a recession do appear to be growing as the coronavirus spreads globally and begins to impact global supply chains and consumer confidence. 

Despite those fears, the Gilbert & Cook Investment Team still maintains a positive view on the U.S. economy, as current fundamentals still support a prolonged recovery where unemployment remains low, job growth and wages increase, borrowing costs remain low, and most importantly we see a healthy and confident consumer base. 

We compare this recovery to running a marathon and reiterate our view for investors to remain fully invested according to their diversified, long-term Strategic Asset Allocation. 

Coming off an extraordinary 2019, the stock market continued its upwards trajectory with the S&P 500 Index closing at a record high of 3,386.15 on Thursday, February 19th (up +4.81% YTD). Then last week fear over the Coronavirus (COVID-19) finally gripped investors as both the Dow Jones Industrial Average and the S&P 500 index fell over 3% multiple days and ended the week down 12.26% and 11.44% respectively. The daily declines were the largest daily declines in two years and the weekly return was the worst since 2008. With minimal volatility over the past six months, one could argue at least a minor pullback was overdue irrespective of the catalysts. 

As we look at the next few quarters, the real economic impact of the coronavirus will need some time before it is fully understood. In the meantime, fear appears to be driving the markets to price in a major economic impact and even a potential recession. Although we are not comfortable going there yet, we recognize the longer the virus disrupts trade and supply chains, the greater the chance the markets remain at correction territory levels and a subsequent economic recession.

Maybe this time is different….or is it?  We look to history for the answers and similar recent events for context. Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 index fell by 12.8%. During the Zika virus, which occurred at the end of 2015 and into 2016 the market fell by 12.9%.1  As we have pointed out during prior times of stress, the S&P 500 Index has never failed to fully recoup any losses sustained from corrections or bear markets over time. In other words, the stock market and more broadly speaking, the U.S. economy, has proven itself to be quite resilient. Last week’s rather quickly pullback was likely overdone as evidenced by the strong market rebounds on Monday, with various stock indices gaining over 5% on the day. For more perspective on pullbacks and market volatility, reference our Timely Topic from October 25th, 2018 entitled Market Update – “Is this still normal?”.

This does not mean investors should dismiss the outbreak altogether, but rather use these pullbacks as:

1) a time to ensure cash needs are supported, or

2) buying opportunities to re-establish or add to equity exposure if your risk tolerance allows.

Certainly, risks remain, and the duration of the outbreak will determine the near-term impact to the global economy. Revenues and earnings from companies that are highly exposed to China will unquestionably be affected. The longer the virus remains, specifically in China, the greater risk to the global supply chain and ultimately the soundness of economic fundamentals.

In the end, we believe the U.S. is relatively insulated given a strong economy and fantastic health system. Robust job growth and more fiscally responsible consumers continue to provide solid underpinnings in the U.S. Economic data has been strong to start the year and so far, nothing has changed. We suspect that any drop in earnings or economic activity will be short lived, and more than made up for in the year to come.  

Right now is not the time to overreact. Instead, Gilbert & Cook has been proactive in protecting portfolios from events and pullbacks like these during this recovery by regularly re-balancing portfolios. Through the planning process we established a Strategic Asset Allocation which is all about balancing risk and reward given your time horizon and other factors. Regular portfolio re-balancing is a disciplined process to help reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. We continue to focus on investing for the long run and potential short-term disruptions can give investors long-term opportunities.

As we’ve said before; Rely on process, not prediction. The Gilbert & Cook team keeps focus on patience and a long-term perspective.

Sources: 1First Trust Advisors L.P.

What is the SECURE Act?

By: Jarret Sheets, CFP®

Welcome to the new year (and decade)! Many take this time of year to look forward and plan for the upcoming year (or decade in this case). One thing we can plan on for sure is that the Setting Every Community Up for Retirement Act (SECURE Act) is officially becoming a law, and changes to how we plan for retirement come along with it. In this article I will discuss the new SECURE Act and highlight a few areas I think will create additional planning conversations as we move into the new decade.

So - What Changes?

Required Minimum Distribution (RMDs)

When money is contributed to a pre-tax account such as a 401k or an IRA, you receive tax benefits when you contribute. Those benefits come in the form of a lower taxable income (your income's reduced by the amount you contribute) and your money can grow tax-deferred until you decide to take it out. Eventually, however, the IRS would like to receive their taxes and you're forced to take money out through a Required Minimum Distribution (or RMD).

An RMD is a minimum amount you’re required to take out each year once you've reached a certain age and it changes yearly based on your age and account size. You can always take out additional money above the RMD amount, but you must distribute the required amount each year. If you don’t, you’ll be facing a 50% penalty on the amount you did not withdraw.

With the SECURE Act, RMD’s weren’t eliminated, but the starting age did increase from age 70 ½ to age 72, which provides a little extra time for tax-deferred growth.

Note: If you turned 70 ½ in 2019, unfortunately, you still fall under the old rules and must start your RMD’s in 2020.

STRETCH IRAs

Under the old rules, if you inherited a retirement account as a non-spouse beneficiary, you could elect to keep the money in that account and let it grow tax-deferred. If you chose that option, you were required to take an RMD out each year, but RMD’s could be "stretched" over your lifetime, resulting in smaller yearly distributions. As a non-spouse beneficiary, which is typically a younger individual, this was a great opportunity to let that account grow for future use while incurring minimal taxes each year from the required distribution.

With the SECURE Act, those rules changed quite dramatically. Now, as a non-spouse beneficiary, you must distribute the entire retirement account (IRA, 401k, Roth IRA, etc.) within 10 years of receiving that account. During those 10 years, you have flexibility on when to take distributions and how much those distributions are (i.e. could take a lump sum or take 10 yearly distributions), which creates an important planning opportunity for inherited retirement accounts. Additionally, if you've saved a large amount in pre-tax accounts, this may be a good time to review your beneficiaries and consider how those accounts will be passed on.

Note: The SECURE Act would NOT eliminate the stretch IRA for existing inherited IRAs for the current beneficiary.If the IRA owner is already deceased and there is an existing inherited IRA, the SECURE Act would not eliminate the stretch for the current beneficiary. Existing inherited IRAs would be grandfathered. The bill as currently written would make these provisions effective for inherited IRAs when the IRA owner dies after December 31, 2019.  If the current beneficiary dies after December 31, 2019, the successor beneficiary would be subject to the new rules of the SECURE Act.

CONTRIBUTIONS & DISTRIBUTIONS 

If you're charitably inclined in any way and may not need your RMD (or at least a portion of it), a Qualified Charitable Distribution (QCD) may be a strategy to utilize. With a Qualified Charitable Distribution, you can donate up to $100,000 per year ($200,000 for couples) directly from an IRA to a public charity and you can exclude the donated amount from your taxable income. With the SECURE Act, the age to begin utilizing QCDs remained unchanged (starts at age 70 ½).

The last two items to touch on before I close are the age limits for IRA contributions and 529 distributions. With IRA contributions, there is no longer an age limit for when contributions must stop while previously contributions were required to end at 70 ½. For 529 plans, student loan repayments up to a lifetime limit of $10,000 are now considered a “qualified expense”. As an added benefit, an additional $10,000 distribution is allowed for every 529 beneficiaries siblings.

As you can see, the SECURE Act brought about some interesting changes and in turn created new areas for unique planning conversations. If one of these topics or any of the other unmentioned changes from the Act creates questions for you, please reach out your Gilbert & Cook team. - Jarret Sheets, CFP®

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Jarret Sheets, CFP®, Associate Advisor

Jarret joined our firm as an Associate Advisor in November 2019. In this role, he works with the Lead Advisor to help his clients and their families meet their financial goals.

Contact Jarret Sheets: jsheets@gilbertcook.com

Market Update - Is This Normal?

From Your Gilbert & Cook Investment Team

Market fluctuations (volatility) come in many shapes, sizes, and timeframes.  The origin of a stock falloff sometimes stares us right in the face such as the horrific terrorist attacks of September 11, 2001 or the Great Recession of 2008-2009.  Other times the downturn is a detached concern when compared to negative movement in investor portfolios.  In those cases, it matters most that the downturn is occurring, not necessarily what event is the catalyst.

Most trading days in October of 2018 fall into the latter category.  There are a litany of issues drifting in and out of headline news.  Mid-term elections, unemployment, interest rates, trade and tariffs, corporate earnings, etc, etc.  Important sure, but not enough on their own merits to cause a meltdown.  These issues and many others are the stuff of “normal” stock market volatility.  Let us explain.

For the next few minutes, grant us that “normal” shall be defined by “how it usually works”.  Usually, generally, typically, regularly, customarily, you get the picture.  The chart below shows the price action of the S&P 500 index in each of the past 38 years.  The gray bar shows the price change for the respective calendar year.  The red dot illustrates the largest intra-year decline.  So what is “normal” in this graphic?  Well, usually, the market has gone up.  29 of the past 38 years or 76% of the time.  76% does not equal “always”, only typical.  The red dot average is down -13.8%.  So, a normal year still sees a pullback of nearly -14% at some point.  Even if we eliminate the two worst years, the average downturn is -12.3%. Ups and Downs in stocks are normal.  

Back to the year 2018.  The S&P 500 saw a drop from January 26th to February 8th of -10.2%.  Our worst stretch of the year, so far, and it happened in the timeframe of 9 business days.  That February 8th low point marked the S&P 500 being down just -3.5% from the beginning of 2018.  At its highest, the S&P 500 index level was up +9.6%.  The Dow Jones Industrial Average follows a similar pattern up +8.5% YTD at peak and down -4.8% YTD at bottom.  Through October 24th, both of these US Large Cap indices are hovering around flat for the year while bonds, small caps, and international stocks are all negative on the year.  Pullbacks feel painful when happening, but don’t let emotions get the best of you.  After some extraordinary years in 2012, ’13, ‘16 and ‘17, treading water in 2018 would appear quite possible.

The entire Gilbert & Cook team is here to help you navigate and discuss any topics you feel are key.  We know it is imperative that you have access to your G&C Investment Team portfolio managers and to understand what is driving your investment performance.

Is this still normal?  Yes.

Mid-Year Economic Outlook

Mid-Year 2018 : Economic Update

THE MONTH IN BRIEF

U.S. stocks have been trending higher, but have endured some rough water over the past few weeks. In May, investors were left to interpret mixed signals. The historic U.S.-North Korea summit was on, then off, then on again. An apparent truce emerged in the U.S.-China tariffs battle, but it did not last. Oil rallied, but then prices fell. Federal Reserve policy meeting minutes indicated central bank officials would accept above-target inflation for a while. Other economic signals were clear: new and existing home sales were down, consumer confidence was back up, and consumer spending was strong. In the end, the markets took all this in stride – the S&P 500 rose 2.16% for the month.

Now in June, U.S. stocks continue to fall as a threat of new tariffs on Chinese imports from the U.S. is ramping up global trade fears. Treasury yields are dropping and the U.S. dollar is rising.

HOUSING

Mortgage rates may have soared in April, but they stabilized in May. On May 31, Freddie Mac’s Primary Mortgage Market Survey found the mean interest rate for a conventional home loan at 4.56%, which was 0.02% lower than on April 26. (At the end of May 2017, the average interest rate on a 30-year ARM was 3.95%.) 

Home buying fell off in April. According to National Association of Realtors research, there was a 2.5% retreat in the pace of existing home sales. Construction for single and multi-family units were solidly higher compared to the prior month and are up noticeably year over year. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell in May compared to April. Permits for single and multi-family unit structures both declined month over month but both remain higher year over year.

LOOKING BACK…LOOKING FORWARD

The economy is still in good shape, and is likely to withstand possible storms ahead. Volatility is unlikely to diminish Fed tightening expectations for the rest of 2018. The Fed hiked rates 0.25% on June 13th.

Trade concerns continue to rise. Tariffs are now being levied on imported steel and aluminum, and the trading partners affected by these taxes are responding or planning to respond with tariffs of their own on U.S. goods. Could stocks stall out because of this? An impeded flow of international trade would certainly impact the GDP of the world’s major economies and exert a drag on corporate earnings. The uneasiness about the brewing trade war gives some investors pause; the potential scope of it seems too large to price in. It is hard to imagine any kind of summer rally if the measures and countermeasures taken by various countries escalate. Not all investors appear to be worried, though – witness what happened in May even as the distinct possibility of trade wars emerged. The blue chips were hurt, but the tech sector and the small caps held up. Do these shares have further room to advance, and will investors retain their bullishness about them? June presents significant questions for investors worldwide, and we may see equities take a pause as threatened tariffs become reality.

That being said, patience and endurance are important in the face of occasional ominous headlines as we look forward to long-term goals.