End of Summer Update
We know the end of summer is near when Starbucks and Dunkin Donuts rollout the Pumpkin Spice Latte and muffins. Despite the heat of summer lingering around, I am sure we will soon see retailers put out the Christmas holiday decorations. I hope your summer season was an enjoyable one.
We are closely watching activity in Congress and attempting to read the tea leaves among the words of various Federal Reserve speeches. Changes may be on the horizon, however, we are constantly looking for changes which may impact your portfolio or family budget.
In late 2019, the president signed the SECURE (Setting Every Community Up for Retirement Enhancement) Act into law.
Required minimum distributions (RMDs) for employer-sponsored plans and IRA accounts were raised from 70 ½ years to 72 years old. It was a welcome change. The act also included smaller changes that aided workers saving for retirement.
But the SECURE Act also changed the rules which govern inherited IRAs, or so-called stretch IRAs. The change in this provision was more controversial because it required faster distributions, at least in most cases.
Although the changes are recent, Congress is already considering what many are calling SECURE Act 2.0. As the bill winds its way through Congress, there is no guarantee of passage. But it enjoys widespread bipartisan support, and both the Senate and the House have drafted similar bills.
The devil is always in the details, but we are monitoring progress and believe now is a good time to provide a high-level overview.
Please feel free to check in with your tax advisor on tax-related matters.
- Easing the RMD bite, again. As already mentioned, an RMD from a traditional IRA isn’t required until 72. SECURE Act 2.0 would raise the RMD to 73 beginning in 2022, 74 in 2029, and 75 in 2032. Taking your first distribution from a tax-deferred retirement account will depend on many factors, but if the funds are not needed, it is usually a good idea to defer withdrawals until required. By delaying a withdrawal, the investments maintain their tax-exempt status. Or, if you need cash before RMDs are required, you decide how much to withdraw. You are not bound by an arbitrary rule.
- A more favorable catch-up provision. If Secure Act 2.0 is passed into law, employees 50 and older can make extra catch-up contributions to a 401(k) or similar plan. The limit for 2021 is $6,500, which is indexed to inflation. As proposed, Secure 2.0 maintains the catch-up limits for those aged 50 but increases the annual catch-up provision to $10,000 for participants ages 62 through 64. The new limit begins in 2023. This new maximum is indexed to inflation. However, all catch-up contributions must be placed in a Roth IRA, which would disallow a tax deduction. Starting in 2022, all catch-up contributions must be made into a Roth IRA. Presumably, it’s a way for the government to capture revenue. Nonetheless, ROTH IRAs are not subject to RMDs, and withdrawals are exempt from federal income taxes.
- Student loan matching. SECURE Act 2.0 would permit employers to make matching contributions to their 401(k) plans tied to the employee’s student loan payments. The goal: encourage younger employees to save for retirement. It would also help employers pass nondiscrimination tests that prevent plans from favoring higher income employers. While we recognize this provision will probably complicate the administration of a 401(k) plan, we applaud the proposal simply because we know that the sooner one begins saving for retirement, the sooner one may enjoy the power of compounded returns. As we always counsel, it’s never too early to start saving.
The proposed changes discussed are the more important components of the proposed act, in our view. But we also wanted to briefly mention some of the additional provisions.
SECURE Act 2.0 would also:
- Allow Roth contributions to SEP and SIMPLE plans
- Accelerate part-time workers’ participation in 401(k) plans
- Extend to 403(b) retirement plans some of the features of 401(k) plans
- Require the Treasury secretary to increase awareness of the Retirement Savings Contributions Credit (also known as the saver’s credit), which is available to low- and moderate-income workers
- Eliminate some impediments to offering lifetime income annuities as a retirement plan investment option
It would also place limits on employers who attempt to capture excess plan payments from a participant.
SECURE Act 2.0 may pass as proposed, changes could be made, or the bill could run into unforeseen obstacles that prevent it from being enacted into law.
As we have already said, the review is a high-level peek at what is being proposed. Any advice we may provide will be tailored to your individual circumstances.
We suspect changes to the proposed law will probably be made, but odds favor passage. We are happy to entertain any questions.
Absorbing unexpected surprises
During August, the rise in Covid cases tied to the Delta variant caused brief volatility, but investors are not on board with the idea that the health crisis will substantially slow the economic recovery and dampen corporate profits.
While some locales are re-implementing mask requirement, we have yet to see the type of restrictions that were in place in 2020 and early 2021. For now, the market is viewing the vaccines as an inoculation against a rapid slowdown in the economy. However, weaker than expected August job growth may further complicate this recovery.
We also saw tragic events play out in Afghanistan. While the images have been difficult to see and the geopolitical ramifications are unknown, simply put, investors don’t expect the U.S. withdrawal to have an impact on U.S. economic growth over the next six to nine months.
I recognize that’s a harsh way of viewing an unsettling situation that is tragic for many. But investors, both large and small (who continually and collectively make buy and sell decisions), have a very narrow lens. That lens is primarily targeted toward future economic growth, profits, Federal Reserve policy and interest rates.
Let’s look at it from a more practical angle. Will consumers decide to delay a vacation, a big purchase, or simply decide to eat at home rather than dining in a restaurant because of what’s happening in Asia? It’s highly unlikely.
Are stocks priced for perfection? In hindsight, all the ingredients for a strong rally have been in place over much of 2021. A strong economic recovery, much better-than-expected corporate profits, plenty of liquidity and extremely low interest rates.
Let’s review one of the pillars that has been a significant support for shares: low interest rates.
Low interest rates not only help fuel market gains, they help support higher valuations.
While we will spare you a mind-numbing explanation of discounted cash flows, a quick way to explain how low rates influence equity prices is with a simple example. Low interest rates provide very little competition to stocks.
Low rates encourage investors to look at stocks and other riskier investments rather than settle for safe but paltry returns.
This is especially true when the economy is expanding, corporate profits are soaring and analysts are ramping up future earnings estimates. In other words, it is not simply low rates, but low rates combined with strong profit growth.
Today, there are few signs that economic growth is set to sharply slow.
Looking ahead, Fed Chief Jerome Powell said [last month in a late August speech] that the Fed is openly pondering a cutback in its monthly purchases of bonds; however, he did not provide a firm timetable.
Many analysts expect something more concrete will be forthcoming this year. But the Fed hasn’t committed, which gives it wiggle room in the event economic growth or job growth unexpectedly slows. But any reduction in bond buys will be well telegraphed.
Furthermore, Powell insisted last month that rate hikes are not on the table right now, and the hurdle to raise interest rates is higher than cutting back on its monthly bond buys.
As we have said before, the pace of economic growth, employment growth, and what happens to inflation will likely have the biggest influence on when and how quickly interest rates might rise.
As we enter September, investors will consider whether lofty valuations can hold up to the unwinding of fiscal stimulus and the potential for a reduction in Federal Reserve bond buys later in the year. Eventually, a market pullback is inevitable. For now, powerful tailwinds have been supportive.
I trust you’ve found this review to be educational and informative.
Let me emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.
Please join us for one of our upcoming webinars for the latest info on Social Security, How we manage your money; and Navigating Healthcare Costs in retirement. We will also have a special legal and estate planning webinar on September 28th. I will be joined by a Central Texas Attorney to have a conversation about the necessary documents you need to have a robust estate plan. You may find links to register for any of our educational webinars on our website at www.clearvistafinancial.com/events . And of course, please share with your friends and colleagues.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
Mark P. Trice
These are the opinions of ClearVista Financial and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice
Securities offered through Cambridge Investment Research, Inc., a broker-dealer, Member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and ClearVista Financial are not affiliated. The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to the sender to inform them of this fact. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling 800-491-4508. This email service may not be monitored every day, or after normal business hours.
[[https://www.jdsupra.com/legalnews/secure-act-2-0-look-out-for-new-8698774/ "SECURE Act 2.0–Look Out for New Retirement Plan Incentives"]]
[[https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/congress-considers-a-new-round-of-retirement-legislation.aspx"Congress Considers ’‘SECURE Act 2.0’ with a New Round of Retirement Plan Fixes"]]
[[https://www.planadviser.com/secure-act-2-0-likely-become-reality/ "‘Secure Act 2.0’ Likely to Become a Reality"]]