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Greetings & Happy New Year,

Well, 2022 was quite a year, and one that most investors will not miss. A significant decline in both stocks and bonds, created an environment where there was no place to hide, and diversification didn’t offer its usual defensive benefits. While no one knows the exact timing of the recovery, we do know that economic and market cycles are normal, and that the best plan is to stick with your long-term strategy through thick and thin. The portfolio rebalancing we do for our investment clients is extremely important in this kind of environment. To the extent that it’s practical, minimizing withdrawals and even adding additional funds to take advantage of lower prices, should be rewarded over time. We will get through this. If you have any questions or concerns about your portfolio strategy, please reach out to us to set up a time to speak.

In the waning days of 2022, Congress passed the Consolidated Appropriations Act of 2023, which authorizes roughly a year of federal spending ($1.7 trillion worth), and also includes the SECURE Act 2.0, with a number of provisions that we wanted to inform you about. SECURE Act 2.0 is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act enacted into law in late 2019.

One provision is a small push-back of the age when required minimum distributions (RMDs) begin. RMDs, as you may know, are amounts that people above a certain age are required to take out of their retirement plans (IRAs, in many cases), whether they need the money or not. Before 2.0, that age was 72. People had to start taking their distributions in the year that they reached 72, and the distributions would be a higher percentage of the retirement assets for each subsequent year.

SECURE Act 2.0 has moved the RMD age from 72 to 73 for anyone who reaches age 72 in 2023 or thereafter. Anyone who reaches age 74 after December 31, 2032, will have to start taking RMDs by age 75. (SECURE 2.0 has no impact on people who are currently taking RMDs; they must follow the same formula that they have been following up to now.)

Updates from the SECURE Act of 2019, have the potential to significantly affect anyone who has an Inherited IRA or Beneficiary IRA. When the SECURE Act changed the 10-year distribution period, most accountants understood that the requirement was just that it had to be fully distributed within 10 years of the decedent’s passing. 

However, SECURE Act 2.0 appears to be changing that. The IRS apparently intended that beneficiaries take an annual distribution over the 10 years. There are still some differing interpretations though, and we are expecting to have a final ruling in 2023. In the meanwhile, it’s comforting to know that the provision states that if you didn’t take a distribution in 2021 or 2022, based on your accountant’s understanding and guidance, you won’t be penalized.   

Prior to the passing of SECURE 2.0, there was a penalty in the tax code for anyone who missed taking out their full RMD in any tax year. This penalty was an excise tax amounting to 50% of the amount that should have been distributed but was not.  In 2.0, Congress reduced that surtax to 25%, and reduced it further, to 10%, if the retiree catches and corrects the under-distribution before the next tax return is due or before the IRS sends a demand letter.

Beyond that, there are several enhancements to the existing panoply of retirement plan options. Previously, people participating in a company-sponsored Roth IRA had to take annual RMDs; now they don’t, which levels the playing field with individual Roth accounts, which have never imposed RMDs. 2.0 will allow employers to offer Roth versions of SIMPLE and SEP plans. Both those plans previously could only include pre-tax funds. Employers will be permitted to deposit matching contributions into these Roth accounts, which would be included in the employee’s taxable income in the year of the contribution.

Another provision will allow employers to make matching contributions to a 401(k), 403(b), or SIMPLE IRA plan for qualified student loan payments, that is, payment on the debt incurred for higher education purposes.

Speaking of higher education, people who have set aside money in a state 529 plan to pay for college expenses, and no longer have a need to use it for that purpose, are now able to move those excess funds directly into a Roth IRA, up to a maximum of $35,000. SECURE Act 2.0 requires that the Roth IRA receiving the funds be in the name of the beneficiary of the 529 plan, and that the 529 account must have been in existence for 15 years or longer. Any contributions made in the most recent five years, and earnings on those contributions, are not eligible for this transfer.

People over 50 have been able to make an additional $1,000 contribution to their IRA, what has been called a catch-up provision, but that amount has never been indexed to inflation. Now, starting in 2024, the catch-up contribution limit will be raised with the inflation rate, in increments of $100. Meanwhile, starting in 2025, participants aged 60-63 will be permitted to make catch-up provisions of $10,000 (up from the current $7,500) in their 401(k) plan, or $5,000 if they are participants in a SIMPLE plan.

Beyond that, 2.0 provides for various new exceptions to the 10% surtax imposed on people taking money out of their IRA or qualified retirement plan before age 59 1/2, and it creates a new type of ‘Emergency Savings Account’ that employers could set up for plan participants who don’t own more than 5% interest in their employer or receive more than $135,000 in compensation. The employees can make tax-deductible cash contributions until the account reaches $2,500, and the money grows tax-free thereafter. The idea is that this money will be used whenever the family faces an emergency.

Two areas where many people were expecting changes did not change. The federal estate tax exemption was not reduced (with inflation indexing, it will be $12,920,000 in 2023; double that amount for married couples), and so-called ‘back-door’ Roth contributions are still a viable planning tool.

Best Regards,
Harry Moran, CFP®, AIF®, CeFT®
Owner/Founder of Sustainable Wealth Advisors (SWA)
Founding Member of Sustainable Advisors Alliance, LLC (SAA)

Elizabeth Litts
Client Service & Administration Coordinator

Sources:

https://www.yahoo.com/finance/news/big-changes-to-the-retirement-system-are-included-in-congresss-end-of-year-bill-182514621.html

 

https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/

 

https://www.yahoo.com/now/secure-2-0-act-retirement-150042550.html

 

Investment advisory services provided by Sustainable Advisors Alliance, LLC (SAA), with Harry Moran, CFP®, AIF® as Investment Advisor Representative (IAR) also doing business under the name Sustainable Wealth Advisors.

Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website,
https://www.sustainableadvisorsalliance.com/regulatorydocs. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.

Neither Sustainable Wealth Advisors nor Sustainable Advisors Alliance, LLC provide tax or legal advice.
 
All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Past performance may not be indicative of future results. Indexes are not available for direct investment. All investing involves risks, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful or that financial markets will act as they have in the past.
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