For those still actively working full time, funding your employer retirement plan every year is the foundation of any long-term plan to retire from the workforce. Setting aside dollars today into a tax deferred account (401(k), 403(b), TSP, etc.) helps to grow one’s nest egg for tomorrow when you are no longer working full time. Clients frequently ask how they could save more into these plans, since there are limits, and one great solution is the ‘Mega’ Back Door Roth.

Let’s take a step back and review how this works. All retirement plans have a maximum annual contribution amount. In 2023, the maximum annual employee contribution to 401(k)s, 403(b)s, and the TSP is $22,500.  If you are over 50, there is an additional “Catch-up” contribution of $7,500.  The IRS has announced the 2024 contribution limit will increase to $23,000, but the catch-up contribution will remain at $7,500.

There is another number to be aware of in 2023 — the maximum that can be contributed to a 401(k) plan by both the employee and employer is $66,000 (or $73,500 if you are at least 50 years old).

       Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401(k)-and-profit-sharing-plan-contribution-limits

So, if you are a high income earner and have maxed out your annual employee contribution ($22,500/ $30,000 in 2023), what should you do next?

Enter the “Mega” Back Door Roth.

The “Mega” Back Door Roth allows you to contribute above and beyond the $22,500/$30,000 to your employer retirement plan.

In order for this strategy to work, you must meet certain criteria:

1. Have earned income to contribute and enough disposable income to make after-tax contributions
2. Your employer plan allows you to make those after-tax contributions
3. The plan must allow periodic in-service distributions or Roth conversions of your after-tax money and any earnings

Roth accounts are a better “deal” for taxpayers in retirement compared to a traditional account for a few reasons. Traditional accounts require an annual distribution beginning at age 73 (age 75 beginning in 2033). This distribution is taxed at ordinary income tax rates, whereas Roth distributions are federal tax free.

Let’s look at how this strategy has worked for our clients using the case studies below.

Case study

Client (age 42) works for a large IT company. The company 401(k) plan allows after-tax contributions and periodic in-plan Roth conversions. In 2023, she contributes $22,500 as her base employee contribution to her company’s 401(k) plan. Her company matches 5% of her $400,000 annual salary to the plan totaling $20,000.

Employee pre-tax contribution   $22,500

Employer contribution                    $20,000

Total 2023 contribution                  $42,500

On top of the contributions above, she contributes an additional $23,500 in after-tax contributions to the 401(k) plan to reach the maximum of $66,000. She immediately does an in-plan Roth conversion of these dollars (if done immediately, there should be no additional income tax liability on the $23,500 as there won’t be any earnings).  These dollars are now in a Roth 401(k) meaning that they will grow tax deferred and distributions in retirement will be federal tax free.

As you can see from the example above, this employee is making maximum use of their employer retirement plan by a) maxing out their annual employee contributions b) maxing out the employer annual matching contribution and c) deferring additional after-tax contributions inside her 401(k) plan and immediately converting these additional contributions to Roth for retirement.

Age 50+ case study

In the example above if the client were age 50 (instead of 42) her contributions would look like this in 2023:

Employee pre-tax contribution                                  $22,500

Employee age 50+ “Catch-up contribution”            $7,500

Employer contribution                                                $20,000

Total 2023 contribution                                                $50,000

In this example, the employee would also make an after-tax contribution of $23,500 (after which the employee does an in-plan conversion of the after-tax dollars to a Roth 401(k) as the IRS allows up to $73,500 including the age 50+ catch-up.

Whew. The tax code, qualified retirement savings rules plus upcoming changes as part of the SECURE 2.0 Act make this quite a complicated tax strategy. But leveraging after-tax contributions inside your employer retirement plan has significant benefits over the long term if done properly.

Note that everyone’s situation and plan is different. You should work with your planner and tax preparer to implement the strategies above.  If you have questions about maximizing your retirement savings or any additional options available to you to make more of your hard earned dollars tax-free in retirement, please contact us today.

Required Minimum Distribution rules used to be simple enough that clients knew when they were subject to the rule. Confusion around Required Minimum Distribution (RMD) rules started in 2019 with the passing of the Secure Act. Additional changes over the past four years have prompted many questions from clients. In this article, we’ll summarize the current rules, what is different for 2023, and what you should do if you have questions.

Current Required Minimum Distribution Rules

• Traditional IRA RMDs must be met as outlined in the below chart

• Inherited IRA RMD rules have not changed for IRAs inherited prior to 2020.
  • Prior to the SECURE Act, beneficiaries of Inherited IRAs had the option to “stretch” the distributions over their own life expectancy, allowing for potentially smaller annual distributions and longer tax-deferred growth.
• IRAs inherited in 2020 or later, most beneficiaries must fully distribute the account within 10 years. In addition:
  • If the original IRA owner was taking RMDs during their lifetime, an annual RMD may be required. However, this requirement is currently waived through 2023.
  • If the original IRA owner had yet to begin taking RMDs, annual RMDs are not required.

So how did we get here? Prior to the passing of the SECURE Act at the end of 2019, the age to start taking RMDs was 70 ½ years old. The Secure Act changed the RMD rules for anyone other than a spouse who inherited an IRA in 2020 or later. The major change requires non-spouses to take all money out of the Inherited IRA within 10 years. My partner, David Greene, put together a great summary article of the SECURE Act.

The Secure Act 2.0 clarified a few points and materially changed the RMD age to 73 starting in 2023, then back further to age 75 beginning in 2033. My colleagues, Brian Jones and Parker Trasborg, wrote an article highlighting the changes.

The IRS ultimately waived the new inherited RMD requirement for 2021 and 2022. They also issued guidance that annual RMDs may be due going forward and vowed to clarify the rule. In June of this year, the IRS issued additional guidance that further waived inherited RMDs for 2023 and noted that final guidance should be expected in 2024. Beneficiaries who inherited their IRAs in 2020 and after may be required to take their first annual RMD in 2024. In 2024, anyone subject to an annual RMD would need to take that distribution or face a tax penalty of 25%. Of course, we’ll continue to monitor the situation in case the IRS decides to change its mind again.

For some clients, it makes sense to take an Inherited IRA distribution this year even though there is no requirement. The 10-year rule still applies, so it’s important to work with your accountant and financial planner to plan for the long-term tax bill that could be associated with the distributions.

With the frequent changes to the RMD rules, our clients have had a lot of questions about their RMDs. At CJM, we handle RMDs for all our managed clients to alleviate the stress of having to keep up with these ever-changing rules. If you still have questions or are uncertain whether you are subject to an annual RMD, please don’t hesitate to reach out; we’d be happy to have a conversation.

Section 529 plans are tax advantaged savings plans that allow you to save money for a beneficiary’s educational expenses. Sometimes referred to as “qualified education (or tuition) plans”, these plans allow for contributions into a 529 savings account to grow income tax deferred and these dollars may be withdrawn federal income tax free for education costs.

Some history….

Section 529 was originally created by Congress in 1996. This allowed for federal rules with regards to taxation of 529 plans. Numerous states have set up their own 529 plans (classified as either a tuition savings plan or a prepaid tuition plan) and these may offer additional state income tax benefits for contributions in a calendar year.

Revisions to the laws over the years have broadened this unique college funding planning tool. Today, it is possible to use up to $10,000 of 529 plan funds annually to pay for K-12 qualified education expenses.  However, there is one major development that we continue to watch with great interest: the ability to convert up to $35,000 of unused 529 plan dollars (beginning in 2024) into a Roth IRA, without being subject to income tax limitations.

In December 2022, Congress passed the Secure Act 2.0 which contained a provision allowing for a Roth IRA rollover of unused 529 plan dollars beginning in 2024. It makes sense that the goal here was to alleviate worries about incurring penalties or income tax in the event that 529 money saved over years was not needed in the future for education purposes.

As always, the devil is in the details. While final regulations continue to trickle out on this important planning issue, here are some key current specifics:

• The 529 plan must have been open for a minimum of 15 years.
• The owner of the Roth IRA must also be the beneficiary of the 529 plan.
• Rollover requirement is subject to earned income, meaning the Owner must have includible compensation at least equal to the rollover amount in the current tax year.
• Contributions made to a 529 plan in the last five years plus earnings are ineligible for a tax free transfer.
• The lifetime limit for these rollovers is capped at $35,000 per person and is limited to the annual IRA contribution limit which in 2023 is $6,500.

As a parent of two teenagers rapidly approaching college, this will be a topic of conversation with my wife regarding the 529 plans that we have for our children. By leveraging this change in the tax code, parents can add some additional resources to their 529 plans that, if not used for college, can give their children a jump start on their retirement funding upon graduation from college.

Saving for college gets an unexpected major boost with SECURE 2.0. For working age parents looking for every tax advantaged way to save on taxes and help their children get started after college, this new benefit is an added opportunity that is worthy of your consideration.  These are the current rules as of July 2023 and as with all changes to the tax code, they are subject to change in the future.

As I meet with clients and prospects to discuss retirement planning, I usually greet them with more “lifestyle” questions than they might expect.  I’ve always been a strong believer in the concept that you need to be going “toward” something, not just “leaving” something to feel fulfilled.  This is especially true to the monumental decision on when to retire from working life.  That decision is so much more than financial.  It wraps up a person’s entire sense of self and seriously impacts your happiness going forward.  Money is not the goal; it is simply a means to that end.  The life you want to live is the goal!

It’s understandable that you may not have clarity on how that journey will look.  I describe it as having a foggy windshield.  Slowly, over time, I hope by talking through the options, clients will have more expanded conversations among themselves.  It seems like when we’re in our 30’s, the dreams come easily. My 29-year-old son can tell you a dozen things he wants to do when he retires.  I don’t know why that exercise gets harder as we get closer to actually stepping away.

Some plans beyond working can be simple, such as losing those stubborn twenty pounds, beginning a regular exercise routine, or learning a new language.  In fact, did you know that many universities and community colleges allow seniors to audit classes free of charge.  Imagine learning in a college setting again when you’ll really appreciate it!

Many retirees offer their time and talents in the community as volunteers. I can’t recall the last time I toured a museum, art gallery, church or cathedral where the guide/docent wasn’t a retiree.  What a great way to stay active and sharp while giving back!

There are a few common things all people want in retirement.  Everyone wants a safe and comfortable place to live, with access to good medical care and the financial independence to afford those things.  That’s really it.  That’s where we come in, to help make sure that the financial side of the equation will support successful retirement, however YOU define it.

So, looking ahead, what do you want to do after you retire? Do you plan to stay in the area? Are you retiring for good or just from your current career? You will have the gift of time.  Have you given any thought on how you want to spend that time? Do you love to travel or are you a hobby person? What’s your dream? Where is your happy place?

Tracey and Griff discuss things that you should think about to try to avoid becoming a victim of a financial scam.

Griffin:

Hello, my name is Griffin Baker, Financial Adviser here at CJM Wealth Advisers. I am joined here today by Tracey Baker who is not only the President and Chief Compliance Officer of CJM Wealth Advisers, but also happens to be my mother. We, along with the rest of the planning team, often get phone calls and emails from clients and how they recently were scammed and we want to try to have a discussion here today to hopefully empower individuals to avoid being scammed in the future. Recently, the Social Security Administration and Federal Trade Commission declared March 9th Slam the Scam Day in an effort to increase financial scam awareness and what to do in the event that you are scammed. With that being said, I want to turn it over to Tracey to share some ways to determine if a communication is in fact a scam.

Tracey:

Thanks, Griff. Yeah, we get almost inundated with stories from clients of contacts that they’ve had that from sometimes government authorities, social security, or they go and file their taxes and find that in fact, someone has filed their taxes for them and already received their refund. There are four basic things that all scams share. And so, just remember the four Ps. The first P is pretend. They’ll pretend to be an authority, either it’s social security, it’s the IRS. It can be a medical thing, or it can be a group that gives a prize, publishers clearing house, those kind of things, the lottery. So, the first thing is they’re pretending to be something else. Second P is kind of a combination. They’ll either put pressure on you to pay something or to win a prize. They’ll tell you you’ve won something, but you’ve got to give information so they can send you money and they want to get your bank account information.

The third is that they pressure you, and that’s probably the most important thing. If someone contacts you and puts pressure on you to act immediately regarding something, you can’t get off the phone, you can’t call them back, you can’t reach out to your family members, that is often a sign that it’s a scam. And lastly, it’s they’ll ask for payment. Even some of the ones with prizes will say, “You need to send us money so we can verify your account and then we’ll send your money back.” Or they’ll ask you to pay them in the form of a gift card. No government agency is asking you to send them gift cards, but that’s an unregulated way for them to receive money. So if you can remember those Ps, you should be in good shape with avoiding that.

Griffin:

That’s good to have four kind of main types of scams to look out for and hopefully recognize in future communications. With that, are there preventative ways that you can kind of get ahead so that you aren’t scammed to begin with?

Tracey:

Well, it’s a good question. One of the things that we always tell people is to be very mindful of when someone reaches out to you. If there’s a link or it’s something that you don’t recognize, just don’t open it. There are programs that if you open a link will allow the scam artists to get into your computer and even access your emails. So, when they do that, then they can then email other people saying they’re you. That’s one important way to avoid it. And then also, just catch a breath. Take a minute. Government agencies are not just going to dial you up and start telling you that your social security has been compromised or you owe money to the IRS. That’s not how it works.

Government agencies reach out via letter usually if there’s an issue or a question or problem. So, I would say if you receive a call, just take a minute. You don’t give them any information, just even hang up on them. You can turn around the call, you won’t get in trouble. That’s probably the most important thing. And then lastly, you can’t rely on your caller ID because these folks are so smart. They are able to log in and mimic through caller ID, government agencies or the FBI or those kind of things. So, be mindful of that. You can hang up, don’t worry. You’re not going to get in trouble.

Griffin:

Now, for email communications, something I recommend to folks is to go to the website directly rather than clicking on any links that are embedded in the email to hopefully avoid any kind of malware being downloaded or anything like that.

Tracey:

Right. That’s great advice. That’s great advice. Yeah. You just want to be very mindful of that and only open things from people that you actually know.

Griffin:

Well, I hope all of you listening are taking notes and want to partner with us to slam the scam. Hopefully, some of these tools can be used for future communications and stuff like, to hopefully give you peace of mind that you’re not actually getting some terrible things from the IRS or whatever it may be.

Tracey:

And one of the smartest things that you know can do is go out and change your password on your email address. That’s-

Griffin:

That’s right.

Tracey:

…the one of the easiest things and you do a complicated password. It can be a sentence, just something that you’ll remember. And then that is the best way. I know I did mine last week, and I think everybody is trying to be very mindful of protecting your data and your information.

Griffin:

Very true. With that, I hope you all stay safe and take care.

Tracey:

Thank you, Griff.

Griffin:

Thank you.

On December 29, 2022 Congress passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 as part of a larger spending package. The original SECURE Act was signed in December 2019. The updates in SECURE Act 2.0 cover a wide array of pre and post-retirement planning issues. Below is a summary of several of the provisions we find most applicable to our clients:

Required Minimum Distributions (RMDs)

Beginning in 2023, SECURE Act 2.0 raises the beginning age for RMDs from age 72 to age 73.  It pushes the age back further from age 73 to age 75 beginning in 2033. Prior to the passing of the original SECURE Act at the end of 2019, the age to start taking RMDs was 70 ½ years old.

Additionally, SECURE Act 2.0 reduces the penalty for a missed RMD from 50% to 25% of the shortfall, and if the mistake is corrected in a “timely” manner, the penalty is reduced even further to 10%.

Qualified Charitable Distributions (QCDs)

Interestingly, SECURE Act 2.0 keeps the age that QCDs can begin at age 70 1/2.  Thus, you can start making distributions from your IRA directly to charities before RMDs must begin, which will reduce the amount of future RMDs (as the account value will be smaller).  SECURE Act 2.0 indexes the maximum annual QCD amount for inflation beginning in 2024, increasing the amount from the current $100,000 limit per year.

As a reminder, our custodian, Pershing, can make QCDs easier by allowing an IRA account to have a checkbook attached to it for making such distributions.  Please note that Pershing is not able to track the amount given directly to charity on the annual 1099, meaning you should keep copies of QCD checks to share with your tax preparer to ensure you receive the benefit of making the distribution and avoid being taxed on the distribution.

Catch-up Contributions

For those age 50 and over, employer retirement plan catch-up contributions have increased from $6,500 in 2022 to $7,500 in 2023. Starting 2025, those age 60 to 63 may make catch-up contributions to employer retirement plans (401(k)s, 403(b)s, TSPs, etc.) up to the greater of $10,000 or 150% of the regular catch-up contribution amount.

Automatic Enrollment in 401(k)s beginning in 2025

To encourage retirement savings, new employer-sponsored retirement plans beginning in 2025 must now include automatic enrollment of employees at a minimum contribution rate of 3%. The rate will increase 1% each year up to at least 10%, but no more than 15%. There are several exemptions to the rule including new businesses, businesses with fewer than 10 employees, church plans and governmental plans.

Student Loan payments

Beginning in 2024, employers will be able to amend their work retirement plans to make matching contributions to an employee’s 401(k) when the employee makes a student loan repayment. As the cost of education rises, many are unable to afford to pay down their student loans and contribute into their work retirement plan. Traditionally, saving into a work retirement plan often includes the perk of having your employer match a percentage of what you contribute, boosting your retirement savings over time.  This new rule will enable many people the opportunity of paying off their student loan and saving for retirement at the same time, rather than having to choose.

Tax free rollovers from 529 plans to Roth IRAs

An issue we have seen with clients for some time has been what to do with excess remaining proceeds in 529 plans after the child or grandchild has graduated from college. Beginning in 2024, the beneficiary of a 529 savings plan can make a direct rollover from a 529 plan in his or her name into a Roth IRA without tax or penalty. The 529 plan must have been open for more than 15 years. The bill limits the amount that can be rolled to a Roth IRA to the annual Roth IRA contribution limit (the greater of 100% of income or $6,500 in 2023) and also limits the lifetime rollover amount to $35,000.

Please note that the highlights above do not constitute all of the changes made in the SECURE Act 2.0. This is a short list highlighting the changes we thought were most relevant to our clients. As the IRS works to clarify these new changes in the tax code, we will work to keep you up-to-date on any financial planning changes that may prove relevant. While we recognize that sometimes politics intersects with all things financial, our intent with this article is simply to inform you of recent changes to the tax code (and some upcoming changes that happen many years in the future, assuming no changes between now and then) and keep the politics out of the conversation. If you have specific questions about any of the new provisions contained in SECURE Act 2.0, please do not hesitate to reach out directly to your planner.

Jessica R. Ness, CFP® and Parker G. Trasborg, CFP® discuss inflation’s impact on 2023 retirement plan contribution limits.

Jess: Hello, I’m Jessica Ness, Senior Vice President and one of the Partners at CJM and joining me today is Parker Trasborg, Senior Financial Adviser.  Thanks for being here.

Parker: Thank you, Jess.

Jess: 2022 has seen stubbornly high inflation with the consumer price index (CPI) rising at the fastest rate since the 1980s peaking at a 9.1% year over year increase this past June. Many of our client conversations this year have touched on inflation, and how it has impacted them at the grocery store and beyond. The higher inflation has lead the Federal Reserve to increase interest rates to try to slow it down which ultimately has caused both stock and bond markets to have a difficult year so far.  With all of the negative market news, Parker, is there is a positive from recent high inflation?

Parker: Yes, a little bit, Jess.  The positive is being able to save more in a tax-advantaged way, thus potentially saving more over time. Contribution limits to work retirement plans are tied to inflation and the IRS announced some big bumps to how much you are able to contribution to these plans in 2023.  As you can see here for 401(k)s, 403(b)s, most 457 plans and the Federal TSP plan, the limit is increasing from $20,500 in 2022 to $22,500 in 2023.  If you are 50 or older, the catch-up contribution is also increasing from $6,500 to $7,500.  This means that someone age 50 or older can save up to $30,000 in 2023 into their work retirement plan.

Jess: That is definitely a big jump and a good amount that the IRS lets you save each year.

Parker: It certainly is, there is one big thing to be aware of when updating your contributions.  Depending on your employer match, you may want to make sure that you have your contributions set-up to hit the maximum amount through the whole year rather than front-loading it early in the year.  For instance, if your work will match up to 4% of your contribution amount but you choose to contribute 15% and hit the maximum in August, you may miss out on 4 months of a potential match because you won’t have contributions going into the plan for September, October, November or December and thus nothing for your employer to match unless they offer what’s called a “true-up”.  So you are better off setting your contribution amount to a lower percentage to try to max out the plan in December to receive the full employer match throughout the year.

Jess: Great point, Parker, and something everyone should be aware of as they are setting up their contribution amount to avoid missing out on “free” money from your employer.  Similar to work plans, IRA and Roth IRA contributions are also increasing in 2023 from $6,000 to $6,500.  The catch-up contribution for those 50 and older is not tied to inflation and will remain at $1,000 for the year.

Parker: So a bump there as well, and the IRS has also bumped the income limits to be able to contribute to a Roth IRA for 2023.

Jess: Right, so if you were right on the edge this year and don’t find yourself receiving a pay bump equivalent to the inflation jump, you may be eligible to contribute to a Roth IRA in 2023.

Parker: Really great to be aware of and since the IRS allows you to contribute to an IRA up until April of the following year, you could wait until early 2024 to see where your income settles and decide to make a contribution at that time for 2023.

Jess: It’s nice that the IRS gives times to calculate your taxes before making a contribution, just don’t forget to do so. Now, there’s one other area that we wanted to hit on today that is seeing an inflation increase in the amount that you can contribute to next year.

Parker: Health Savings Accounts or HSAs.  For those eligible and are contributing to an HSA, the limits are going up to $3,850 for single and $7,750 for family coverage in 2023.  The catch-up contribution for those that are 55 and above will remain at $1,000.

Jess: Thanks Parker, these are all good tips and great ways to try to reduce your taxable income while also saving for the future.  If you have any specific questions or concerns, please reach out to your planner.  We are CJM Wealth Advisers and in a world of right now, we plan for what’s ahead.

As Financial Advisers, it is easy to get overly excited about financial changes that are made by the IRS. With that being said, the recent updates to Required Minimum Distributions (or RMD) affects anyone and everyone with retirement assets eventually. Prior to hitting the meat and potatoes, lets divulge into the vegetables.

To start, you may be asking what is an RMD? A Required Minimum Distribution or RMD is the amount that needs to be distributed annually from tax-deferred or retirement accounts once you have reached a certain age. Essentially these assets have yet to be taxed when the accounts are contributed to and grow tax deferred. You may be asking deferred till when? Well, upon distribution, these assets are taxed at ordinary income levels. The idea being these retirement assets grow and hopefully, when they are taxed during your retirement, you have a lower income tax-bracket than when you were working. Much like a tip for a lingering bellhop, the RMD makes sure that eventually, the IRS gets a piece of the action. This is calculated with a factor based on life expectancy being applied to your 12/31 retirement account value from the year prior.

Now for the mains. In November 2020, the IRA released new life expectancy tables containing new factors to be applied to RMDs beginning in 2022 and beyond. Fortunately, the new tables have a slight reduction to the factor used for calculating the RMD each year. This reduction in factor means a reduced RMD year over year thus allowing for the assets to continue to grow tax deferred within the retirement account. But wait… there’s more! Formally, the age RMDs began was 70 ½, however, the IRS has moved this date now to age 72. This is not to say if you need to take money from your retirement accounts you can’t prior to age 72, but it is not a requirement to do so. As long as you are 59 ½, retirement accounts are fair game.

The reasons these changes to the RMD benefit you, the investor, is that as mentioned before, retirement assets grow tax deferred. By reducing the factor applied during calculation of the RMD or deferring it till 72, more of those assets get to stay in that tax deferred bucket longer. As many savvy investors know, small incremental changes are incredibly helpful over the long run when striving for financial security or independence. Much like putting a small amount of money away for a rainy day (or retirement), it is nice that you won’t get completely soaked when you need to reach for that umbrella.

The bill for the Secure Act 2.0, otherwise known as H.R. 2954, passed the House with a 414-5 vote in late March.  While the bill heads to the Senate where modifications are sure to be made, it is rare to see a bill with such strong bipartisan support.

What’s in it? Here are some highlights of the proposed legislation:

• Auto-enrollment of employees in most new 401(k) plans.
• Delays Required Minimum Distributions (RMDs) to age 73 beginning January 1, 2023, to age 74 starting January 1, 2030 and to age 75 starting January 1, 2033.
• Increases “catch up” contributions (age 62, 63 and 64). The bill increases contributions (currently $6,500) to $10,000 for those individuals aged 62, 63 and 64 (note: but not 65). The bill retains the current age 50+ “catch up” contribution limit.
• Roth SIMPLE & SEP IRAs: Under current law, a SEP and SIMPLE IRA contribution may not be designated as a Roth IRA. Secure Act 2.0 would allow participants to make Roth contributions.
• Catchup contributions: 401(k)  plan “catch up” contributions for those age 50 and older would be required to be made on a Roth basis.
• Penalty Reduction – Failure to take a Required Minimum Distribution (RMD): Secure Act 2.0 reduces the federal penalty tax failure to take an RMD from 50% to 25%.
• Qualified Charitable Distributions (QCD): Under current law, QCDs are limited to $100,000. Under Secure Act 2.0, the annual limits would be indexed for inflation.

While none of the proposed changes have yet to become law, this should serve as a reminder that retirement rules and tax laws are always in flux and we need to keep a watchful eye on potential changes in the future. If you’re curious how this may impact your financial situation, reach out to your Planner or give us a call.

Sources:

Congress.gov

National Law Review

If you’ve invested for any length of time, you have learned that the stock market can be quite volatile, rising or falling several percentage points in a single day based on the day’s headlines, recent earnings reports, or seemingly at times for no specific reason at all. In fact, the S&P 500 historically has averaged one 10% “correction” (from market peak to bottom) approximately every 18-19 months and one or more 5% drawdowns in any given 12-month period. That volatility can be a good thing for those accumulating wealth as it can lower the average price of the investments you are buying when making regular systematic purchases (dollar cost averaging) into retirement plans or other investment accounts. However, the volatility can be unsettling and even downright scary for those who are currently in retirement and utilizing the nest egg that they’ve accumulated over decades to fund their income needs and replace former pay checks.

This market volatility is one of the reasons why it’s important for those taking income to have a structured plan in place to provide their income. You don’t want to be forced to sell some of the stock holdings in your portfolio when they are down 10% or more in order to fund your income need. Since its founding in 1978, CJM has a long history of providing clients with retirement income. This history spans many market cycles and we have learned some important lessons over those years. We established a system that gives clients peace of mind and we review it each year with each of our retirement income clients at our annual review meeting. For our clients who currently utilize their portfolios to provide them with retirement income or other needs, we aim to keep at least 3 years’ worth of their need in bonds and cash, which have been the historically safer asset classes in the portfolio. Bonds often act as a ballast in the portfolio, providing relative stability and holding their value when the stock market drops and investors get frightened causing a flight to safety. The cash will continue to hold its value regardless of what’s happening in markets although it’s value slowly erodes over time due to inflation.  Keeping a portion of our retirement income clients’ planned income in these historically safer asset classes allows us to remain level headed and focus on long-term investment and planning objectives.

Our income funding plan, the three-year buffer, allows the stock portion of the portfolio time to rebound after a downturn before we may need to sell any of it to provide income needs. Since 1946, the average time to recover from a 10%-20% downturn in the S&P 500 has been about 4 months. As we know, larger downturns occur as well. When the S&P 500 has been down 20%-40%, the average time to recover has been about 14 months (source: CNBC). This means that holding at least 3 years’ worth of income needs in cash and bonds should normally be sufficient time for stocks to recover before we would have to consider selling them for income. Additionally, our 3-year target doesn’t factor in potential dividend or income payments from the stocks and bonds which would increase that time frame even a little bit further.

We know markets will continue to be volatile. Our three-year income plan helps reduce the heightened anxiety and stress during those difficult times as we know that there will normally be ample time for the portfolio to recover before the possibility of having to sell any of the stocks to provide income arises. This allows us to continue to focus on the long-term plan.  Market turbulence, while natural, is unsettling. Knowing there is a plan in place to provide your income while also allowing the portfolio time to recover any potential losses can help make the market swings more tolerable.