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 expedited distributions for non-spousal beneficiaries in most cases. Although the changes are recent, Congress is already considering what many are calling the 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.
As always, check in with us or 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 it makes the most sense from the perspective of the tax liability it will incur.
By delaying a withdrawal, the investments maintain their tax-exempt status.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, starting in 2022, all catch-up contributions must be placed in a Roth IRA; while thiswill disallow a tax deduction, these contributions will never be subject to RMDs nor will they be taxed again.
- 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.
In our view, the aforementioned changes are the more important components of the proposed act. 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
- Place limits on employers who attempt to capture excess plan payments from a participant
While SECURE Act 2.0 may pass as proposed, though we suspect there will be changes. While odds favor passage due to its bipartisan support, the bill could run into unforeseen obstacles that prevent it from being enacted into law.
As we have already said, our review is a high-level peek at what is being proposed. We are happy to entertain any questions, and any advice we provide will be tailored to your individual circumstances.
The ‘seemingly’ unstoppable bull market
Whether from clients or acquaintances, there has been no shortage of inquiries about the market’s astounding rise.
Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA*
MSCI Emerging Markets*
Bloomberg Barclays US Aggregate Bond Total Return
Source: MSCI.com, Bloomberg, MarketWatch
MTD: returns: July 30, 2021— August 31, 2021
YTD returns: Dec 31, 2020—August 31, 2021
*in US dollars
During August, we saw multiple highs on the broad-based S&P 500 Index, while the tech-heavy NASDAQ Composite topped 15,000 for the first time, according to data provided by Yahoo Finance.
Let’s offer a simple perspective. On August 18, 2020, the S&P 500 Index closed at a new high of 3,389.78, erasing all the losses incurred during the lockdowns and the Covid recession, according to S&P data from the St. Louis Federal Reserve. The S&P 500’s prior peak of 3,386.15 occurred on February 19, 2020.
Since eclipsing its former high, the S&P 500 Index has racked up a gain of 33.4%, excluding reinvested dividends, through August 31, 2021. Put another way, this is an advance of over 30% in just over one year.
That said, let’s get back to the question about the market’s astounding rise. Most folks don’t understand it. I’ve heard it in casual conversations, and you have probably heard it, too. And many seem to expect (or want) a significant pullback.
We get it. While we are a strong believer that a diversified approach to stocks helps one participate in the long-term upward bias of stocks, we do not try to time the market nor do we predict where a major index might be in one month, six months, or one year.
Yet, the sharp run-up suggests that stocks are overvalued, or “priced for perfection”. In these circumstances, we become cautiously optimistic and maintain the idea that the market could be vulnerable to a selloff, since any negative surprises can broadside overly-optimistic investors. While “prior performance does not guarantee future returns,” we have seen many a selloff happen before. That being said, declines have been minor and short-lived over the past twelve months.
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.
Are stocks priced for perfection? In hindsight, all the ingredients for a 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 one of the biggest supports for share prices: low interest rates. Low interest rates not only help fuel market gains, they help support higher valuations. Put simply, low interest rates take the competitive away from bonds and encourage investors to look at stocks and other riskier investments rather than settle for safe but paltry returns. This is especially true during periods of economic expansion, soaring corporate profits , and analysts ramping up future earnings estimates. In other words, it is not simply low rates, but low rates combined with investor sentiment.
Today, there are few signs that economic growth is set to sharply slow.
Looking ahead, Federal Reserve Chair Jerome Powell said last month in a late August speech that the Fed is openly pondering a cutback in its monthly purchases of bonds. Within the year, many analysts expect a timetable or something more concrete, but the Fed hasn’t committed to anything yet. It still has wiggle room in the event of economic growth or job growth unexpectedly slowing. Furthermore, Powell insisted that rate hikes are not on the table right now, and that 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 inflation will likely have the biggest influence on if, when, and how 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. While the eventual market pullback is inevitable, powerful tailwinds have been supportive of current stock prices.
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.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.