The U.S. government loves its acronyms. In December 2019, the original Setting Every Community Up for Retirement (SECURE) Act was passed to make saving for retirement easier. On December 29, 2022, President Biden signed SECURE 2.0 into law.
There are about 90 sections to the SECURE 2.0 Act. Even the U.S. Senate Committee on Finance summary is 19 pages. I will spare you a review of each section and instead reference a handful that may help you invest for retirement or navigate your finances before then. I want you to be able to skim this column so you can quickly determine what’s relevant to you.
Retirement contribution limits increase – and rise with inflation
SECURE 2.0 increases Roth and Traditional IRA contribution limits. In the past, contribution limits were fixed. Now they’ll be linked to inflation. The standard contribution limit for 2022 was $6,000. In 2023, it jumps to $6,500. Investors at least 50 years old were allowed to “catch-up” with an additional $1,000 contribution. That will remain at $1,000 for 2023, but then SECURE 2.0 will enable that catch-up amount to adjust higher based on inflation rates, starting in 2024.
Contribution limits for 401(k)s will increase. In 2022, the standard contribution limit for an employee was $20,500. In 2023, the limit goes up to $22,500. As with IRAs, there are catch-up contributions for those over 50 years of age. The catch-up was $6,500, but in 2023 it is $7,500. In 2024, that catch-up limit will be indexed to inflation, like for IRAs.
Some of these provisions will be phased in. For example, starting in 2025, those aged 60 to 63 can add even more to their 401k with a bigger catch-up provision. The increased catch-up provision for participants aged 60 to 63 will be the greater of $10,000 or 150 percent of that year’s catch-up contribution for those under the age of 60. This will apply to 401(k), 403(b), and 457 plan.
Changes are coming to catch-up contributions
In 401(k)s, starting in 2024, if an employee’s wages are more than $145,000 (and that amount will be indexed to inflation), any catch-up contributions made by those age 50 or older will go to an after-tax Roth bucket of the 401(k). The employee won’t get the tax deduction, but qualified withdrawals are tax-free.
SIMPLE IRA plans (Savings Incentive Match Plan for Employees) are accounts for small-business owners who can contribute more than the IRA limit but don’t want to set up a 401(k) account. Catch-up contributions will increase under SECURE 2.0, and there is an age 60-to-63 provision just like the 401(k).
Changing the rules on required minimum distributions
The age to take a minimum required distribution from IRAs will increase. Previously, at age 72, you had to withdraw a percentage of your IRA. That RMD (required minimum distribution) is based on the IRS-published life-expectancy table. In 2023, that age will go from 72 to 73. It’ll phase up to age 75 in 2033.
As of 2024, minimum distributions will no longer be required from Roth accounts in employer retirement plans.
Flexibility for savers
There will be a once-every-three-year option to take up to $1,000 from retirement plans for emergencies with no penalties. Applicable taxes must be paid, but the traditional 10 percent penalty for early withdrawal is eliminated. For distributions made in 2024 or later, participants who self-certify that they have experienced domestic abuse within the past year can withdraw up to about $10,000 from their plan without triggering early withdrawal penalties.
After 15 years, unused 529-plan assets can be rolled over tax- and penalty-free to a Roth IRA for the beneficiary.
More employees saving for retirement
Long-term part-time workers will more easily qualify to be eligible for 401(k) and 403(b) plans. Not only do I love this one, but I also love the provision that the default for employees will be to be enrolled in these plans starting in 2025. The starting contribution rate must be a minimum of three percent of the salary but not more than 10 percent. (Companies with 10 or fewer employees and businesses under three years old are excluded from this mandate.)
As it stands now, the default is that the employee is unenrolled and must elect to opt-in. Under SECURE 2.0, employees will have to elect to opt-out. You might think that wouldn’t affect the number of people participating, but it does. You can either take my word for it or read the book “Nudge” by Nobel Prize-winning behavioral economist Richard Thaler.
Among other findings, Thaler demonstrated that people can be nudged to do something better (or worse) for them if that particular something is set as the default. This is one of the best things I’ve ever seen the government do when it comes to helping people save for their retirement. Savings tools are helpful but ultimately useless if disregarded.
Effective 2027, lower-income retirement savers will be able to receive a government-funded match to their IRA up to 50 percent of their contribution, up to $2,000.
Additional retirement plan options for employers
SEP-IRA (Simplified Employee Pension) plans are primarily for small-business owners. SEP-IRAs were traditionally tax-deferred accounts (an employer contributes, gets a tax deduction, and pays taxes upon distribution). Should the employer elect to do so, under SECURE 2.0, they can forgo the tax deduction and let it grow tax-free. Later, they can withdraw funds with no tax implications. This will also be true for SIMPLE IRA plans.
Currently, employers can match employee contributions to pre-tax 401(k) plans. The SECURE 2.0 Act will allow employers the option to match after-tax Roth retirement plan contributions.
There will be more significant tax credits given to small employers. The old credit was the lesser of half the administrative cost of setting up the plan or $5,000. Under SECURE 2.0, the employer will receive credits set as a percentage of the amount the employer contributed, up to a $1,000 cap per employee. The percentages decline each year, starting at 100 percent, then falling to 75 percent, 50 percent, 25 percent, then zero percent.
Employers can match student loan payments with matching contributions to the employee’s retirement accounts starting in 2024.
This column is not intended to be a textbook-like explanation of the selected sections. I hope these brief synopses are a means to make you aware of topics you can discuss with your financial advisor.
Stock Market Returns for 2023
“Never tell me the odds!” – Han Solo.
Ben Carlson tweeted the below chart.
Carlson used this chart to remind us that 2023 probably won’t be a “normal” year for the stock market. Carlson says that many people believe it’s normal for the S&P 500 to return about eight to 10 percent in a calendar year. Going back to 1928, there was just one year, 1993, when the returns fell between eight and 10 percent.
The S&P 500 declined 19.4 percent in 2022. It is rare to see the market go down two years in a row. The market was down four years in a row from 1929 to 1932. It was down three years in a row from 1939 to 1941. It was down two years in a row in 1973 and 1974. Then down three years in a row from 2000 to 2002.
Since 1928, the S&P 500 has been up 72 percent of years and down 28 percent, averaging an 11.7 percent return. Those gains and losses have not been evenly distributed. The S&P 500 has increased 10 percent or more in a year 57 percent of the time and declined 10 percent or more only 12 percent of the time.
The historical odds appear that the market returns for 2023 might be positive double-digits instead of another down year. But if there was a period when the stock market might be negative two years in a row, it could happen if in Year One, the Federal Reserve crushed it, and in Year Two, the most anticipated recession in history further punished it.
While I like to fancy myself as a Han Solo-type, the truth is that I’m more the Warren Buffet-type. That’s not to compare my stock-picking skill to arguably the world’s most excellent stock picker, but rather to equate my inclination toward conservatism. One of Buffet’s sayings is, “Rule number 1: Never lose money. Rule number 2: Don’t forget rule Number 1.”
Previously, I illustrated my attraction toward small-cap stock investments. I expect that by the time you are able to read this column, I will have increased my exposure to small-caps primarily through a defined-outcome ETF, the Innovator Funds U.S. Small Cap Power Buffer ETF (symbol: KJAN)
Should the stock market decline in 2023, KJAN protects my downside with a 15 percent buffer. The price I pay for that insurance is that KJAN’s 2023 upside performance is capped at 21.54 percent. Should the Russell 2000 (the ETFs underlying index) increase by 31.54 percent, I’ll leave 10 percent on the table. I’ll kick myself if that happens, but at least I’ll know I tried to adhere to Warren Buffet’s advice.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures: https://berkshiremm.com/capital-ideas-disclosures/ Direct inquiries to Allen at AHarris@BerkshireMM.com.
