Posts made in February 2023

Return of the Debt Ceiling

Debt Ceiling Preview

“Here we go again.”  That’s a line from Return of the Jedi, delivered by C-3PO just before he and his friends prepare to go out on another harrowing adventure.  In the movie, poor 3PO was referring to taking down the Death Star, but he could have easily been referring to something else:  

The Debt Ceiling. 

Yes, it’s back.  And now, economists, pundits, politicians, and investors are all saying the same thing: “Here we go again.” 

On January 19, the United States officially hit the debt ceiling.1  Now, you probably didn’t notice anything different when you woke up that morning, and nor will you for a while.  But there is a chance that sometime this year, the effects will be very noticeable indeed.  This is a story that will likely dominate the news more and more in the coming months.  Furthermore, it may lead to volatility in the markets.  So, to help prepare you for the spate of headlines coming our way, here’s a quick preview on the debt ceiling fight brewing in Washington. 

First, let’s recap what the debt ceiling actually is.  Many people think the debt ceiling is a cap on how much total money our government can spend, but it’s not.  This is actually an important point.  In truth, the debt ceiling is “the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations.”1

Now, what are these obligations?  It’s a massive list, including everything from Social Security and Medicare benefits to tax refunds, military salaries, and interest payments on Treasury bonds.  The debt ceiling, then, is the limit to what the government can borrow to pay back what it has already spent.  (Or is legally obligated to spend.)

To better understand this, we must understand the difference between government spending and government borrowing.  The two are not interchangeable. You see, when Congress passes a law, the government must spend money to enact it.  There are two types of legislation used to get that money.  Sometimes Congress authorizes a law, but the authorization doesn’t contain provisions to fund the law.  A separate piece of legislation, known as an appropriations bill, is required.  This is where Congress separately appropriates money for the new law.  These appropriations must be renewed, usually on an annual basis, for the law to remain funded.  This sort of thing is known as discretionary spending, because Congress decides upon its own discretion whether to continue funding the law. 

Other laws fall under the umbrella of mandatory spending.  When a new law is enacted that does contain the authority for funding, then Congress is required to fund the law perpetually until the law expires (assuming the law has an expiration date).  Social Security and Medicare, for example, fall under mandatory spending. 

Now, here’s the important part.  Sometimes Congress doesn’t have the money to pay for the laws it previously enacted, especially the larger mandatory programs.  But Congress can’t simply not pay for them.  A law is a law, and Congress is legally obligated to find the money to fund them.  So, in those cases, Congress must borrow the money it is compelled to spend.  That’s the difference between borrowing and spending, and the debt ceiling only applies to the former.  It limits how much the government can borrow to cover what it has already spent.

Normally, raising the debt ceiling requires a simple act of Congress.  Some years, however, politicians in Congress disagree about whether the ceiling should be raised.  Or, if the ceiling should only be raised if it also comes with a decrease in government spending.  When this happens, we get a debt ceiling crisis, where the nation comes perilously close to defaulting on its debts.  The most nerve-racking of these crises occurred in 2011.  Back then, the U.S. came so close to a default, our nation’s credit rating was downgraded for the first time in history.  (More on that in a moment.) 

Unless things change very quickly, 2023 is setting up to be the most bare-knuckled fight since then.  Now, for all our sakes, I’m going to skip the political aspects of this and focus solely on the financial.   The most important being: What happens if the U.S. defaults on its debt?

The short answer: Nobody knows.  It’s never happened before. 

The long answer: Nobody knows for sure, but we have a good idea.  It isn’t pretty. 

For starters, seniors could stop receiving Social Security payments, or at least experience delays.  Families could stop receiving Child Tax Credit Payments.  Members of the US military would stop receiving paychecks, as would federal employees.  Veterans’ benefits would be delayed.  Food assistance for the hungry, homeless, poor, and malnourished could stop.  Medicare patients would have no means of getting healthcare.  You get the idea. 

Less gut-wrenching on a human level, but equally impactful on a financial, is what a default would mean for the bond market.  As you know, the U.S. issues Treasury bonds to pay for everything that taxes alone cannot.  In a default, bondholders would no longer be paid, and the value of their bonds would plummet.  This would lead to dramatically higher interest rates on any new debt issued in the future – which in turn would lead to higher rates for everyone.  Given that rates are already higher than they’ve been in years, this would likely plunge the economy into a deep recession.  And since Treasury bonds are historically the most stable investment in the world, it would probably disrupt international bond markets, too.  The result?  A global recession. 

Now, there are some possible steps the government could take to diminish the effects of a default.  The most likely option would be for the government to prioritize its debt payments.  In this scenario, bondholders would get paid first, since they literally own the country’s debt.  That might stabilize the bond market, but it could still lead to higher unemployment, lower consumer spending, and other problems.  In other words, still a recession. 

Another possibility would be for the Federal Reserve to buy a portion of those bonds so that bondholders aren’t left out in the cold.  But doing this would also increase the nation’s money supply, leading to lower interest rates and higher inflation.  That’s the very opposite of what the Fed is currently trying to do!

Other scenarios are either more far-fetched or come with a host of potential legal problems.  For example, some academics argue that President Biden could simply ignore the debt ceiling.  Other experts think this would be unconstitutional.  If the courts agreed with that interpretation, all payments the government makes after breaching the debt ceiling would be considered invalid.  This would also throw the bond market into turmoil.  For these reasons, most policymakers usually see raising the debt ceiling as the only viable option. 

At this point, you’re probably wondering why none of this has happened yet if we’ve technically already reached the debt ceiling. I can give you the answer in two words: Extraordinary Measures.

Now, let me give you the answer in a few more words.  These “extraordinary measures” are basically accounting tools that help the government pay its bills without authorizing new debt.  The good news is that these measures buy the government time.  The bad news is that it’s just like replacing a flat tire with a spare one.  It’ll get your car to the shop, but sooner or later, you’ll have to get a new tire. 

As far as the debt ceiling is concerned, no one is exactly sure when “sooner or later will be.”  In a recent letter to Congress, the Treasury Department estimated the clock will hit zero no earlier than June.1  So, the immediate question we need to ponder is what will happen before then. 

Up to this point, the markets have been fairly calm about the debt ceiling.  There are two reasons for this.  The first reason is that, right now, investors are more concerned about things like interest rates and inflation.  The second reason is due to the assumption that Washington will get its act together and raise the debt ceiling like it always has before. 

Whether this happens remains to be seen.  But, while history suggests the country will avoid a default, history also suggests the markets will get increasingly nervous the closer we get to the June deadline.  For proof of that, let’s rewind back to 2011. 

Back then, President Obama and House Republicans were locked in a fierce debate over the same issues Washington faces today.  As the clock got closer to zero, Wall Street began to truly come to grips with the possibility of a default.  At one point, things looked so dire that one of the major rating agencies actually downgraded the nation’s credit for the first time in history.  It didn’t last very long, but it certainly rattled investors.  The stock market fell sharply while the cost of borrowing rose.  The only upside was that these effects shocked Washington into action, and a deal was cut to raise the debt ceiling mere days before a potential default. 

For these reasons, my team and I are carefully watching the negotiations going on in the White House and on Capitol Hill.  For the moment, we don’t see a need to make major changes to your portfolio.  And we certainly don’t think you need to feel any stress about the subject right now.  However, should anything change, we will let you know immediately.  Furthermore, we’ll keep you up to date about the situation as we get closer to June.  While Congress may be in the habit of waiting to the last minute to get things done, that’s not how we work here at Vaughan & Co. Securities, Inc..  We are committed to being vigilant and proactive as the months go by.        

In the meantime, we’ll continue to monitor your investments daily.  It’s our job to stress about the markets so that you don’t have to!  Of course, please let me know if you ever have any questions, concerns, or just want to chat.  Because, while the Force may not be real, I can still give you my own version of another famous Star Wars quote: “Remember, my team and I will be with you…always.”


1 “Letter to the Speaker of the House,” Department of the Treasury, January 13, 2023.

The Secure 2.0 Act

Breaking down SECURE Act 2.0

On December 23, Congress passed the Consolidated Appropriations Act of 2023.  This is what’s known as an “omnibus spending bill”.  (The word omnibus means that multiple measures were packaged into a single document.)  The bill authorizes $1.7 trillion in government spending on everything from disaster relief to supporting Ukraine to workplace protections for pregnant mothers. On December 29, President Biden signed the bill into law.1

As you can imagine, this was a massive bill.  In fact, it contained over four thousand pages.  That’s because, as an omnibus, it’s really multiple bills combined into one.  Among those many bills is one that will have a profound impact on retirement called SECURE Act 2.0.

Back in 2019, Congress passed a law known as the Setting Every Community Up for Retirement Act.  This was the original SECURE Act.  The law made important changes to IRAs and 401(k)s, among other things, and was designed to help more Americans save for retirement.

SECURE Act 2.0 widens the scope of several provisions from the original law.  It also comes with a variety of new ones.  To help you understand this law and how it may affect your finances, I’ve written this special letter.  Now, as you’ve probably guessed, I’ve sent the following information to all my clients.  So, while some of the information you’re about to read may not apply to you right now, it could apply to members of your family.  If so, feel free to share this letter with them!

There’s a lot to unpack here, so please take a few minutes to read about these new provisions.  Most are fairly simple, and I’ve done my best to explain them all in plain English.  But if you have any questions or concerns, please let me know.
In the meantime, I wish you a Happy New Year!  I hope the year 2023 is a great one!

Important Provisions of the SECURE Act

Before we dive in, understand that SECURE Act 2.0 is over 20,000 words long.  That means there isn’t room to cover every aspect of the law, and many won’t apply to you anyway.  So, what follows is a brief overview of the provisions that could affect your finances.

Are you ready?  Then take a deep breath as we go over…

Changes to RMDs2

One of the most notable changes from the original SECURE Act was raising the age at which retirees need to take required minimum distributions, or RMDs.  SECURE Act 2.0 raises the age again.  Beginning on January 1 of this year, retirees may now wait until age 73 (up from age 72).  This is important, because it gives retirees an additional year to benefit from the tax advantages that come with IRAs before making mandatory withdrawals.  (Note that anyone who turned 72 last year will still need to continue taking RMDs as previously scheduled.)

Per the new law, the RMD age will increase to 75 beginning in 2033.

Another noteworthy change is the penalty applied to those who fail to take their RMD, or don’t withdraw enough.  Previously, the penalty was 50% of what the retiree should have withdrawn.  Beginning this year, that penalty has now been reduced to 25%.  And if the mistake is corrected within the proper “Correction Window”, it will be reduced further to a mere 10%. The Correction Window is usually defined as beginning January 1st of the year following the year of the missed RMD and ending when a Notice of Deficiency is mailed to the taxpayer or penalty is assessed

Finally, the law eliminates the need to take RMDs for Roth IRAs that are inside qualified employer plans.  What does that mean in English?  It means that if a retiree owns a Roth IRA through their old employer, they need never make mandatory withdrawals during their lifetime.  This change begins in 2024.

(Note, of course, that regular Roth IRAs not part of an employer plan were never subject to RMDs to begin with, so this change does not apply.)

Changes to Catch-Up Contributions2

Under current law, employees aged fifty or older can make extra “catch-up” contributions of up to $7,500 per year to their 401(k) or 403(b).  Beginning in 2025, individuals aged 60 through 63 will be able to contribute up to $10,000 annually.  Furthermore, that amount will be indexed to inflation, meaning it will go up as inflation does.

For people who are 50 or older – but not between the ages of 60-63 – the catch-up limit will remain $7,500 per year.

People aged 50 and older who own IRAs can also make catch-up contributions, albeit at a smaller amount.  Currently, the catch-up contribution limit for IRAs is $1,000 per year.  In 2024, that number will be indexed to inflation, too.  Again, that means the limit could increase each year as cost-of-living expenses rise.

Other Provisions to Note2

Here’s an interesting provision: Starting in 2024, individuals may transfer money from a 529 plan into a Roth IRA.  This could be useful if you own a 529 plan that has more funds than you or your loved one needs to pay for an education.  Think of it as a way to add more flexibility to your long-term finances.

It’s important to note, however, that this provision comes with a lot of terms and conditions.  For example, the Roth IRA must be in the same name as the beneficiary of the 529 plan.  Furthermore, no transfers can be made until the 529 plan has been maintained for at least fifteen years.  There are also very specific limits on how much money can be rolled over.  So, if you ever intend to make use of this provision, my advice is to talk to me first so my team can help you through the process.

Let’s move on to another interesting provision.  As a financial advisor, I’ve long recommended that all investors have a Rainy-Day Fund.  But sometimes, even this isn’t enough to handle unexpected expenses, like a health crisis or loss of income.  Under SECURE Act 2.0, it’s now easier to make use of your retirement savings in an emergency.  Previously, there was a 10% penalty for withdrawing money from a retirement account prior to reaching age 59½.  (This was to prevent people from using their retirement savings for something other than retirement.)  However, there are some exceptions, such as when you need the money to pay for certain medical expenses.  The new law has expanded the list of exceptions.  Here are some examples where the 10% penalty no longer applies:

- Recovering from a natural disaster, like an earthquake or hurricane

- Dealing with a terminal illness

- Being the victim of domestic abuse

The law also allows for emergency withdrawals for any taxpayer who needs to meet “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”2  Now, what the law does not do is specify what situations qualify as an emergency.  Instead, the law states that “the administrator of an…eligible retirement plan may rely on an employee’s written certification that the employee satisfies the conditions of the preceding sentence in determining whether any distribution is an emergency personal expense distribution.”2

I know, I know – that sentence is Washington legalese at its finest.  Basically, this means people just need to be reasonable at determining for themselves what qualifies as an emergency.  For example, if a loved one has been injured in an accident?  That’s an emergency.  Desperately want to buy the newest PlayStation before it goes out of stock?  Not an emergency.

Hopefully, you will never have to make use of this provision.  But it’s nice to know that it’s there in case you ever do!

The final provision I want to address in this letter involves qualified charitable distributions, or QCDs.  A QCD is a direct transfer of funds from your IRA to a qualified charity.  They are a popular tool for retirees who want to contribute to a worthy cause, because QCDs also double as RMDs under most situations.

Under SECURE Act 2.0, people age 70½ and older may use a QCD to gift up to $50,000 to a beneficiary.  This is a one-time deal, and several conditions must be met.  So, again, if you want to take advantage of this provision, talk to me and my team first so we can help you navigate the rules and restrictions.

Lastly, the law also links the maximum annual QCD amount to inflation rather than capping it at $100,000 like before.


As you can see, SECURE Act 2.0 is loaded with provisions for those saving for retirement.  So, again, if you have any questions or concerns, please don’t hesitate to contact me!

Of course, my team and I will continue pouring over these changes.  If there is anything else we feel you need to know, we’ll reach out to you, or go over them with you during our next review.

In the meantime, remember that I’m here to help you work toward your financial goals.  Please let me know if there’s ever anything I can do – in 2023 and beyond.



1 “Here’s what’s in the $1.7 trillion spending law,” CNN, December 29, 2022.
2 Text of “Consolidated Appropriations Act of 2023,” (beginning page 817),