Business Owners

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.

Conclusion

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.

 

Sources

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), Congress.gov.  https://www.congress.gov/117/bills/hr2617/BILLS-117hr2617enr.pdf

As you know, the coronavirus pandemic has created both a health crisis and an economic crisis.  As of this writing, there are over 160,000 known cases.¹  By the time you read this, there will certainly be more – and that number does not reflect those who have been infected but not tested.  The economic cost, meanwhile, has resulted in millions of Americans losing their jobs.  Some economists at the Federal Reserve estimate the unemployment rate could rise as high as 32%!² 

To help address both crises, Congress recently passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  It’s a massive, $2 trillion stimulus package designed to help everything from hospitals, to individuals, to businesses large and small.  Time will tell if it will be enough to blunt the impact of this pandemic, but the fact Congress was able to pass something so significant, so quickly, is a rare feat worth celebrating. 

Charles Darwin once said, “It is the long history of humankind that those who learned to collaborate and improvise most effectively have prevailed.”  For many years now, that is not a quote you could usually apply to the United States Congress.  Political partisanship has meant that gridlock usually prevails over collaboration.  Thankfully, both sides of the aisle recently proved the institution still works when people put aside their differences and work together for the common good. 

This is major legislation, with benefits for almost every American.  Some of the bill’s provisions are especially important for retirees.  So, to help you understand what the CARES Act does, and how it will impact you, I have prepared a special breakdown.  As I am sending this to all my clients, some information may apply to you, and some may not.  Please read it carefully, and then let me know if you have any questions.      

 We at Vaughan & Co. Securities Inc, hope you and your family are staying healthy and safe.  Please let us know if there is anything we can do for you!                                  

Important Provisions of the CARES Act

The CARES Act is designed “to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”³  Think of it as a kind of massive care package.  Just as an actual care package is meant to get somebody through a tough time, that’s what the CARES Act is designed to do.  Because so many people have either lost their job, seen their hours cut back, or experienced drastic changes to their daily lives, many Americans must now contend with potential cashflow problems.  The CARES Act contains a number of provisions to help individuals and businesses handle those problems, at least for the short-term.

What follows is a brief overview of the provisions that could affect you and your finances.  Let’s start with:

What’s the quickest way to ensure people get the money they need?  Pay them directly.  Perhaps the most newsworthy aspect of this bill is that many taxpayers will receive a one-time direct payment to help them cover expenses. 

Here’s a breakdown of how it will work. 

Individuals who made up to $75,000 in 2019 will receive $1,200. 

Heads of Household (single parents, for example) who made up to $112,500 in 2019 will receive $1,200.

Married couples filing a joint tax return who made up to $150,000 in 2019 will receive $2,400.

On top of this, each taxpayer will receive up to $500 for each child they have under the age of 17.  So, for example, a married couple with two children would receive $3,400.

Note that payments decrease for individuals and married couples with income above their respective thresholds.  Specifically, payments shrink by $5 for every $100 earned above the $75,000/$150,000 limits.  The payments disappear entirely for individuals who made $99,000 or more, and for married couples who made $198,000 or more. 

So, when will this money actually arrive?  It’s unclear.  The IRS could start issuing payments sometime in April or May, but an official schedule has not been released.  (The CARES Act itself only mandates that payments be made “as rapidly as possible.”⁴)  It’s likely that those who filed their 2019 tax returns with direct-deposit information will receive payments first.  

If you haven’t filed your tax return for 2019 yet, please let me know.  We would be happy to work with your tax preparer to expedite the process. 

Speaking of tax filing…

This isn’t technically part of the CARES Act, but I’m going to cover it anyway because it’s important.  Due to the pandemic, IRS has extended this year’s tax-filing and payment deadlines.  Now, taxpayers have until July 15 – up from the standard April 15 – to file their 2019 tax returns.  The deadline to make IRA and Roth IRA contributions is now July 15 as well. 

Note that this new deadline applies to everyone, not just those who are sick, under quarantine, or materially affected by the coronavirus in some way.  And if you’ve already filed your return, you should still receive your refund around the same time you would during a typical tax season.

Let’s get back to the CARES Act.

I said a moment ago that direct payments were the most newsworthy aspect of the bill.  But for the overall economy, the bill’s unemployment provisions are probably the most important.  Unemployment claims rose by 3.28 million between March 15-21.  That’s the highest weekly surge in history.  The previous record?  695,000.⁶ 

To help combat this, the CARES Act provides approximately $260 billion in unemployment assistance for those who lose their jobs.  This includes freelancers, independent contractors, and other self-employed workers.  That’s a major change, because under normal circumstances, they can’t apply for unemployment benefits. 

Generally, workers who lose their jobs will receive $600 per week for four months, in addition to what their state unemployment program pays.  The CARES Act also adds an additional thirteen months of federal unemployment insurance on top of a person’s state benefits.

If any family members lose their job, please let me know.  We would be happy to answer their questions or provide any assistance we can. 

Even those who don’t lose their jobs will still want to keep a close eye on our nation’s unemployment rate.  More people out of work means less people spending money on the economy – which can have a profound influence on the markets.  That’s why one of the most critical things the government can do right now is help businesses avoid laying people off. 

Roughly $350 billion of the legislation’s price tag is geared towards just that.  Companies with up to 500 employees can receive loans of up to $10 million.  Any portion of the loan used to maintain payroll or retain workers – at least through the end of June – will be forgiven.  In addition, businesses can apply for grants of up to $10,000 to cover their operating costs. 

For larger businesses, the CARES Act sets aside around $500 billion in loans and grants, especially for hard-hit industries like airlines.  And for companies that are forced to close or furlough workers, the legislation “covers to 50% of payroll on the first $10,000 of compensation, including health benefits, for each employee.”⁷

These are all necessary steps to keep our economy going.  Will they be enough?  That’s an open question.  The answer largely depends on how long the pandemic lasts – and how well Americans commit to social distancing to stop the virus’ spread.  Watch this space.             

Certain aspects of the CARES Act’s provisions are especially important for retirees.  Let’s cover those now.

First up, Required Minimum Distributions, or RMDs.  In a normal year, anyone 72 years or older would need to withdraw a minimum amount from their IRA or 401(k).  Not this year.  Under the CARES Act, all RMDs are suspended in 2020.  That means you can leave that money in your retirement account for the year if you don’t need it now.  Note that this applies both to retirement account owners and beneficiaries.

People who have already taken their distribution for 2020 can potentially return the money to their account if they want.  This could be a slightly complicated process, so I won’t cover it here.  However, if you want further information about it, let me know.

The CARES Act also waives the 10% early withdrawal penalty for retirement accounts.  Withdrawals will still be taxed, but spread over a three-year period.  Under most circumstances, my advice is to leave your retirement savings where they are, but it’s nice to know that early withdrawals are an option if you need them.

Finally, the CARES Act increases the 401(k) loan-limit from $50,000 to $100,000.

If you have questions about any of these provisions, or how they apply to you, let’s chat!

Finally, it should come as a great comfort to know that the brave doctors, nurses, and scientists on the front lines are getting assistance, too.  Specifically, the CARES Act provides $100 billion for hospitals, $1.32 billion for community health centers, $11 billion for coronavirus treatments and vaccines, $16 billion for additional medical supplies, like ventilators and masks, and $20 billion for veterans’ health care.  You should know, too, that the Act includes a telehealth program so that if you can’t leave home, you can still have a virtual appointment with your doctor.

Our hearts goes out to all those giving their time, talents – and sometimes, lives – to keep the rest of us safe.  They are true heroes, and we are so grateful for them.  Let’s all do our part to make their jobs just a little easier by maintaining our distance, keeping clean, and staying home as much as possible.

As you can see, the CARES Act is a loaded piece of legislation.  Time will tell whether more measures are needed, but this is definitely a good start.

Of course, our team will continue poring over these changes.  If there is anything else we feel you need to know, we’ll reach out to you.  In the meantime, if you have any questions about:

·         Getting a direct payment

·         Filing your taxes

·         Protecting your paycheck and/or income

·         Your retirement accounts

Please don’t hesitate to let us know.  Whether we’re in the office or working from our own homes, my team and I are always here for you.

Stay healthy, and stay safe.