Wealth Management

The SECURE 2.0 legislation included in the $1.7 trillion appropriations bill passed late last year builds on changes established by the original Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0) enacted in 2019. SECURE 2.0 includes significant changes to the rules that apply to required minimum distributions from IRAs and employer retirement plans. Here’s what you need to know.

What Are Required Minimum Distributions (RMDs)?

Required minimum distributions, sometimes referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer retirement plans after you reach a certain age, or in some cases, retire. You can withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal tax penalty.

These lifetime distribution rules apply to traditional IRAs, Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, as well as qualified pension plans, qualified stock bonus plans, and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also generally subject to these rules. If you are uncertain whether the RMD rules apply to your employer plan, you should consult your plan administrator, a tax professional, or your financial adviser.

Here is a brief overview of the top five ways that the new legislation changes the RMD rules.

1. Applicable Age for RMDs Increased

Prior to passage of the SECURE 1.0 legislation in 2019, RMDs were generally required to start after reaching age 70½. The 2019 legislation changed the required starting age to 72 for those who had not yet reached age 70½ before January 1, 2020.

SECURE 2.0 raises the trigger age for required minimum distributions to age 73 for those who reach age 72 after 2022. It increases the age again, to age 75, starting in 2033. So, here’s when you have to start taking RMDs based on your date of birth:

Your first required minimum distribution is for the year that you reach the age specified in the chart, and generally must be taken by April 1 of the year following the year that you reached that age. Subsequent required distributions must be taken by the end of each calendar year (so if you wait until April 1 of the year after you attain your required beginning age, you’ll have to take two required distributions during that calendar year). If you continue working past your required beginning age, you may delay RMDs from your current employer’s retirement plan until after you retire.

2. RMD Penalty Tax Decreased

The penalty for failing to take a required minimum distribution is steep — historically, a 50% excise tax on the amount by which you fell short of the required distribution amount.

SECURE 2.0 reduces the RMD tax penalty to 25% of the shortfall, effective this year (still steep, but better than 50%).

Also, effective this year, the Act establishes a two-year period to correct a failure to take a timely RMD distribution, with a resulting reduction in the tax penalty to 10%. Basically, if you self-correct the error by withdrawing the required funds and filing a return reflecting the tax during that two-year period, you can qualify for the lower penalty tax rate.

3. Lifetime Required Minimum Distributions from Roth Employer Accounts Eliminated

Roth IRAs have never been subject to lifetime Required Minimum Distributions. That is, a Roth IRA owner does not have to take RMDs from the Roth IRA while he or she is alive. Distributions to beneficiaries are required after the Roth IRA owner’s death, however.

The same has not been true for Roth employer plan accounts, including Roth 401(k) and Roth 403(b) accounts. Plan participants have been required to take minimum distributions from these accounts upon reaching their RMD age or avoid the requirement by rolling over the funds in the Roth employer plan account to a Roth IRA.

Beginning in 2024, the SECURE 2.0 legislation eliminates the lifetime RMD requirements for all Roth employer plan account participants, even those participants who had already commenced lifetime RMDs. Any lifetime RMD from a Roth employer account attributable to 2023, but payable in 2024, is still required.

4. Additional Option for Spouse Beneficiaries of Employer Plans

The SECURE 2.0 legislation provides that, beginning in 2024, when a participant has designated his or her spouse as the sole beneficiary of an employer plan, a special option is available if the participant dies before required minimum distributions have commenced.

This provision will permit a surviving spouse to elect to be treated as the employee, similar to the already existing provision that allows a surviving spouse who is the sole designated beneficiary of an inherited IRA to elect to be treated as the IRA owner. This will generally allow a surviving spouse the option to delay the start of required minimum distributions until the deceased employee would have reached the appropriate RMD age, or until the surviving spouse reaches the appropriate RMD age, whichever is more beneficial. This will also generally allow the surviving spouse to utilize a more favorable RMD life expectancy table to calculate distribution amounts.

5. New Flexibility Regarding Annuity Options

Starting in 2023, the SECURE 2.0 legislation makes specific changes to the required minimum distribution rules that allow for some additional flexibility for annuities held within qualified employer retirement plans and IRAs. Allowable options may include:

• Annuity payments that increase by a constant percentage, provided certain requirements are met
• Lump-sum payment options that shorten the annuity payment period
• Acceleration of annuity payments payable over the ensuing 12 months
• Payments in the nature of dividends
• A final payment upon death that does not exceed premiums paid less total distributions made

It is important to understand that purchasing an annuity in an IRA or an employer-sponsored retirement plan provides no additional tax benefits beyond those available through the tax-deferred retirement plan. Qualified annuities are typically purchased with pre-tax money, so withdrawals are fully taxable as ordinary income, and withdrawals prior to age 59½ may be subject to a 10% federal tax penalty.

These are just a few of the many provisions in the SECURE 2.0 legislation. The rules regarding required minimum distributions are complicated. While the changes described here provide significant benefit to individuals, the rules remain difficult to navigate, and you should consult with a tax professional or your financial adviser to discuss your individual situation.

Footnotes:

1. A technical correction is needed to clarify the transition from age 73 to age 75 for purposes of the required minimum distribution rule. As currently written, it is unclear what the correct starting age is for an individual born in 1959 who reaches age 73 in the year 2032.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

There has been a flurry of news articles on the collapse of Silicon Valley Bank (SIVB) coming out recently, and rightfully so. It is the largest bank to collapse since Washington Mutual failed in 2008. Silicon Valley Bank had $173 billion of customer deposits at the end of 2022 and served businesses such as Roku and Etsy. Two other banks, Silvergate (had $11.36 billion in assets) and Signature Bank (had $110.36 billion in assets) have also failed. While there may be contagion to other small community/regional banks, the systemically important banks like JP Morgan Chase and Bank of America are very unlikely to follow in SIVB’s footsteps. The SIVB situation is another example of the market volatility we can expect as global monetary policy tightens and liquidity wanes.

While we can get into the weeds into why these failures occurred, all three banks have failed because of a lack of diversification in their balance sheets. While we don’t believe there’s going to be widespread contagion, this does serve as a reminder to review your Federal Deposit Insurance Corporation (FDIC) coverage. Here’s a link to use to confirm your FDIC coverage. If you are concerned about not having sufficient FDIC coverage, we have multibank programs that offer an option for clients seeking full FDIC insurance on balances up to $100 million per single Tax ID.

We are in close communication with our custodians (Schwab and Fidelity) to ensure our clients’ brokerage accounts are protected from any undue risk and firmly believe in the strength and resilience of our custodians. Investments held at the custodians are not commingled with assets at their banking divisions. I would also encourage you to read the statement on Schwab’s financial stability found here from the founder and CEO. In addition, for your brokerage accounts, Securities Investor Protection Corporation (SIPC) provides up to $500,000 of protection for brokerage accounts held in each separate capacity (i.e., joint tenant or sole owner), with a limit of $250,000 for claims of uninvested cash balances. Schwab and Fidelity both have additional protection through Lloyd’s of London and other London insurers.

We believe that our client’s assets are safe and that the potential for widespread disruption in the banking system has been greatly reduced by the government’s forceful and timely actions. There has been and will always be some news to stir the pot and spook investors. The SIVB news is just the latest installment. Changing market environments are factored into our clients’ financial plans as a fundamental element of our overarching investment thesis to maintain downside protection for our clients amidst volatility. 

Please give us a call at 714-282-1566 or email us at financialplanning@bfsg.com to schedule a time to revisit your financial plan or discuss FDIC coverage. Thank you.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

On January 19, 2023, the outstanding debt of the U.S. government reached its statutory limit, commonly called the debt ceiling. The current limit was set by Congress at about $31.4 trillion in December 2021.¹

On the day the limit was reached, Treasury Secretary Janet Yellen instituted well-established “extraordinary measures” to allow necessary borrowing for a limited period of time. While Yellen projects the extension will last until early June, the Congressional Budget Office (CBO) estimates it may last until sometime between July and September. However, the CBO cautions that if April tax revenues fall short of its projections, the Treasury could run out of funds earlier.^2,3

Flexibility vs. Fiscal Fights

A debt ceiling was first established in 1917 to give the federal government more flexibility to borrow during World War I. Before that time, all borrowing had to be authorized by Congress in very specific terms, which made it difficult for the government to respond to changing needs.⁴

The modern debt ceiling, which aggregates almost all government debt under one limit, was established in 1939. Since 1960, it has been raised, modified, or suspended 78 times, mostly with little fanfare. That changed in 2011, when a political battle over the ceiling pushed the Treasury so close to the edge that Standard & Poor’s downgraded the credit rating of the U.S. government.^5,6

The debt ceiling limits the amount that the U.S. Treasury can borrow to meet financial obligations already authorized by Congress. It does not authorize future spending. However, beginning with the bitter battle of 2011, it has been used as leverage for partisan negotiations over government spending.  With the White House and the House of Representatives — which must authorize spending — held by different parties, this year’s negotiations could be particularly difficult.

Potential Consequences

If the debt ceiling is not raised in a timely manner, the U.S. government could default on its financial obligations, resulting in unpaid bills, higher interest rates, and a loss of faith in U.S. government securities that would reverberate throughout the global economy. While it’s unlikely that the current situation will lead to a default, pushing negotiations close to the edge can be damaging in itself. It was estimated that the 2011 impasse cost U.S. taxpayers $1.3 billion in increased borrowing costs in FY 2011 with additional costs in the following years.⁷

The Deficit and the Debt

Put simply, the federal government runs at a deficit when tax revenues are not sufficient to meet spending obligations. Federal spending has outpaced revenue for the last 50 years, except from 1998 to 2001.⁸ Annual budget deficits add to the national debt.

The current debt of $31.4 trillion is the highest in U.S. history.⁹ However, measuring the debt as a percentage of gross domestic product (GDP) provides a better comparison over time.  More specifically, economists look at debt held by the public — funds the government has borrowed to meet operational expenses and liabilities, primarily through issuing Treasury securities. Interagency debt — funds borrowed from government accounts such as the Social Security trust funds — is also subject to the limit but does not directly affect the economy or federal budget.

At the end of fiscal year 2022 (September 30, 2022), debt held by the public was equivalent to 97% of GDP. In 2019, before the pandemic, it was 79% of GDP, and in 2007, before the Great Recession, it  was 35%. Both of these crises caused explosions of the deficit and debt due to lower tax revenues and high spending on government stimulus programs. The last time the debt exceeded current levels was at the end of World War II.^10,11

In a new February 2023 analysis, the CBO projected that the debt will rise steadily over the next decade to 118% of GDP in 2033, which would be the highest percentage in U.S. history. The driving forces behind this increase would be higher spending on Social Security and Medicare, and rising interest costs (due to increasing debt and higher rates). If current laws remain unchanged, the debt is projected to rise even more quickly in the next two decades, reaching 195% of GDP in 2053.¹²

No Easy Answer

The only way to change this trajectory is to increase revenue, reduce spending, or both. The rosiest scenario would be decades of high GDP growth that increases revenue at current tax rates, but this seems unlikely. The CBO projects real (inflation-adjusted) GDP growth to average a tepid 1.7% annually over the next decade.¹³ Raising tax rates may be necessary, but that is always a difficult political option.

There is also little room to maneuver on the spending side. Only 28% of federal spending is “discretionary,” meaning Congress can set amounts through annual appropriations bills, and almost half of that spending goes to national defense, which few leaders would want to cut in the current global climate. The rest is mandatory spending, including Social Security and Medicare (which will account for nearly 36% of federal spending in 2023) and interest on the national debt.¹⁴ While both parties have indicated that Social Security and Medicare are off the table, other mandatory spending could be reduced through Congressional action.

The White House released its budget proposal for FY 2024 last week and this will be followed by a counterproposal from House Republicans in April, setting up what is sure to be an intense period of budget negotiations.¹⁵ President Biden and House Speaker Kevin McCarthy have already begun to discuss the debt ceiling issue, and it remains to be seen whether the ceiling can be addressed outside of the budget process or whether it will be caught in the crosshairs. In either case, the ceiling will have to be raised or suspended in order to maintain U.S. government operations.

Sources:

1, 3, 10, 12–14) Congressional Budget Office, 2023

2, 6, 9) U.S. Treasury, 2023

4–5) Bipartisan Policy Center, 2023

7) U.S. Government Accountability Office, July 23, 2012

8, 11) U.S. Office of Management and Budget, 2023

15) The White House

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Additional Disclosures: U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Forecasts are based on current conditions, are subject to change, and may not come to pass.

By:  Paul Horn, CFP®, CPWA® Senior Financial Planner

Most of our clients as they get older want to begin to think of ways that they can take care of their grandchildren. Most commonly the discussion revolves around opening 529 plans and saving for college. Below are five alternatives that are worth considering if you are trying to take care of grandkids:

1. Pay for their first car. Another large expense for kids is getting them their first car. The costs of gas and insurance alone are a burden for parents. This can be a great way to bond with grandkids and help them get their first taste of freedom.
2. Pay for vacations with the grandkids. Raising kids is expensive and there may not be a lot of money left in the parent’s budget for nice vacations. Instead of material goods, create memories that will last their lifetime. Paying for vacations with the grandkids will help them have new experiences, learn new things, and create lasting memories. I will never forget the camping and fishing trips I had with my grandparents. I learned how to bait a hook, drive a boat, and appreciate the mountains because my grandparents did this for me.
3. Buy them their first stock. You can transfer shares to your grandkids, and this can save you on taxes since you don’t have to sell the shares. Investing on behalf of your grandkids is an excellent way to help them start on the right foot financially. This also creates a great teaching opportunity to help your grandkids to develop the right financial habits. Here are the best accounts to open for your grandkid’s future.
4. Help them with giving to charity. Most of our clients would prefer to pass on values than assets to their kids and grandkids. Something we do is work with grandparents and have them make charitable donations each year on behalf of their grandkids. You can have the grandkids choose the charity and even give a little pitch as to why the charity deserves the money. The kids tend to love this and expect some money to go to the local animal shelter!
5. Spend time with them. If you live close to them, kidnap the grandkids for the day. Spoil them and get them hopped up on sugar and send them home! This can provide a needed break for the parents and helps create a strong bond and lasting memories for the grandkids. At the end of the day, kids want time more than anything else (even though they won’t say it).

There are many ways to help provide for and take care of grandchildren. Many of these ideas can be done without having to break the bank or spend too much money. If you have questions or would like to discuss these ideas, please contact us at financialplanning@bfsg.com.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

Our team would like to provide an update on a recent blog post discussing tax relief and the tax filing deadline for certain counties in California. The individuals in counties originally discussed in that posting will have until May 15^th, 2023, to file tax returns, but some counties are automatically extending that tax filing deadline to October 16^th, 2023. If you are a resident in one of the following counties, you qualify for additional relief and your tax filing deadline is October 16^th, 2023.

Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Benito, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, San Diego, San Francisco, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, and Yolo

Residents in Alabama and Georgia may also be able to receive tax relief and have the tax filing deadline extended to October 16^th, 2023.

This means that IRA contributions and Health Savings Account (HSA) contributions for Tax Year 2022 may be made as late as October 16^th, 2023. Estimated tax payments normally due on April 18^th, June 15^th, and September 15^th, and the California Passthrough Entity (PTE) payments for all taxpayers in affected areas are due between now and October 16^th.

For those that are claiming disaster-related casualty losses or would like to request copies of tax returns and waive the fee for requesting prior year tax returns, you may do so by completing Form 4684 ‘Casualties and Thefts’ or Form 4506 (or 4506-T) ‘Request for Copy of Tax Return’ (or ‘Request for Transcript of Tax Return’) respectively. Please reference in bold letters at the top of the applicable form “California, severe winter storms, flooding, and mudslides” and reference the FEMA disaster declaration number, FEMA-3591-DR. The IRS also has a disaster hotline (866-562-5227) and FEMA’s website can be used: https://www.disasterassistance.gov/ for any questions on the above deadlines and inquiries on whether or not you qualify for disaster relief.

Please visit the disaster assistance overview page on the IRS website for further guidance if you live in an impacted area.

Please let us know how we can be of help during what may be a difficult time for you and your family.

Sources:

1. https://www.irs.gov/newsroom/irs-announces-tax-relief-for-victims-of-severe-winter-storms-flooding-landslides-and-mudslides-in-california.
2. https://www.irs.gov/newsroom/irs-may-15-tax-deadline-extended-to-oct-16-for-disaster-area-taxpayers-in-california-alabama-and-georgia
3. https://www.irs.gov/businesses/small-businesses-self-employed/disaster-assistance-and-emergency-relief-for-individuals-and-businesses

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.