Arrowhead Wealth Partners Newsletter – March 2023

Let’s Start the Year Right!

We hope your year is off to a good start! This is the premiere issue of the Arrowhead Wealth Partners newsletter, and we intend to send out future editions at the end of every quarter moving forward.

In this newsletter, we will shed some light on SECURE Act 2.0, which has made some substantial changes to the retirement savings world.

The Arrowhead Team

 

SECURE Act 2.0: The Four Most Impactful Changes You Should Be Aware Of

The Secure Act 2.0 bill was signed into law on December 29, 2022, and is somewhat of a sequel to the SECURE Act passed in 2019. Some of the new specifications make it easier:

• to save for retirement,
• for businesses to provide retirement benefits (as well as encouraging them to)
• to preserve savings in retirement

There were many provisions passed in this act, but we are going to highlight the 4 that we find most impactful to you.

Required Minimum Distribution (RMD) Changes

In 2019, the RMD age went from 70.5 to 72. With SECURE Act 2.0, since the beginning of 2023, the RMD age is now 73. In 2033, the RMD age will increase again, moving to 75 at that time.

It is also worth noting that the penalty tax for missing a required minimum distribution has been changed, reduced to 25% (previously 50%).If the failure is corrected in a timely manner, the penalty tax is reduced from the 25% down to 10%. As always, please consult your tax advisor when dealing with a situation like this. Remember, these changes are in effect now.

529 Plans and Retirement Savings

529 Plans have proven to be a valuable tool for investors saving for college. One question we are frequently asked revolves around what to do with any funds that may be left in the account after all the college expenses are paid. Thanks to SECURE 2.0, there is a provision that allows some expanded options. Beginning in 2024, if funds remain in a 529 Plan, they may be rolled into a Roth IRA for the beneficiary. However, there are a few rules to this option that need to be remembered.

1. The 529 Plan must have been opened for at least 15 years.
2. The amount rolled from the 529 Plan to the Roth IRA each year cannot exceed the Roth contribution limit ($6,500 for 2023).
3. The amount rolled from the 529 Plan to the Roth IRA cannot exceed $35,000 in the beneficiary’s lifetime.

There will be a lot of thought that goes into making your decision on how to utilize this new rule, but we feel anyone with unused 529 Plan accounts will find the rollover option to be a helpful one.

Higher Catch-Up Contributions

There are two significant changes to catch-up contributions that were made with SECURE 2.0. In 2023, an individual is allowed to defer $22,500 into a 401k account. If you are 50 or older, you are allowed to make an additional $7,500 in catch-up contributions. Those numbers change each year and are indexed for inflation.

The first provision is effective in 2024 and states all catch-up contributions for individuals earning more than $145,000 per year (indexed for inflation) must be made into a Roth account on an after tax basis. 

The second provision affects individuals between the ages of 60 and 63. Beginning in 2025, individuals in this age range will be eligible for a higher catch-up contribution limit. As mentioned above, the current catch-up contribution would be $7,500. Under SECURE 2.0, this amount will be raised to $10,000 for those between 60 and 63 years old.

There is a catch-up contribution for IRAs, currently $1,000 for anyone over the age of 50. Beginning in 2024, that limit will be indexed to inflation, meaning that it could increase every year depending on cost-of-living increases.

Student Loan Debt

Beginning in 2024, employers will be able to “match” employee student loan repayments with matching payments to a retirement account. This will help to provide the incentive, as well as less of a financial strain, for younger workers to begin building retirement savings while paying off student loans. While this provision regarding student loan debt won’t impact very many people who are closer to retirement, we think it is good information for everyone to know. The older generations can help encourage younger investors (or potential younger investors) they know to keep an eye on this option and perhaps start their retirement accounts much sooner than they would otherwise.

It's Not Too Late 

As we move into this year’s tax season, just know it is not too late to fund certain retirement accounts for 2022! Up until the tax filing deadline of April 17th, you are still able to contribute to your Traditional or Roth IRA accounts if you have not done so for 2022, or if you would like to make any last-minute additional contributions.

1Q 2023 Portfolio Update

Here at Arrowhead Wealth Partners, we believe it is important that you are up to date on our assessment of the current market situation. This video will go over some of the key areas of focus we have currently for 1st Quarter of 2023.

Watch the Video

4 Rocks of Retirement

In 2022, a financial services company conducted studies with over 10,000 American pre-retirees and current retirees asking how they feel about retirement. It’s a new phase in your lifetime that is basically unwritten, and those entering this chapter in life can make it what they want… but they must make sure they have what is needed. At the top of that list is financial resources, but there are 3 other mainstays of retirement that allow you to make the most of it. Even if you’re not nearing your planned retirement age, there’s no time like the present to start working on these pillars.

1. Financial Resources (Assets, Investments, Savings, Liquidity)

Money, and access to it, affords retirees both wants and needs – autonomy / freedom and security / stability. Unfortunately though, 66% of Americans planning their retirement in the next decade admit the costs of their healthcare, including any possible long-term care, is a mystery to them. Illnesses and car accidents are just two unexpected situations that can use a large chunk of money that has to come from somewhere. Over 50% of survey respondents stated they would budget more for surprise expenditures if they could go back in time, so perhaps their hindsight will help you better prepare for such situations.

2. Health, Well-Being, and Preventative Care 

The COVID-19 pandemic revealed to the majority of study participants what was important in life, including their legacy. They also responded that the perfect length of retirement would be just shy of 3 decades, at 29 years. That’s a long time, and when you realize up to a decade of those years may bring serious health concerns – dementia and cancer are 2 of the most common – supporting and monitoring your health is paramount.

3. Family, Friends, and Relationships

Sadly, over 70% of the surveyed retirees or pre-retirees stated they worry about being burdensome on other family members. Previous studies have shown that as early as 50 years of age this same fear is present. They don’t want to be an inconvenience, whether it is due to healthcare decisions at critical times, finances, or end-of-life topics. These are difficult and uncomfortable subjects to broach, but are important so not only preferences and wishes are made known, but also, to alleviate some of the burden on relatives.

4. Purpose and Meaning

Hanging out with family members ranked first in the survey when pre-retirees and retirees were questioned about what gave them the most purpose in life. Learning new things and expanding knowledge were rated very high too. There’s no doubt that retirement equals much more free time per day, and one-third of respondents report struggling with their purpose in life. Do you feel the talents, abilities, gifts, experience, and expertise of retirees should be utilized more? If so, you are aligned with the vast majority of study participants, because 9 in 10 Americans believe there should absolutely be more opportunities to put all of those to much better use to improve the lives of others and our communities.

With the information that over half of the pre-retirees and retirees who participated in this study regret their retirement planning – in all aspects – was not more comprehensive, you can use their experience to make sure the 4 rocks of retirement are set in stone for you.

Arrowhead Wealth Partners was founded to serve the needs of ordinary people who want well-regarded professionals to manage their investments and guide them towards successfully meeting their financial goals.