Is the Bull Market Really Ready to Charge?

On June 8, 2023, the S&P 500 index closed at 4,293.93, just over 20% higher than its lowest recent closing value of 3,577.03 reached on October 12, 2022.(1) According to a common definition of market cycles, this indicated that the benchmark index was officially in a bull market (uptrend) after a bear market (downtrend) that began in January 2022. By this definition, the current bull market began on October 13, 2022, the day after the bear market ended at its lowest point.

In more general terms, a bull market is an extended period of rising stock values. Bull markets tend to last longer than bear markets, and bull gains tend to be greater than bear losses. Since the end of World War II, the average bull market has lasted more than five years with a cumulative gain of 177%. By contrast, the average bear market has lasted about a year with a cumulative loss of 33%.(2)

Although a bull market is typically a time for celebration by investors, the current bull is being met cautiously, and it is unclear whether it will keep charging or shift into retreat. While it is impossible to predict market direction,  here are some factors to consider.

It's important to understand that while a 20% rally off last October’s bottom technically qualifies as a new bull market by Wall Street standards, it does not signal clear sailing ahead.

Over the past 100 years, a dozen bear market rallies of 20% or more occurred in protracted long-term bear markets. Not so surprisingly, five of these occurred in the 1929-32 slide into the Great Depression. A not-so-humorous anecdote from that era was that seven months after the October 1929 Crash, the stock market had recovered over half of its loss, and exuberant confidence had returned to both Wall Street and Main Street.

"While the crash only took place six months ago, I am convinced we have now passed the worst, and with continued unity of effort we shall rapidly recover." President Hoover – May 1, 1930

Yet the majority of the 1929-32 bear market still lay ahead.

Likewise, more recently, the 2000-02 bear market was interrupted by two very alluring back-to-back bear market rallies. One was +49%, that technically, by Wall Street standards– would have qualified for new bull market status.

It's important to consider how long every major stock market bottom has taken to achieve the 20% status to qualify as a “new” bull market. Since 1932, the median length of time to reach a 20% "liftoff" has been 64 days.

Today’s bull market required a lengthy 164 trading days to reach a +20% gain. Instead of a V-shaped bottom from extreme oversold and undervalued levels, this has turned into a grueling struggle. Ironically, the longest period in the past 100 years was in the 1947 bull market (281 days), which peaked with only a +24.4% gain just one month after reaching the 20% level. Real bull markets charge forward and are not timid.

Still lagging behind the high

One reason the new bull might not seem convincing is that (as of late June) the S&P 500 remains well below the record bull market peak in early January 2022. (3) Investors who hold positions in the broader market are still looking at paper losses and could face real losses if they choose to sell, a situation that may not generate the kind of widespread confidence that often drives extended rallies.

The current bull market is already eight months old, and it's unknown how much longer it might take to recover the total bear loss of about 25%, but recent history offers contrasting possibilities (remember, a 25% loss requires a 33% gain just to get back to even).

The last bull market regained the pandemic bear loss of 34% in five months and went on to a cumulative gain of 114%. The long bull market that followed the Great Recession of 2007-2009 took more than four years to recover an even steeper loss of 57%. But that bull kept charging and went on to a cumulative gain of 400%. (4–5)

A more pressing question is whether the recent surge could be a temporary bear market rally that quickly slips back into bear territory. This happened during the bear markets of 2000–2002 and 2007–2009. However, in 12 other "bear exits" since World War II, a gain of 20% from the most recent low was the beginning of a solid bull market. (6)

A narrow rally

Another key concern is that the current rally has been driven by large technology companies, which have posted big gains, due in part to excitement over the future of artificial intelligence. (7) The S&P 500  is a market-cap-weighted index, which means that companies with larger market capitalization (number of shares multiplied by share price) have an outsized effect on index performance.  As of May 31, the ten biggest companies, including eight technology companies, accounted for more than 30% of the index value. (8) Fewer than one out of four S&P 500 stocks have beaten the index in 2023, and nearly half have dropped in value. While it is not unusual for a relatively small number of companies to drive a rally, the current situation is more imbalanced than usual, and it remains to be seen whether exuberance for Big Tech will spread to the broader market. (9–10)

The market and the economy

While the stock market sometimes seems to have a mind of its own, it is anchored over the longer term to the U.S. economy, and the current economy continues to send mixed signals. The long-predicted recession has failed to materialize, and consumer spending and the job market remain strong. (11) On the other hand, inflation, while improving, is still too high for a healthy economy. Although the Fed paused its aggressive rate hikes in June — one reason for the market rally — a majority of Fed officials projected two more increases by the end of the year, and Fed Chair Jerome Powell confirmed the prospect of higher rates in Congressional testimony on June 21. (12)

Higher interest rates are intended to slow the economy and inflation by making it more expensive for consumers and businesses to borrow, which should slow consumer spending and business growth — and could send the economy into a recession. Although it may seem counterintuitive, bull markets usually begin during a recession, or to look at it another way, the market usually hits bottom while the economy is down and recovers along with the broader economy. Along the same lines, a bull market typically begins when the Fed is lowering interest rates to stimulate the economy, not when it's raising them to slow it down. (13) The current bull will have to buck both of these trends to sustain momentum.  And if a recession does develop, it could turn the bull into a bear.

Corporate earnings

Although investor enthusiasm can carry the market a long way, corporate earnings are the most fundamental factor in market performance, and the earnings picture is also mixed. Earnings declined by 2%  in Q1 2023 — less of a loss than analysts expected but the second consecutive quarter of earnings declines. The slide is expected to continue with a 6.4% projected decrease in Q2, which would be the largest decline since the pandemic rocked the market in Q2 2020.  The good news is that earnings growth is expected to return in the second half of the year, with robust growth of 8.2% in Q4. However, as with the current market rally, the surge is projected to be driven by large technology companies. (14)

Clearly, this bull market faces serious headwinds, and it may be some time before its true character emerges. While market cycles are important, it's generally not wise to overreact to short-term shifts, and it's better to focus on a long-term investment strategy appropriate for your personal goals, time frame, and risk tolerance.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Disclaimer: The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. The S&P 500 index is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary. Forecasts are based on current conditions, are subject to change, and may not come to pass.

1, 3–4, 8) S&P Dow Jones Indices, 2023

2, 5) Yardeni Research, October 28, 2022

6) MarketWatch, June 8, 2023

7, 9) CNN, June 9, 2023

10)  Associated Press, June 8, 2023

11) Fitch Ratings, June 8, 2023

12) CNBC, June 21, 2021

13)  Bloomberg, June 5, 2023

14) FactSet, June 9, 2023

Working while Collecting Social Security Benefits Increases Lifetime Benefits

The rules governing working while collecting social security benefits are complicated and voluminous. Many people think they can’t work once they start collecting social security or they must return all benefits received. That’s simply not the case.

In some cases, you can earn unlimited income from work and keep 100% of your social security benefits. In other cases, you may have to re-pay some or all your social security benefits if you earn too much money.

In short, anyone can get Social Security retirement or survivors benefits and work at the same time. But, if you’re younger than full retirement age (see below), and earn more than certain amounts, your benefits will be reduced.

The amount that your benefits are reduced, however, isn’t truly lost. Your benefit will increase at your full retirement age to account for benefits withheld due to earlier earnings. Note that spouses and survivors who receive benefits because they care for children who are minors or have disabilities, don’t receive increased benefits at full retirement age if benefits were withheld because of work.
 
NOTE: Different rules apply if you receive Social Security disability benefits or Supplemental Security Income payments. If so, then you must report all earnings to the Social Security Administration (SSA). Also, different rules apply if you work outside the United States.
 
How much can you earn and still get benefits?
If you were born after January 1, 1960, then your full retirement age for retirement insurance benefits is 67.

If you work, and are at full retirement age or older, you keep all your benefits, no matter how much money you earn.

If you’re younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits.

• If you’re younger than full retirement age during all of 2023, the SSA must deduct $1 from your benefits for each $2 you earn above $21,240.
• If you reach full retirement age in 2023, the SSA will deduct $1 from your benefits for each $3 you earn above $56,520 until the month you reach full retirement age.

The following two examples show how the rules might affect you:

Example #1: Let’s say that you file for Social Security benefits at age 62 in January 2023 and your payment will be $600 per month ($7,200 for the year). During 2023, you plan to work and earn $23,920 ($2,680 above the $21,240 limit). The SSA would withhold $1,340 of your Social Security benefits ($1 for every $2 you earn over the limit). To do this, SSA would withhold all monthly benefit payments from January 2023 through March 2023 ($1,800 total). Beginning in April 2023, you would receive your full $600 benefit and this amount would be paid to you each month for the remainder of the year. In 2024, SSA would pay you the additional $460 ($1,800 minus $1,340) over-withheld in March 2023.

Example #2: Let’s say you aren’t yet at full retirement age at the beginning of the year but reach it in November 2023. You expect to earn $57,000 in the 10 months from January through October. During this period, SSA would withhold $160 ($1 for every $3 you earn above the $56,520 limit). To do this, SSA would withhold the full benefit payment for January 2023 ($600), your first check of the year. Beginning in February 2023, you would receive your $600 benefit, and this amount would be paid to you each month for the remainder of the year. In 2024, SSA would pay you the additional $440 over-withheld in January 2023.

NOTE: If you receive survivors’ benefits, SSA uses your full retirement age for retirement benefits when applying the annual earnings test (AET) for retirement or survivors’ benefits. Although the full retirement age for survivors’ benefits may be earlier, for AET purposes, SSA uses your full retirement age for retirement benefits. This rule applies even if you are not entitled to your own retirement benefits.

What Income Counts and When is it Counted?
If you work for an employer, only your wages count toward Social Security’s earnings limits. If you’re self-employed, only your net earnings from self-employment count. For the earnings limits, SSA doesn’t count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains. However, SSA does count an employee’s contribution to a pension or retirement plan (i.e., 401(k) or 403(b) plan) if the contribution amount is included in the employee’s gross wages.

If you earn salary or wages, income counts when it’s earned, not when it’s paid. If you have income that you earned in one year, but the payment was made in the following year, it should be counted as earnings for the year you earned it, not the year paid to you. Some examples include year-end earnings paid in January, accumulated sick pay, vacation pay, or bonuses.
 
If you’re self-employed, income counts when you receive it, not when you earn it. This is not the case if it’s paid in a year after you become entitled to social security benefits but earned before you became entitled to benefits.

Special Rule for the First Year You Retire
Sometimes people who retire in mid-year have already earned more than the annual earnings limit. That’s why there is a special rule that applies to earnings for one year-- usually the first year of retirement.
 
Under this rule, you can get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings. In 2023, a person younger than full retirement age for the entire year is considered retired if monthly earnings are $1,770 or less (1/12^th of the annual earnings limit).

Example: Someone retires at age 62 on October 30, 2023 and has earned $45,000 through October. He/she takes a part-time job beginning in November earning $500 per month. Although their earnings for the year substantially exceed the 2023 annual limit ($21,240), they will receive a full Social Security payment for November and December. This is because their earnings in those months are $1,770 or less, the monthly limit for people younger than full retirement age. If they earn more than $1,770 in either November or December, they won’t receive a benefit for that month. Beginning in 2024, only the annual limit will apply.
 
If you’re self-employed, SSA considers how much work you do in your business to determine whether you’re retired. One way is by looking at the amount of time that you spend working. In general, if you work more than 45 hours a month in a self-employment venture, you’re not retired. If you work less than 15 hours a month, you’re considered retired. If you work between 15 and 45 hours a month, you won’t be considered retired if it’s in a job that requires a lot of skill, or you’re managing a sizable business.

Should You Report Changes in Your Earnings?
SSA adjusts the amount of your Social Security benefits in 2023 based on what you told them you would earn in 2023. If you think your earnings for 2023 will be different from what you originally told the SSA, let them know right away.

If other family members get benefits based on your work, your earnings from work you do after you start getting retirement benefits could reduce their benefits, too. If your spouse and children get benefits as family members, however, earnings from their own work affect only their own benefits.

Will You Receive Higher Monthly Benefits Later if Benefits are Withheld Because of Work?
Yes, if some of your retirement benefits are withheld because of your earnings, your monthly benefit will increase starting at your full retirement age. This is to consider those months in which benefits were withheld.

Example: Let’s say you claim retirement benefits upon turning 62 in 2023, and your payment is $910 per month. Subsequently, you return to work and have 12 months of benefits withheld.

In that case, SSA would recalculate your benefit at your full retirement age of 67 and pay you $975 per month (in today’s dollars). Or maybe you earn so much between the ages of 62 and 67 that all benefits in those years are withheld. In that case, SSA would pay you $1,300 a month starting at age 67.

Are There Other Ways That Work Can Increase Your Benefits?
Yes. Each year the SSA reviews the records for all Social Security recipients who work. If your latest year of earnings turns out to be one of your highest years, the SSA refigures your benefit and pays you any increase due. This is an automatic process, and benefits are paid in December of the following year. For example, in December 2023, you should get an increase for your 2022 earnings if those earnings raised your benefit. The increase would be retroactive to January 2023.

The number of possible work and social security benefit scenarios are many and varied. If your situation is unique or complicated, it may be worth a call to your local social security office to find out how the rules affect your situation.

The bottom line is that working while receiving social security benefits may temporarily reduce your benefits, but may, in fact, increase your overall lifetime benefits. If you plan to claim social security benefits before your full retirement age, you should talk to your financial advisor or contact us for help.

If you would like to review your current investment portfolio or discuss any other financial planning or social security benefit matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: SSA.gov, “How Work Affects Your Benefits”

SECURE 2.0 Adds New Early Withdrawal Exceptions

Normally, an early withdrawal (distribution) from a pre-tax retirement account comes with a 10% federal income tax penalty, but under certain conditions, the tax code has always provided a few exceptions.

The 10% penalty tax generally applies to withdrawals prior to age 59½ from IRAs, employer-sponsored plans such as 401(k) and 403(b) plans, and traditional pension plans, unless an exception applies. The penalty is assessed on top of ordinary income taxes.

For example, exceptions to penalty taxes apply in hardship cases, or if you agree to withdraw substantially equal payments for a minimum length of time. Note that you avoid the 10% tax penalty but not any regular taxes due on the distribution.

The SECURE 2.0 Act, passed as part of an omnibus spending bill in December 2022, added new exceptions to the 10% federal income tax penalty for early withdrawals from tax-advantaged retirement accounts. The Act also expanded an existing exception that applies specifically to employer plans. These exceptions are often called 72(t) exceptions, because they are listed in Section 72(t) of the Internal Revenue Code.

New exceptions

Here are the new exceptions with their effective dates. Withdrawals covered by these exceptions can be repaid within three years to an eligible retirement plan. If repayment is made after the year of the distribution, an amended return would have to be filed to obtain a refund of any taxes paid.

• Disaster relief — up to $22,000 for expenses related to a federally declared disaster if the distribution is made within 180 days of the disaster occurring; the distribution is included in gross income equally over three years, beginning with the year of distribution, unless the taxpayer elects to report the full amount in the year of distribution (effective for disasters on or after January 26, 2021)
• Terminal illness — defined as a condition that will cause death within seven years as certified by a physician (effective 2023)
• Emergency expenses — one distribution per calendar year of up to $1,000 for personal or family emergency expenses to meet unforeseeable or immediate financial needs; no further emergency distributions are allowed during the three-year repayment period unless the funds are repaid or new contributions are at least equal to the withdrawal (effective 2024)
• Domestic abuse — the lesser of $10,000 (indexed for inflation in future years) or 50% of the account value for an account holder who certifies that he or she has been the victim of domestic abuse (physical, psychological, sexual, emotional, or economic abuse) during the preceding one-year period (effective 2024)

Expanded exception for employer accounts

The 10% penalty does not apply for distributions from an employer plan to an employee who leaves a job after age 55, or age 50 for qualified public safety employees. SECURE 2.0 extended the exception to public safety officers with at least 25 years of service with the employer sponsoring the plan, regardless of age, as well as to state and local corrections officers and private-sector firefighters.

Previously established exceptions

These exceptions to the 10% early withdrawal penalty were in effect prior to the SECURE 2.0 Act. They cannot be repaid unless indicated. Exceptions apply to distributions relating to:

• Death or permanent disability of the account owner
• A series of substantially equal periodic payments for the life of the account holder or the joint lives of the account holder and designated beneficiary
• Unreimbursed medical expenses that exceed 7.5% of adjusted gross income
• Up to $5,000 for each spouse (from individual accounts) for expenses related to the birth or adoption of a child; can be repaid within three years to an eligible retirement plan
• Distributions taken by an account holder on active military reserve duty; can be repaid up to two years after end of active duty to an individual retirement plan
• Distributions due to an IRS levy on the account
• (IRA only) Up to $10,000 lifetime for a first-time homebuyer to buy, build, or improve a home
• (IRA only) Health insurance premiums if unemployed
• (IRA only) Qualified higher education expenses

These exceptions could be helpful if you are forced to tap your retirement account prior to age 59½. However, keep in mind that the greatest penalty for early withdrawal from retirement savings may be the loss of future earnings on those savings. Some employer plans allow loans that might be a better solution than an early withdrawal.

Retirement account withdrawals can have complex tax consequences and other costs. Consider calling on us for advice and possible alternative sources of funds before taking specific action with your retirement plan assets.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

There's Still Time to Fund an IRA for 2022

The tax filing deadline is fast approaching, which means time is running out to fund an IRA for 2022.

If you had earned income as an employee or self-employed person last year, you may be able to contribute up to $6,000 for 2022 ($7,000 for those age 50 or older by December 31, 2022) up until your tax return due date, excluding extensions. For most people, that date is Tuesday, April 18, 2023.

You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2022, even if your spouse didn't have earned income.

Traditional IRA contributions may be deductible

If you and your spouse were not covered by a work-based retirement plan in 2022, your traditional IRA contributions are fully tax deductible.

If you were covered by a work-based plan, you can take a full deduction if you're single and had a 2022 modified adjusted gross income (MAGI) of $68,000 or less, or if married filing jointly, with a 2022 MAGI of $109,000 or less. You may be able to take a partial deduction if your MAGI fell within the following limits:

Filing as:	MAGI is between:
Single/Head of household	$68,000 and $78,000*
Married filing jointly	$109,000 and $129,000*
Married filing separately	$0 and $10,000*

*No deduction is allowed if your MAGI is more than the above listed maximum MAGI.

If you were not covered by a work-based plan but your spouse was, you can take a full deduction if your joint MAGI was $204,000 or less, a partial deduction if your MAGI fell between $204,000 and $214,000, and no deduction if your MAGI was $214,000 or more.

Consider Roth IRAs as an alternative

If you can't make a deductible traditional IRA contribution, a Roth IRA may be a more appropriate alternative. Although Roth IRA contributions are not tax-deductible, investment earnings and qualified distributions** are tax-free.

You can make a full Roth IRA contribution for 2022 if you're single and your MAGI was $129,000 or less, or if married filing jointly, with a 2022 MAGI of $204,000 or less.

Partial contributions may be allowed if your MAGI fell within the following limits:

Filing as:	MAGI is between:
Single/Head of household	$129,000 and $144,000*
Married filing jointly	$204,000 and $214,000*
Married filing separately	$0 and $10,000*

*You cannot contribute if your MAGI is more than the above listed maximum MAGI.

Tip: If you can't make an annual contribution to a Roth IRA because of the income limits, there is a workaround, often referred to as a “Backdoor Roth IRA” contribution. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you'll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you've inherited — when you calculate the taxable portion of your conversion.

**A qualified distribution from a Roth IRA can be made after the account is held for at least five years and the account owner reaches age 59½, becomes disabled, or dies. Under this so called 5-year rule, if you make a contribution  — no matter how small — to a Roth IRA for 2022 by your tax return due date, and it is your first Roth IRA contribution, your five-year holding period starts on January 1, 2022. Regardless of your Roth contribution’s holding period, in an emergency, you can withdraw your Roth IRA contributions (not the earnings) without penalty at any time.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

SECURE 2.0 Changes the Required Minimum Distribution Rules

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 or 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.

The RMD rules are designed to spread out the distribution of your entire interest in an IRA or plan account over your lifetime. The RMD rules aim to ensure that funds are utilized during retirement instead of remaining untouched and benefiting from continued tax deferral until left as an inheritance. RMDs generally have the effect of producing taxable income during your lifetime.

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 subject to these rules. If you are uncertain whether the RMD rules apply to your employer plan, you should consult your plan administrator or us.

Here is a brief overview of how the new legislation changes the RMD rules.

1. Applicable Age for RMDs Increased

Before the 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 a summary of when you have to start taking RMDs based on your date of birth:

Date of Birth	Age at Which RMDs Must Commence
Before July 1, 1949	70½
July 1, 1949, through 1950	72
1951 to 1959	73
1960 or later1	75

Your first RMD is for the year you reach the age specified in the chart and generally must be taken by April 1 of the year following the year 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.

¹ A technical correction is needed to clarify the transition from age 73 to age 75 for purposes of the RMD 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.

2. RMD Penalty Tax Decreased

The penalty for failing to take a RMD 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 RMDs from Roth Employer Accounts Eliminated

Roth IRAs have never been subject to lifetime RMDs. 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 this 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 RMDs 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 RMDs 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 RMD 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. If you plan to purchase an annuity in your IRA, you should talk to us or your financial planner first. Qualified annuities are typically purchased with pre-tax money, so withdrawals are fully taxable as ordinary income, and withdrawals before 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 RMDs are complicated. While the changes described here provide significant benefits to individuals, the rules remain difficult to navigate, and you should consult a tax professional like us to discuss your individual situation.

If you would like to review your current investment portfolio or discuss any RMD planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.