Month: January 2023

On December 23, 2022, Congress passed the Secure 2.0 Act into law, as part of a significant $1.7 trillion spending bill. Just like its predecessor, Secure 2.0 includes an extensive list of retirement-related changes designed to expand access to retirement savings accounts and provide more options for contributing to and drawing from these accounts.¹

To help you understand what Secure 2.0 means for you, here are eight significant changes it brings and the impacts they might have:

1.  Required Minimum Distributions (RMDs)

One of the most significant changes comes to the way RMDs are handled. Previously, retirees had to begin taking RMDs at 72. Secure 2.0 raised this minimum age to 73 for 2023, and it will increase again to 74 in 2033. Penalties for failing to take an RMD have also dropped to 25%, compared to 50% before.

This provision may benefit those who can afford to hold off on RMD withdrawals because they don’t need access to the funds immediately. So, if you’re turning 72 in 2023 and you’ve already scheduled your withdrawal, you might want to consider making an adjustment to your plan.

2.  Retirement Account Catch-Up Contributions

Beginning in 2025, individuals between the ages of 60 and 63 can make catch-up contributions to their 401(k) plans of up to $10,000 or 150% of their regular contributions.

For IRAs, the annual catch-up amount has remained the same since 2006 at $1,000. Starting in 2024, this contribution limit will be indexed to inflation and, therefore, subject to an increase each year.

3. Qualified Charitable Distributions (QCDs)

Secure 2.0 has also expanded the types of charities that can receive a QCD. Individuals who are 70.5 years or older can now give a one-time gift of up to $50,000 to either a charitable remainder unitrust, annuity trust, or gift annuity. However, this money must come directly from your IRA by the end of the year for it to count toward your annual RMD. It’s also important to note that QCDs are not applicable to all charities.

4. 529 College Savings Accounts

Starting in 2024, Secure 2.0 makes it possible for you to move money from a 529 plan directly to a Roth IRA. However, there are a number of conditions you must meet before you can use this provision:

●        The maximum lifetime amount you can move is $35,000.

●        The annual limit you can move is that year’s IRA contribution limit.

●        The beneficiary must have had the 529 plan for at least 15 years.

●        The Roth IRA must be under the beneficiary’s name.

●        You can’t move any contributions that were made in the last five years.

5. Part-Time Employee Access to Retirement Savings Accounts

Long-term part-time employees can now participate in their employer’s 401(k) plans, provided they meet certain criteria. To qualify for an employer-sponsored retirement plan, you must either:

●        Complete one year of service (totaling at least 1,000 hours).

●        Or two to three consecutive years of service (with at least 500 hours of service).

For plans beginning in 2025, this three-year rule is reduced to two years.

6. Student Loan Payments

For students who might not be able to save for retirement because they’re paying off student debt, Secure 2.0 allows employers to match employee student loan payments in a retirement account.

7. Automatic Enrollment in 401(k)s

In 2025, businesses adopting new 401(k) or 403(b) plans will be required to automatically enroll eligible employees at a contribution rate of at least 3%. This rule is aimed at increasing retirement savings participation, especially in younger demographics. While employees aren’t required to contribute, they will have to take the extra step of opting out of the program.

8. Emergency Savings

To help people save for unexpected expenses, Secure 2.0 will enable defined contribution plans to add an emergency savings Roth account in 2024. Annual contribution limits are set at $2,500 (or lower, depending on your employer), and may be eligible for an employer match. In addition, the first four withdrawals won’t be taxed or penalized.

Next Steps

SECURE 2.0 brings many changes to the realm of retirement planning, including some that haven’t been addressed here. Consider consulting with an Ausperity Private Wealth team member to determine how these changes might impact you.

Best,

Robert (Rory) J. O’Hara III, CFP®, CRPC®
Founder I Senior Managing Partner

Endnotes
1  “Secure 2.0 Act of 2022.” United States Senate Committee on Finance, December 19, 2022. https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf

Disclosures:

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional.  Non-qualifying distribution earnings are taxable and subject to a 10% tax penalty.

Securities offered through Sanctuary Securities Inc, Member FINRA, SIPC Advisory services offered through Sanctuary Advisors, LLC. A SEC Registered Investment Advisor. Ausperity Private Wealth is a DBA of Sanctuary Securities, Inc. and a DBA of Sanctuary Advisors, LLC. Do not transmit orders regarding your Sanctuary Securities, Inc. account(s) or Sanctuary Advisors, LLC account(s) via e-mail. Sanctuary Securities, Inc., Sanctuary Advisors, LLC, and Ausperity Private Wealth will not be responsible for executing such orders and or instructions. This e-mail message is intended only for the use of the individual or entity to which the transmission is addressed. Any interception may be a violation of law. If you are not the intended recipient, any dissemination, distribution or copying of this e-mail is strictly prohibited. If you are not the intended recipient, please contact the sender by reply e-mail and destroy all copies of the document.

Mutual funds have become an increasingly popular investment tool due to their widespread accessibility, the diversification they can provide, and the fact that they’re managed by industry professionals.1 In fact, over 115 million individuals in the US – and more than 52% of US households – owned mutual funds in 2022.2 But despite their place in so many investors’ portfolios, these funds are not free of risk.

To help you better understand how these funds work, what their benefits could be, and the risks you might face when investing in them, we’ve put together this guide detailing some of the things you might want to know about mutual funds before investing.

What is a Mutual Fund?

Mutual funds pool money from their different shareholders and invest them in various assets, such as stocks, bonds, and other types of securities. Each shareholder then receives gains or losses that are proportional to their total investment in the fund.

These funds have a relatively low barrier to entry, offering even the most casual market participants the opportunity to participate in a professionally-managed investment vehicle. As with any type of investment fund, the structure and asset allocation of each mutual fund are guided by its stated investment objective – called a prospectus – which varies from fund to fund. Depending on your individual circumstances and financial goals, certain mutual funds may suit you better than others.

8 Types of Mutual Funds

Before we dive into the pros and cons of mutual funds, let’s take a look at some of the different categories that are available for you to choose from.

Stock funds typically invest in equities. Depending on the fund’s stated goals, its managers may determine its holdings based on things like market cap, dividend structure, or growth prospects.

Bond funds focus on income-generating investments like corporate and government bonds, as well as other investments that offer a fixed rate of return.

Balanced funds, sometimes referred to as asset allocation funds, combine different assets to reduce the risk of overexposure to one particular asset class. They can be divided into two subcategories for fixed and dynamic allocation strategies.

Money market funds function similarly to savings or checking accounts in that they hold short-term debt instruments like US treasuries that are lower risk but offer more modest returns.

International and global funds invest in foreign assets. While international funds only acquire assets outside of the country in which they’re based, global funds can invest anywhere – domestically or abroad.

Specialty funds may be further divided into subcategories, such as:

       ● Sector funds target specific economic sectors, such as healthcare or technology.

       ● Regional funds focus on a specific geographic area.

       ● Values-based funds abide by specific criteria for investments based on shareholder beliefs and values.

Potential Pitfalls of Mutual Funds

While mutual funds vary in size, scope, and allocation strategy, they share some potential pitfalls that bear consideration before deciding whether or not to invest in one:

           ● High Costs & Fees: Professional management often entails higher costs, and some investors may be put off by the associated fees. These payments differ from fund to fund, but they’re generally required regardless of performance.

           ● Tax Liabilities: Selling assets triggers capital gains taxes, which get distributed regularly with mutual funds. Since you don’t control when assets are bought and sold within a mutual fund, your annual tax burden may be higher or lower than you anticipate.

           ● Cash Drag: Mutual fund managers may hold a significant portion of cash to maintain liquidity, but this cash doesn’t earn as much as it might if you invested it elsewhere.

Potential Benefits of Investing in Mutual Funds

Mutual funds may be able to provide a handful of benefits including:

          ● Portfolio Management: With a professional portfolio manager, you don’t have to worry about doing your own research. Mutual fund managers work full-time to monitor investments, maintain a specific risk/return profile, and align the fund with its stated goals.

          ● High Liquidity: Buying and selling mutual funds can be relatively easy compared to other investment options. Because they hold a large amount of cash, you can often access your money quickly when you need to.

          ● Diversification: The wide range of mutual fund categories and the mixture of assets within each can allow you to diversify your portfolio. This method can be cheaper and simpler than researching and buying individual assets.
Interested in Getting Started?

If you’ve weighed the potential benefits and pitfalls of mutual funds and are still looking to invest in one, consider discussing it with a financial professional who can help you identify the fund that best suits your needs. As with any important financial decision, your choice to invest in a mutual fund should be colored by your individual circumstances and investment goals. Reach out to a Financial Planner at Ausperity Private Wealth to learn more.

Best,

Robert (Rory) J. O’Hara III, CFP®, CRPC®
Founder I Senior Managing Partner

References:

Endnotes
1 Boyte-White, Claire. “Why Have Mutual Funds Become so Popular?” Investopedia, October 8, 2022. https://www.investopedia.com/ask/answers/100615/why-have-mutual-funds-become-so-popular.asp

2 “Mutual Funds Are Key to Building Wealth for Majority of US Households.” Investment Company Institute, October 31, 2022. https://www.ici.org/news-release/22-news-ownership

Disclosures:

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Mutual Funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing in Mutual Funds. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.