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The SECURE ACT: Monumental Tax Law Changes Bring Planning Opportunities

5 years ago

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On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law effective January 1, 2020.  This legislation brought about many significant and sweeping changes to our tax and retirement laws. 

The four primary takeaways and planning opportunities that may affect you are as follows:

1. The required minimum distribution age for individual retirement accounts (IRAs) was changed from 70 ½ to 72.  Therefore, if you did not reach age 70 ½ by December 31, 2019, your required minimum distributions do not begin until you reach age 72.

Planning opportunity: This change allows for continued tax-deferred growth of your IRA and may necessitate an evaluation of the timing of your distributions with your advisor.

2. Required minimum distributions can no longer be stretched for inherited IRAs over the life expectancy of the beneficiary, except in limited circumstances.

Planning opportunity: Review your IRA beneficiary designations and estate planning documents with your financial advisor and estate planning attorney to ensure that your IRAs will be inherited and distributed in the most tax efficient and asset protected manner under the new law.

3. IRA owners can contribute to their IRAs after age 70 ½ provided the participant is continuing to work and earn income.  Prior to the enactment of the SECURE Act, you were not permitted to make contributions once you reached age 70 ½. 

Planning opportunity: Meet with your financial advisor to discuss retirement readiness and how long you should work to meet your retirement goals.

4. Small businesses are eligible for a tax credit of up to $5,000 for 3 years ($15,000) for establishing a retirement plan and an additional tax credit of $500 for 3 years ($1,500) if the business adds an auto-enrollment feature to its retirement plan. Prior law capped the retirement plan establishment credit at $500 per year for 3 years, and it did not include the tax credit for adding an auto-enrollment feature to the retirement plan.

Planning opportunity:  If you are a small business owner, you should meet with your financial advisor to discuss the benefits for yourself and your employees of starting a retirement plan, including increased employee retention and creating a nest egg for you.

In addition to the opportunities above, the SECURE Act also provides for penalty free withdrawals of up to $5,000 from IRAs for the birth or adoption of a child, long term, part-time employees can now qualify to participate in a 401(K), increased opportunities for lifetime income planning inside of qualified retirement plans, student loan debt repayment using 529 funds, and it increases the safety of lower cost retirement planning for small business owners through the addition of protections inside of Multiple Employer Retirement Plans.

Legislation of this magnitude historically comes along only once or twice a decade, and it provides both opportunities and challenges for individuals and small business owners. Therefore, we would encourage you to sit down with your financial advisor and estate planning attorney to determine the opportunities it presents for you to increase your financial fitness and retirement readiness. 

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

“CARA” is Cabana’s Cyclical Asset Reallocation Algorithm. Scenes assigned as per the judgment of The Cabana Group. Scene names and number of scenes have changed over time in an effort to obtain efficiencies and provide clarity of investment objective. 

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq