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With the filing deadline for the 2022 tax year less than two months away, another important deadline is looming: The end date to make 2022 contributions to individual retirement accounts (IRAs).
Due to the recent passage of the SECURE Act 2.0, there are some IRA details advisors need to be aware of because they’re beneficial to clients, including new catch-up provisions and fresh guidelines pertaining to required minimum distributions (RMDs).
“The new rules allow IRA catch-up contributions to automatically adjust for inflation, but not until 2024. The adjustments will be in increments of $100, so the 2024 limit will likely be $1,200 rather than the current $1,000,” notes Mornngstar’s Sheryl Rowling. “Beginning in 2025, the catch-up contributions of employer retirement plans such as 401(k)s and 403(b)s will increase depending on the participant’s age. For participants of ages 60 to 63, the catch-up contribution limit will be increased to the greater of $10,000 or 150% of the regular catch-up contribution amount (indexed for inflation).”
Broadly speaking, SECURE Act 2.0 is a positive for retirees and clients that are actively engaged in retirement planning, there are still areas where advisors can add ample value while potentially improving client relationships.
Deadlines Matter, Best to Beat Them
As noted above, the deadline for 2022 IRA contributions is Tax Day, or April 18. Plenty of individual investors make the mistake of waiting until that day or just before it, but that’s a mistake. That mistake is magnified if the investor is doing that every year.
“The reason you don’t want to do that is foregone compounding. It’s not a big deal if you do it one year. But if you do it year after year, that’s 12 months, maybe 15 months of foregone compounding,” notes Morningstar’s Christine Benz. “So, I think that ideally, you would get those contributions in as soon as you’re able to make them. You can make your 2023 contribution now as of Jan. 1. You could start funding that 2023 IRA. I like the idea of people doing that.”
By helping clients avoid this mistake, advisors put the power of compounding on the side of clients. It’s simple, but potent, valuable math. On a somewhat related note, there’s the issue of what Benz dubs the “procrastination penalty.
“I think a great way to work around that is, assuming these are funds that you are setting aside for your own retirement, why not use a target-date fund here as well? I think they’re arguably underutilized in the IRA context. Of course, people use them very much in 401(k) plans. But I think they’re equally effective, equally hands-off and easy to use in the years leading up to retirement as a target-date fund would be in a 401(k),” she adds.
Cash Considerations
With Treasury yields high and potentially poised to rise further, another IRA strategy advisors may want to discuss with clients, particularly those conservative by nature or in older demographics, is the refreshed case for cash instruments.
“I’m hearing a lot of enthusiasm for very conservative investments, cash investments in part because stocks were bad last year, bonds were bad last year, but also yields are starting to look pretty compelling,” observes Benz. “You can earn a 4% FDIC-insured return on a savings account today or on some sort of CD or very safe account.”
Fortunately, advisors have new avenues with which to make cash even more appealing, particularly for affluent clients.