Money Management

Your IRA has some new superpowers. 

The SECURE Act 2.0, which was signed into law in December, made significant changes to the way Americans will save for retirement. Many of the 90-plus sections of the bill centered around reforming employer-sponsored retirement plans. However, savers using individual retirement accounts, or IRAs, should still pay attention to these three changes.

1. A change to catch-up contributions

For many Americans, traditional and Roth IRA contributions are capped at $6,500 in 2023. However, for those aged 50 and up, that limit is increased by $1,000 for so-called “catch-up” contributions. Thanks to the SECURE Act 2.0, that catch-up limit is about to keep up with inflation.

Section 108 of the new legislation dictates that the catch-up limit be indexed by inflation starting in 2024. That may not seem like a big deal to some, but consider that the standard IRA contribution limit sometimes remains unchanged for years.

Between 2019 and 2022, the IRA contribution limit was stuck at $6,000 per year. Over the same period of time, it is estimated that inflation compounded to over 16%. Had the standard contribution limit kept up with inflation, like the catch-up limit now will, you would be able to stash about $6,960 in an IRA in 2023. That’s nearly another catch-up contribution in itself.

2. 529 rollovers

One of the most headline-grabbing provisions of the new law is the ability to roll unused 529 funds into a Roth IRA. Prior to the legislation, penalties and income taxes led many to shy away from 529 accounts. If your child decided not to go to college, or if you overfunded the account, you might have had to take a nonqualified withdrawal, which would be subject to a 10% penalty and may have been partially taxable. Your state might have tacked on an additional penalty, too.

However, the SECURE Act 2.0 allows 529 funds to be rolled over to Roth IRAs tax and penalty free, on a few conditions. First, the Roth IRA must be in the name of the 529’s beneficiary. Second, the account must have been opened for over 15 years. Third, the amount that can be rolled over in a year is limited to the Roth IRA contribution limit in that year, and reduced by any other Roth IRA contributions made that year. Finally, a beneficiary may only roll up to $35,000 out of a 529 during their lifetime.

How this section of the law will work in practice is as of yet unclear, and many taxpayers are seeking additional guidance from the IRS. One closely-watched issue is whether changing beneficiaries on a 529 plan will reset the 15-year waiting period. Hopefully, taxpayers will have some clarification prior to the section’s effective date of Jan. 1, 2024.

3. Expansion of charitable gifting

Charitable gifts support a good cause, make you feel good, and just might help you save on taxes. That’s the idea behind Qualified Charitable Distributions, which allow retirees to replace their Required Minimum Distributions with a gift to a qualified charitable organization. Capped at $100,000 for the past 15 years, the QCD limit will be inflation indexed starting in 2023.

Split-interest entities, such as charitable trusts, may be in for a hey-day thanks to new funding opportunities in the SECURE Act 2.0. Beginning in 2023, the IRS will allow taxpayers to make a one-time, $50,000 distribution to certain entities which benefit charitable organizations. The provision will provide another avenue for charitably-inclined retirees to reduce their tax liability.

While a major focus of the SECURE Act 2.0 was reforming employer-sponsored retirement plans, IRA owners weren’t entirely left out in the cold. Those aged 50 and above will see their catch-up contribution limits increase regularly in future years, 529 beneficiaries will soon be able to bolster their Roth IRAs with unused college savings, and those nearing RMD age have more ways to reduce their tax liability through well-timed charitable contributions.

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Brace yourself for further economic woes. 

Jeremy Grantham, co-founder and chief investment strategist of asset manager GMO, thinks the stock market could fall considerably in 2023. Grantham has a reputation for calling market bubbles and he’s been warning of an impending crash for the past few years.

Sure, the market has already seen substantial losses, with the S&P falling by almost 20% in 2022. But Grantham says this is only the “first and easiest leg of the bursting of the bubble we called for a year ago.” Find out why he thinks there’s more pain in store for investors.

Why Jeremy Grantham is warning of a 20% drop in equity prices

In a recent paper, Grantham highlighted what he called “a rare level of uncertainty” and set out the factors he believes could contribute to further stock market losses. These include the war in Ukraine, which he says has an impact on the production of grain, oilseed, and fertilizer. He also raised concerns about the knock on effect on Europe’s energy supplies.

In addition to long-term issues, such as a declining population, damage from climate change, and shortages of raw materials, the 84-year-old investor thinks the global housing bubble is only just starting to burst. He says housing busts tend to take longer to unfold than equities and predicts there will be a “painful” economic impact that hasn’t yet fully been felt.

All in all, Grantham thinks there’s a 3 to 1 chance that the S&P 500 will decline a further 20% this year. He warns that if any of the negative factors get out of hand, we may see a global economic recession. “Because of the sheer length of the list of important negatives, I believe continued economic and financial problems are likely,” he writes. “I believe they could easily turn out to be unexpectedly dire.”

Investing during a downturn

As an investor, it isn’t easy to hold your nerve and continue to invest against a backdrop of impending doom. But even Grantham admits that his worst-case scenarios may not unfold. None of us has a crystal ball to accurately predict what will happen. Moreover, if the U.S. enters a recession, we don’t know how long or how severe it will be.

If you’re a long-term investor, economic downturns can offer an opportunity to pick up quality stocks at lower prices. Historically, prices have always recovered eventually. What matters is your timeframe. If you’re buying stocks with money you don’t plan to touch in the coming five to 10 years or more, there’s a good chance you’ll come out on top in time.

Dollar-cost averaging — investing a set amount at regular intervals — can make it easier to resist the temptation to time the market. Make regular incremental investments rather than trying to wait for stocks to hit their lowest point, which is almost impossible to do. It takes a lot of the emotion out of your decisions and can make sense in volatile markets.

That said, if your emergency fund isn’t in good shape, this needs to take priority over buying stocks or other assets. With a recession looming, many financial experts think the traditional three to six months’ worth of emergency savings isn’t enough. Some recommend socking away as much as a year’s worth of money, or more. Make sure you have enough cash in an accessible savings account to cushion you against the unexpected.

If you’re close to retirement, seeing your portfolio drop in value can be particularly nerve wracking. It’s a good idea to think about your asset allocation and ensure you’re comfortable with the level of risk involved. You might want to consider putting a higher percentage of your portfolio into bonds, which usually generate a fixed income and carry less risk.

Whether times are good or bad, building a diversified portfolio is another way to build wealth over time. That means holding equities from a mix of sectors and companies, as well as other asset types such as commodities and real estate. The percentage you allocate to different investments depends on you, your financial situation, and your risk tolerance.

Bottom line

It’s important not to let pessimistic predictions stop you from building wealth. There are times when investing during a recession can make sense, with some important caveats. First make sure you have enough cash to see you through any immediate emergencies and only invest money you don’t plan to touch in the near future.

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You can have a direct impact on the amount of money you save — as well as how you position it for growth. 

It’s safe to say that we could all use a bit more money in our lives, especially after the last year of rampant inflation and the current “will we or won’t we” atmosphere surrounding the possibility of a recession in 2023. With that in mind, you might be looking for ways to optimize the returns on any investments you may have.

Unfortunately, there’s very little you can do in a direct way when it comes to your brokerage account to increase your returns. Making sure you have a diversified portfolio and choosing quality investments that will perform well over the long term will help. You’ll be better able to weather the market’s ups and downs, and have plenty of time to benefit from compound interest. But if you’re hoping to increase your cash on hand now, there’s a better way.

Real estate investor and financial guru Graham Stephan recently noted on Twitter, “It’s much easier to increase your savings rate by 5% than to find an additional 5% return on your investments.” Remember, your savings rate isn’t dependent on the stock market. And rather than locking up your money between now and retirement, you might be able to increase your emergency fund or even your savings for a large purchase in the next few years. Here’s how.

How can you increase your savings rate?

If you’ve set a goal to save more money in 2023, you’re in good company. Thankfully, there are a few key moves to help make this goal more achievable.

Automate your savings and make it easy

If you’re trying to put money aside, one of the kindest things you can do for yourself is to make it automatic. Calculate how much you want to save, run the numbers through your budget to ensure you actually can afford to save that much (keep reading for what to do if your savings goal isn’t supported by your income), and set up an automatic transfer from your checking account. You can set this up monthly or even for each paycheck. If the money is moved before you have a chance to spend it, you’ll be more successful at saving. Plus, this way you won’t even have to think about it beyond that initial setup.

Choose the right savings account

Ideally, automating your savings means you’re sending your money to the right savings account. Which is the right one? There are a few ways to tell. First, look for a high-yield savings account. The best ones are currently paying 3% or more on money stored in them, and you’re likely to find the best rates offered by online-only banks, as opposed to traditional banks. This means your saved cash will grow even more over time. And the more money you add to the account, the more growth you’ll see — there’s our old friend compound interest again.

Cut back — or bring in more money

If you wish to increase your savings, you need to have the money to save. While some finance experts will tell you to cut your discretionary spending to the bone and suck all the fun out of your life to achieve this, you will have more success saving more if you can make more money.

By all means, go through your budget and your bank and credit card statements to see where all your money is going. If your spending isn’t where you want it to be, definitely tighten things up and cut back. But also consider adding a side hustle, asking for a raise at work, or even changing jobs altogether to make more money. If you gain a higher income and make a plan to save more, it’ll be easier to meet your goals.

Saving more is key

If you’re hoping to have more money in your life available for emergency expenses or a big near-term purchase, the best way to achieve it is to increase your savings rate. While this may seem daunting, implementing some or all of these steps can help.

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The COVID-19 emergency is coming to an official end, which means another stimulus check is less likely. 

The COVID-19 pandemic changed people’s lives forever, so it’s not surprising it resulted in the country officially entering a state of emergency. However, despite the fact that COVID-19 has not been eradicated, life has largely returned to normal for most people.

As the threat of the pandemic waned, the country remained officially in that state of emergency. However, that will soon end. President Joe Biden recently announced that the national and public health emergency declaration would be extended one more time until May 11, 2023 but would terminate after that.

This important announcement could affect the likelihood that you will get another stimulus check deposited into your bank account.

An end to the state of emergency likely means no more COVID-related stimulus payments

When the COVID-19 pandemic first hit full force in the United States, this prompted bipartisan action to offer financial help to the public during lockdowns. In fact, both the first and second stimulus checks were supported by lawmakers on both sides of the aisle.

After Biden took office, however, Republicans largely stopped supporting the idea of more financial relief. In fact, the third stimulus check was passed by Democrats only with no support from lawmakers on the right at all.

Control of Congress has shifted since Biden took office, so it is no longer possible for a fourth check to be authorized without support from both Republicans and Democrats. As a result, it is very unlikely that the federal government would send out another payment unless the pandemic once again presented a grave threat as it did initially.

With the president indicating the emergency declaration is coming to an end, this is a clear signal that experts do not expect the pandemic to ramp up and cause further lockdowns. If COVID-19 is no longer an emergency after May, Congress will have no incentive at all to come together to try to send out a fourth check.

Does this mean stimulus checks are entirely off the table?

Pandemic-related stimulus payments will almost assuredly not be coming once COVID-19 is no longer considered an emergency, but there is still a slim chance that stimulus money could be sent for other reasons.

Stimulus relief has been authorized during recessions in the past, so if economic conditions worsen, it’s possible a bipartisan bill could be passed to provide more financial help. This would not be a COVID-19 related payment, though, but would instead be designed to help jumpstart a poor economy if lawmakers believe this extra bit of help is necessary to keep the economy afloat.

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Buyer’s remorse is the real deal. 

Have you ever gotten home with a purchase and thought to yourself, “Why did I just buy this?!”

Yep. Me, too.

That’s what a “No Buy” list is for. It’s for all those things you know you really just need to stop buying, be it for your finances or even just your own peace of mind.

Maybe you already have 12 of them but just keep buying them. Maybe you feel pressured to buy it but are tired of it. Maybe you’re done letting your money go to a bad company.

Any and all of these are great reasons to make a No Buy list for 2023.

Enough is enough

One big reason I decided to make a No Buy list this year was organizing my hobby closet over the winter. I have a lot of hobbies. This means I also have a lot of hobby supplies. In fact, at this point, it’s almost more appropriate to say my actual hobby is collecting hobby supplies.

In 2023, however, I’m going to do my best to stop the cycle. I’ve put hobby supplies on my No Buy list for the year. My goal is to use up the supplies I already own instead of simply adding to the piles.

Most folks have something similar. That thing that inexplicably multiples every time you come home from the store. Maybe it’s sneakers or clothing. Perhaps you have stacks of unread books or video games you never finished.

For a friend of mine, it’s blankets and throws. They’re ready for the next ice age, but still find cute throws to add to the collection. (Though to be fair, many of us have that curiously overflowing linen closet. I don’t even know where those towels came from!)

Whatever it is, make 2023 the year you finally put it to use — and stop buying more.

Give yourself permission to say ‘No’

In some cases, we have that thing we keep buying because we’re convinced it’s something we need or are supposed to have. This happens a lot with societal pressures, like when we feel compelled to upgrade electronics that still work just fine.

But we also tend to pressure ourselves, too.

Yes, kale is good for you. But if you don’t actually like it, why keep buying it just to throw it out when it gets slimy in your crisper? You feel bad that you let it go to waste — and so does your wallet.

It’s highly unlikely you’re going to suddenly decide, “Hey, this thing I don’t like is actually great now that I’ve bought it for the 10th time!” Give yourself permission to just stop buying things you don’t want or need.

Put your money where your mouth is

The heart of the No Buy list is to increase your awareness of where your money is going. This includes being aware of the impact of your money after you spend it.

For example, one big trend in the No Buy list the last few years is people deciding they’re done buying drinks in plastic bottles. If enough people stopped buying plastic bottles, companies would change their practices. Money talks.

Similarly, you may decide to add entire brands or companies to your No Buy list. Maybe you did some research into Nestle and now you’re choosing to avoid their products (welcome, friend!). Or perhaps you’ve decided that this is the year you finally cut the cord on Amazon.

Change the conversation

Our society has become highly commercialized. Half the conversations we seem to have are about the latest thing we bought or plan to buy.

Embracing the No Buy list changes the conversation — in the best way.

Talk about your hobby accomplishments, not your hobby purchases. Chat about that great carrot recipe instead of lamenting the limp kale. Gush about your favorite small brand instead of the junk from the ethically questionable conglomerate.

What we do with our money matters, in all kinds of ways.

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I don’t want to buy someone else’s hastily “fixed” problems. 

I’m hoping to transition from renter to homeowner again in the near future, and when it comes to finding a house, I have a list of must-haves as well as must-avoids. Flipped houses are on my must-avoid list. A flipped house is one that’s been purchased by a real estate investor (referred to as a flipper), fixed up, then and resold. While this isn’t bad in principle, the problem is that house flippers are incentivized to buy homes and remodel them for cheap, so they can make the largest profits possible on reselling them. This can lead to a world of problems for the unfortunate home buyer who ends up with a mortgage loan on an improperly remodeled house.

My current city, where I am intending to buy, has a lot of cheap older homes ripe for rehabilitation, and in fact, I have friends here who bought a flipped house a few years ago. While the home itself looks pretty nice (and even has new windows), my friends have contended with major repair costs for issues with their furnace and plumbing. Meanwhile, they live with annoyances like no bathroom ventilation fan, confusing wiring, and kitchen appliances purchased for cheap at the scratch-and-ding outlet. Here’s why I’ll be avoiding flipped houses when I’m ready to buy.

1. For flippers, it’s usually looks that matter

It’s a sad fact that flippers are often less concerned with the functionality of a home’s vital systems (like HVAC, plumbing, and so on) than they are with making a house look nice and new. This means that flippers sometimes strive to mask problems with fresh paint, new appliances (which isn’t to say expensive appliances; remember, they’re trying to turn the home around cheaply), and whatever cabinetry or bathroom fixtures they can get a good deal on. Why fix that ceiling leak when you can paint over it and pretend it no longer exists? Flippers are often counting on offers from potential buyers who see only shiny new kitchen cabinets and don’t think to ask about the age of the water heater or the condition of the roof. Ditto the state of the plumbing or safety of electrical wiring.

When buying a flipped home, you could wind up needing to tap your bank account to purchase new fixtures anyway, because you’ll be at the mercy of the flipper’s taste (or, more likely, what they could get for cheap). My friends’ home came with the ugliest lighting fixtures I’ve ever seen. When they tried to sell them (or even give them away), they had no takers and ended up tossing them out. What a waste!

2. House flippers didn’t actually live in the home

In the course of buying a home, your in-person conversations with the seller may be minimal (unless it’s a for-sale-by-owner situation), but you will at least be able to ask questions via your real estate agent. If the seller has lived in the house, the information they have about its history could be invaluable to you as the buyer.

They can offer details about when the basement was finished, when the roof was replaced, and whether the backyard has effective drainage during rainstorms. And from a purely emotional standpoint, there’s something appealing to me about buying a beloved family home from its former residents.

3. A flipped house can be expensive and time-consuming to inspect and research

Finally, the last reason flipped houses are on my must-avoid list is that I’d like to keep my home-buying expenses as low as possible. I will not be going cheap on a home inspection (or, worse, waiving the inspection contingency altogether), and I know I’d have to spend more to get a flipped house well and truly inspected. This could even mean hiring (and paying) individual professionals to come in and have a look if the home inspector is unsure about certain features or potential problems.

I’d also be taking the time to pull building permits to ensure the flipper had all the right paperwork and the projects were completed to the standards laid out in the permits. All of this equals more money and more time — and likely, more stress.

While I expect stress in the course of buying a home, I’d like to give myself the best chance of success in finding the right house for me at the right price. And that will be one that doesn’t come with a heap of problems that have been hastily painted over or hidden with new cabinets or flooring. For me, that means avoiding flipped houses.

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