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Investment Insight: What Comes After Rate Cuts?

Mon, 23 Sep 2024 20:15:39 GMT

A recession could upend plans for people approaching retirement. Taking these steps can help, experts say

Wed, 04 Sep 2024 14:35:51 GMT

With the Federal Reserve poised to start cutting interest rates, experts are divided on what’s ahead for the U.S. economy.

While some worry the economy could be in for a broad decline, or recession, others hope the central bank can effectively avoid a downturn and execute a “soft landing.”

For people who are in or near retirement, the stakes are particularly high when it comes to what happens next.

A recession or sudden market decline could upend the size of their retirement nest egg, planned retirement date or both.

Everyone approaching retirement should be asking themselves, “What’s my Plan B?” said Anne Lester, author of “Your Best Financial Life” and former head of retirement solutions at JPMorgan.

“Now is a great time to build some scenarios and start asking yourself that question, ‘What would I do?’” Lester said. “If you have a plan, you’re much less likely to panic and do something unwise.”

Research shows people who are approaching retirement are much more likely to panic when a downturn sets in, according to David Blanchett, managing director and head of retirement research at PGIM DC Solutions.

“Being proactive now is especially viable for older Americans for whom retirement is all of a sudden becoming very real,” Blanchett said.

To test your current retirement plan, asking some questions can help.

Is my portfolio allocated where it should be?

For retirees and near-retirees, a market decline can prompt what’s known as sequence of returns risk — where poor investment returns negatively impact how long retirement savings may last.

“If you are near the end of your career or just starting retirement and a recession hits, then you have much less time than you’d like for your portfolio to recover,” said Emerson Sprick, associate director of the Bipartisan Policy Center’s economic policy program.

A market selloff can happen without the economy going into a recession, Lester said. And the economy can go into a recession without meaningful stock market declines.

Consequently, it helps to always be prepared for the markets — and your retirement nest egg — to take an unexpected big hit.

The good news is that it’s rare for the markets to have a big correction — defined as a decline of 10% or more — and keep sinking, Lester said.

“It is very unlikely that we rerun 1929 again, where you have five or seven years of very bad returns in a row,” Lester said.

Roth IRA rollovers: A fresh feature for 529 owners

Thu, 18 Jul 2024 20:13:27 GMT

The passing of the SECURE 2.0 Act turned 529 accounts into an even more valuable savings tool for families looking to give the gift of education to their loved ones. With the new regulations, 529 account owners can now, subject to certain limitations, roll over 529 funds to a beneficiary-owned Roth IRA without being subject to taxes or penalties.

Since they came into being in 1996, section 529 accounts have served as highly tax-efficient vehicles for funding a child’s education. Individual contributions to 529 accounts of up to $18,000 per year (or $36,000 per married couple) are not treated as taxable gifts to the beneficiary, the money in the account can grow tax-deferred, and some states even offer deductions on in-state plans. That said, the implications of possibly unused 529 assets is a source of uncertainty for some 529 account owners—particularly those who wonder what might happen to the funds if their loved one receives a scholarship, attends a less expensive school, or even decides to forego college altogether.

Fortunately, there is welcome news for families concerned about overfunding 529 accounts. The recently passed SECURE 2.0 Act now provides families the option to use leftover 529 funds to help kids save for retirement. More specifically, the Act includes a provision that, as of January 1, 2024, allows 529 account owners to transfer funds to a Roth IRA without incurring taxes or penalties. Previously, a 529 account owner or beneficiary who wanted to withdraw funds for any non-qualified education expense would be subject to income taxes and a 10% federal tax penalty on earnings.

This is an exciting development for families that adds to the list of reasons to save with 529 plans. The new feature, however, is subject to some limitations:

Contribution limits: Rollover amounts cannot be greater than the annual Roth IRA contribution limit set by the IRS. In 2024, that amount is $7,000, plus an extra $1,000 catch-up allowance for individuals over the age of 50. The beneficiary must have earned income that is equal to a greater than the amount to be rolled over. There is also a $35,000 lifetime limit per beneficiary for rollover contributions to Roth IRAs.
Holding periods: The 529 account holder must have owned the 529 for at least 15 years prior to executing a rollover. Furthermore, contributions made to the 529 account within the last 5 years are not eligible for the tax-free benefit.
Ownership: For a tax- and penalty-free rollover, the 529 beneficiary and the owner of the Roth IRA must be the same person.

It is advisable to discuss your specific circumstances with a financial or tax professional before executing a rollover, as there are grey areas in the new statute that remain open to IRS interpretation. For example, it remains unclear whether a change of beneficiary in a 529 account—currently permissible at any time—will reset the 15-year holding period requirement. In addition, the state tax treatment of rollovers may vary from state to state.

Despite some of these limitations, families should feel encouraged that 529 plans continue to evolve in their favor, and that they now have more options to tax-efficiently support their loved ones, no matter what the future may bring.

Introducing Roth employee deferrals for SIMPLE IRA Plus

Thu, 18 Jul 2024 20:11:09 GMT

Later this year, SIMPLE IRA Plus plan sponsors will be able to offer participants more ways to save for retirement by adding Roth after-tax deferral contributions as a plan feature.

Driven by the SECURE 2.0 Act of 2022, Roth employee deferrals are an optional plan feature available to new plans effective May 1, 2024. Existing plans can add the feature for the 2025 plan year.

To take advantage of these capabilities:

New plans must select Roth elective deferrals in their plan adoption agreement.
Existing plans must amend and restate their adoption agreement prior to November 2 and notify participants of this change prior to the annual enrollment period, which will run from November 2 through December 31. Learn more about amending and restating SIMPLE IRA Plus plans.

We’ll notify existing SIMPLE IRA Plus plan sponsors of these enhancements. Additionally, we’ll provide these plans with the steps required to amend and restate their adoption agreements, including the appropriate notification documents to participants, prior to the annual enrollment period.

We’re also evaluating recent guidance on employer Roth contribution, and we expect to introduce Roth contribution options for other SIMPLE IRA products later this year. We plan to communicate more details about these options at a later date.

Please visit our account resource center for additional assistance with your SIMPLE IRA Plus plans. You can also learn more about the status of our support for SECURE 2.0 provisions.

Frequently asked questions

General

What’s driving the availability of Roth for SIMPLE IRAs?
Section 601 of SECURE 2.0 Act of 2022 allows plans to offer Roth employee and employer contributions for SIMPLE IRAs and SEP IRAs for plan years beginning after December 31, 2022.
What’s Capital Group’s plan for introducing Roth contributions to SIMPLE IRA plans?
We plan to introduce Roth employee deferrals to SIMPLE IRA Plus starting May 1, 2024.
We’re also evaluating recent guidance on employer Roth contribution, and we expect to introduce Roth contribution options for other SIMPLE IRA products later this year. We’ll communicate more details about these options at a later date.

SIMPLE IRA Plus

What’s required for plans to offer Roth employee deferrals?
New plans must select Roth employee elective deferrals in their plan adoption agreement.
Existing plans must amend and restate their adoption agreement prior to November 2 , and notify participants of this change prior to the annual enrollment period from November 2 through December 31 . We’ll share more information with plan sponsors, including the required steps to add a Roth option to an existing plan, later this year.

Note: All employer contributions must be made on a pre-tax basis at this time. We’re working on updating our recordkeeping system to accommodate Roth employer contributions and expect to communicate more information soon.

Are plans required to offer Roth employee deferrals contributions?
No, this is an optional plan feature.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

Use of this website is intended for U.S. residents only. Use of this website and materials is also subject to approval by your home office.

Effective July 1, 2024, American Funds Distributors, Inc. was renamed Capital Client Group, Inc.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

3 mistakes investors make during election years

Thu, 18 Jul 2024 20:01:46 GMT

Investing during an election year can be tough on the nerves, and 2024 promises to be no different. Politics can bring out strong emotions and biases, but investors would be wise to put these aside when making investment decisions.

Benjamin Graham, the father of value investing, famously noted that “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” He wasn’t literally referring to the intersection of elections and investing, but he could have been. Markets can be especially choppy during election years, with sentiment often changing as quickly as candidates open their mouths.

Graham first made his analogy in 1934, in his seminal book, “Security Analysis.” Since then there have been 23 election cycles, and we’ve analyzed them all to help you and your clients prepare for investing in these potentially volatile periods. Below we highlight three common mistakes made by investors in election years and offer ways to avoid these pitfalls and invest with confidence in 2024.

Mistake #1: Investors worry too much about which party wins the election

There’s nothing wrong with wanting your candidate to win, but investors can run into trouble when they place too much importance on election results. That’s because elections have, historically speaking, made essentially no difference when it comes to long-term investment returns.

“Presidents get far too much credit, and far too much blame, for the health of the U.S. economy and the state of the financial markets,” says Capital Group economist Darrell Spence. “There are many other variables that determine economic growth and market returns and, frankly, presidents have very little influence over them.”

What should matter more to investors is staying invested. Although past results are not predictive of future returns, a $1,000 investment in the S&P 500 Index made when Franklin D. Roosevelt took office would have been worth almost $22 million today. During this time there have been eight Democratic and seven Republican presidents. Getting out of the market to avoid a certain party or candidate in office could have severely detracted from an investor’s long-term returns.

By design, elections have clear winners and losers. But the real winners were investors who avoided the temptation to base their decisions around election results and stayed invested for the long haul.

Stocks have trended higher regardless of which party has been in office

Sources: Capital Group, Morningstar, Standard & Poor’s. As of December 31, 2023. Dates of party control are based on inauguration dates. Values are based on total returns in USD. Shown on a logarithmic scale. Past results are not predictive of results in future periods.

Mistake #2: Investors get spooked by primary season volatility

Markets hate uncertainty, and what’s more uncertain than primary season of an election year? That said, volatility caused by this uncertainty is often short-lived. After the primaries are over and each party has selected its candidate, markets have tended to return to their normal upward trajectory.

Markets often bounced back after the volatility of primary season

Election year volatility can also bring select buying opportunities. Policy proposals during primaries often target specific industries, putting pressure on share prices. The health care sector has been in the crosshairs for a number of election cycles. Heated rhetoric over drug pricing put pressure on many stocks in the pharmaceutical and managed care industries. Other sectors have had similar bouts of weakness prior to elections.

Does that mean you should avoid specific sectors altogether? Not according to Rob Lovelace, an equity portfolio manager with 38 years of experience investing through many election cycles. “When everyone is worried that a new government policy is going to come along and destroy a sector, that concern is usually overblown,” Lovelace says.

Regardless of who wins, stocks with strong long-term fundamentals have often rallied once the campaign spotlight fades. This pre-election market turbulence can create buying opportunities for investors with a contrarian point of view and the strength to tolerate what could be short-term volatility.

Mistake #3: Investors try to time the markets around politics

If you’re nervous about the markets in 2024, you’re not alone. Presidential candidates often draw attention to the country’s problems, and campaigns regularly amplify negative messages. So maybe it should be no surprise that investors have tended to be more conservative with their portfolios ahead of elections.

Since 1992, investors have poured assets into money market funds — traditionally one of the lowest risk investment vehicles — much more often leading up to elections. By contrast, equity-focused mutual funds have seen the highest net inflows in the year immediately after an election. This suggests that investors may prefer to minimize risk during election years and wait until after uncertainty has subsided to revisit riskier assets like stocks.

Investors have tended to be more cautious leading up to elections

But market timing is rarely a winning long-term investment strategy, and it can pose a major problem for portfolio returns. To verify this, we analyzed investment returns over the last 23 election cycles to compare three hypothetical investment approaches: being fully invested in equities, making monthly contributions to equities, or staying in cash until after the election. We then calculated the portfolio returns after each cycle, assuming a four-year holding period.

The hypothetical investor who stayed in cash until after the election had the worst outcome of the three portfolios in 17 of 23 periods. Meanwhile, investors who were fully invested or made monthly contributions during election years came out on top. These investors had higher average portfolio balances over the full period and more often outpaced the investor who stayed on the sidelines longer. For more information on the methodology of this analysis, please refer to the Guide to investing in an election year.

Sticking with a sound long-term investment plan based on individual investment objectives is usually the best course of action. Whether that strategy is to be fully invested throughout the year or to consistently invest through a vehicle such as a 401(k) plan, the bottom line is that investors should avoid market timing around politics. As is often the case with investing, the key is to put aside short-term noise and focus on long-term goals.

How can investors avoid these mistakes?

Don’t allow election predictions and outcomes to influence investment decisions. History shows that election results have very little impact on long-term returns.
Expect volatility, especially during primary season, but don’t fear it. View it as a potential opportunity.
Stick to a long-term investment strategy instead of trying to time markets around elections. Investors who were fully invested or made regular, monthly investments would have done better than those who stayed in cash in election years.