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Controlling Your Nest Egg

controlling your nest egg
Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

Investors do not have control of their retirement investments when their nest egg is gambled on Wall Street. This is becoming abundantly clear as the government is now trying to address their climate change agenda through the power of investing. Known as ESG Funds, the government is incentivizing asset fund managers to think of climate-related financial risks when making allocations in pension and 401(k) plans under regulations in the Employee Retirement Income Security Act (ERISA). ESG is a form of sustainable investing, in which companies are put under a microscope and analyzed to be given a score based on their Environmental, Social, and Corporate Governance risks — hence ESG. 

Financial activists pushed ESG analyses into the forefront of investing conversations to encourage more ethical investing that not only benefits the stakeholders but ensures that money is being invested in companies that are helping the environment, serving the communities in which they do business, and taking care of their employees. Supporters of ESG and sustainable investing argue that these factors are often overlooked in traditional financial planning, which is primarily focused on earning a consistent return. Opponents to this type of financial analysis argue that ESG is nothing more than a gimmick used to boost marketing and public relations. For example, Tesla, who revolutionized the electric car business, was removed from the S&P 500 ESG Index from the sustainability benchmark over allegations of employees being mistreated in the workplace. Critics of the decision were quick to point out that Amazon, ExxonMobil, and Walmart all remained within the top 30 holdings on the ESG Index despite their substantial amounts of carbon emissions and allegations of workplace misconduct. 

Despite sentiment surrounding ESG investing, the Biden administration sided with the financial activists by issuing an executive order in 2021 instructing the federal government to treat climate change as a financial threat to Americans’ retirement security. In response, the Department of Labor proposed a rule that would “make investment decisions that reflect climate change and other environmental, social, or governance (ESG) considerations, including climate-related financial risk,” according to over thirty Attorney Generals, State Auditors, State Treasury officials, and more, from across the country. Opponents to the rule believe that this could hurt investor returns by using non-financial variables to determine asset allocation in defined benefit and contribution plans. Additionally, former Blackrock CIO Tariq Fancy, raised the concern about potential conflicts of interest for fund managers who may be put into a situation where they can follow ESG guidelines at the risk of losing money, or not follow the guidelines and increase their chances of earning a higher return. 

At the end of the day, the Biden administration and the Department of Labor is taking their first steps in turning asset managers — whose responsibility should be to the clients they represent to maximize their returns — into activist investors, who prioritize non-financial factors. Many who fear the economic policies of the current administration have additional concerns about this DOL rule evolving into activist investors picking winners and losers based on non-financial data, while strong-arming companies to fit the ESG mold at the potential detriment to their company’s bottom line, which in turn hurts average investors. 

Although the sustainable investment market has seen billions of dollars flow into the coffers of companies listed on the ESG Index, researchers have determined that their returns have been less than impressive. The Harvard Business Review released a report that highlighted multiple studies across several different reputable financial journals and found that while ESG portfolios were supposed to promote sustainable and ethical investing, researchers found that this was not the case. Researchers at Columbia University and the London School of Economics reported that ESG portfolios actually had a worse compliance record for following environmental, labor, and corporate governance regulations. Furthermore, the University of Chicago published a paper in the Journal of Finance in which they compared the performance of the highest rated ESG funds to the lowest rated funds, and although ESG funds brought in more capital during the time of their study, their returns on investment were worse. Additional studies conducted on this comparison between ESG and non-ESG funds uncovered that ESG funds have higher investment fees which further erodes investors’ nest eggs. 

Despite their intent for good, the result of investing in an ESG fund increases the risk of losses and exposes investors to higher fees. The government’s push to force more of these funds into investors’ portfolios establishes a responsibility among asset managers to consider climate related risks when making recommendations and allocations. Doing so presents a greater possibility of running into a conflict of interest as ESG funds sacrifice financial returns for a facade of environmental sustainability. 

The primary goal of investing is to accumulate wealth and maximize returns to generate a larger nest egg for retirement. This is no longer the intended goal of investing based on the actions taken by the Biden administration to force asset managers to consider non-financial factors in making investment decisions. Sustainable investing and ESG standards not only threaten investors’ ability to retire with security and peace of mind, but risks worsening a growing retirement crisis here in the United States.

When Americans transition into the retirement phase of investing, they have the opportunity to take advantage of strategies that put their interests first by guaranteeing the protection of the wealth that they have accumulated during their working careers.

Increased Regulations for Brokers

Increased regulation for brokers
Liadership, difference and standing out of crowd concept. 3D rendered illustration.

A surprise ruling from the Securities and Exchange Commission will start to put brokerages and investment professionals from the securities industry in the hot seat as the agency seeks to increase protections for consumers. Dating back to 2019, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have attempted to impose stricter regulation guidelines on investment advisors and the firms that employ them to crack down on firms with a history of regulatory disclosure issues. In an attempt to provide more consumer protections in the securities industry, the SEC passed FINRA’s proposed Rule 4111 which establishes monetary punishments for firms and their advisors if FINRA designates them as a risk to the investing public. 

Misconduct in the financial securities industry includes violations of securities laws and regulations, criminal or civil litigations, client arbitrations, and other forms of financial harm. If it was found that a firm had a long history of misconduct, Rule 4111 mandates that the firm put cash or qualified security assets into a Restricted Deposit Requirement (RDR) fund that will be used as an insurance policy to cover the costs of pending and unpaid regulatory issues, such as arbitration awards. In 2019, nearly 30% of cases (totaling $19 million) that were awarded damages from firms went unpaid and nearly 35% (totaling $31 million) went unpaid in 2018, according to FINRA. The average balance of an unpaid consumer arbitration in 2019 was just south of $500,000 and stretched well north or $700,000 in 2018. 

Firms that are seen as a red flag, or in other words, are a risk to the investing public, would be subject to these mandates. The size of the disciplinary deposit would be determined based on the severity of the misconduct, how many disclosures are held by the firm and the individuals involved, while also considering the size of the firm. With that said however, FINRA will not assess financial penalties that would put a firm at risk of becoming insolvent. To determine whether these financial firms should be designated as a risk or not, FINRA intends on analyzing the companies each year to determine the proper course of action. When FINRA designates a firm as restricted, those firms will have the ability to appeal these decisions made by FINRA, but outside of the appeals process, FINRA obtains sole discretion when it comes to assessing the disciplinary actions for red flag firms and the monetary penalties required to be deposited. 

To address the restricted firm designation, these firms can release advisors that are high-risk to potentially mitigate their RDR penalty. While assessing monetary penalties and putting firms—particularly smaller firms—in the hot seat to unload advisors with records of financial misconduct is a step in the right direction, experts have pointed out that this kind of regulatory action does not go far enough to solve the industry-wide problem. Even if a firm were to fire a risky advisor, it doesn’t preclude that individual from being rehired by another firm, nor does it address advisors from other firms who may have slipped under the radar that also have a history of misconduct in the securities industry. 

Opponents of the newly adopted rule argued that FINRA is targeting smaller firms and the forced removal of staff could ultimately lead to legal challenges and other complications. Firms that are faced with a restricted designation from FINRA will have only two choices according to legal experts in the field. The first option is to simply accept the penalty for having advisors with regulatory issues working for the company and pay the RDR, or the firm can release the advisors who have a history of misconduct. Legal experts believe that this ties the hands of smaller investment firms. 

While opponents to the new rule raise a legitimate concern about the impact this will have on smaller investment firms, the importance of Rule 4111 is to establish credibility in the securities industry and crack down on rogue brokers while also identifying them to the public. For years, industry professionals and regulators have warned about red flags in the industry and brokers with a history of regulatory issues moving from throughout the industry. These include recidivist brokers who slip under the radar and are high-risk for consumers in the investment industry. In a joint public statement, SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw stated, “A firm’s high-risk status is important information and will help investors make informed choices about the firms they select.” They also said that they are pleased to have FINRA “disclose the identities of high-risk firms to the public.” 

Establishing consumer protections in an industry that is known for putting investors at risk is a step in the right direction but there is certainly more that the financial industry can do to protect investors. Despite the benefits of Rule 4111, the objections raised by investment firms and some legal experts about how the new regulations will impact the business of small firms speaks volumes to whom the industry is more concerned about representing. Investors young and old can utilize FINRAs online Broker Check to determine if their broker and investment firm are a risk to their investments by checking their regulatory disclosures. While retirees can utilize these tools there are no protections in the securities industry to protect nest eggs from the market risk and fees of Wall Street that threaten the retirement security of millions of investors every day. 

China’s Growing Debt Crisis

A pile of RMB banknotes Chinese yuan money
A pile of RMB banknotes Chinese yuan money

The threat of another global financial crisis sank equity markets on September 20, 2021, after news broke of a Chinese development company that was on the verge of defaulting on more than $300 billion dollars’ worth of debt. This event contributed to a growing tension in the United States surrounding the potential of defaulting on the country’s national debt that is fast approaching $29 trillion dollars. The combination of domestic and global debt issues creates a lethal mixture for Wall Street investors that could potentially cause one of the most disastrous market events in history—especially if the United States government defaults on their national debt. 

Evergrande Group, one of the largest development companies in China, was under increasing pressure to make interest payments to bondholders as they stated in a financial filing earlier in September that they could not guarantee that those payments would be made. This uncertainty spread fear among investors in China and Hong Kong as Asian market indices lost 3% or more. The fear of default quickly spread all the way to Wall Street, which shed 2% on September 20, 2021, and caused American investors to lose tens of thousands of dollars in one day before rebounding in the days that followed. 

A contagion of fear was the culprit for the decline on Wall Street and despite the rebound in the days that followed the 2% crash, an unsettling sentiment remained that this may just be the calm before the storm. Evergrande had multiple bond interest payments to make on September 22 and September 23 and missing either of those payments would bring the company to the brink of collapse and threaten to destabilize China’s economy. Investors are split on their speculation of a potential default from Evergrande as some believe that a default on more than $300 billion dollars will not have a global effect, encouraging Wall Street investors to remain steadfast in their holdings. Other experts, however, have drawn sharp comparisons between the Evergrande situation in China and the Lehman Brothers group, whose collapse in the late 2000s served as a catalyst for the 2008 global financial crisis. It should be noted however, that Evergrande is not the only Chinese company that is facing debt concerns. Another Chinese development company, Fantasia Holdings, is also having debt concerns.  

If Evergrande were to collapse on their $300 billion dollars of debt, it would be the second largest debt default in history, even outpacing Greece who restructured $200 billion dollars of debt during their 2012 collapse. The largest to date occurred in 2008 when the Lehman Brothers group defaulted on more than $600 billion dollars of debt and ignited a spark that led to the global financial crisis. Currently, there are some economists that dismiss the Evergrande situation as having the ability to cause a global financial crisis, but others are not so sure. Wall Street investors quickly panicked and even if the selloff was based on a contagion of fear, the fact of the matter is that the stock market still suffered critical losses as a result. If Evergrande and other companies in China start to default on their debt payments, it absolutely would have a broad impact on global equities, especially if the situation grows. This is a developing situation that could last for several months as bond interest payments will be due for the debt-laden development company every month for the remainder of the year. 

On top of the Evergrande Group situation, federal officials in the United States are racing against the clock to come up with a plan to avoid what would be the largest default in history. In 2019, former President Trump suspended the debt ceiling for two years. At the time, the national debt was roughly $22 trillion dollars and was signed several months prior to the start of the coronavirus pandemic. When the debt ceiling suspension officially came to an end during the summer of 2021, the national debt had increased $6 trillion dollars and was fast approaching a total of $29 trillion dollars. Congress failed to pass a budget proposition with a debt ceiling provision prior to their summer recess and this forced Treasury Secretary Janet Yellen to implement extraordinary measures to maintain the government’s financial obligations while congress attempted to find a solution. The problem that lawmakers are waking up to today is the exhaustion of those extraordinary measures and a fast-approaching October 18 deadline to avoid a national default. 

Secretary Yellen has pleaded with members in both parties in the House and Senate to pass an official resolution to avoid what she believes will be the most catastrophic financial crisis in history, potentially sending the United States into another recession. Federal Reserve Chairman, Jerome Powell, also expressed concern about the national debt during a press conference where he made the point that it’s difficult to contemplate the consequences of failing to raise the debt ceiling, but the United States should not wait to find out. To make progress in the debt debate, President Biden met with Congressional Democrats and progressives to discuss his $3.5 trillion dollar spending package, including the debt ceiling, but no progress has been made and Republicans in Congress have stated that they have no intention of voting to raise the debt ceiling any further.

The United States faces a very real possibility that the government will default on its national debt despite having raised or suspended the debt ceiling countless times over the last several decades. The outcome of this worst-case scenario is inconceivable for investors with at-risk assets. In conjunction with these domestic issues, investors must now keep a watchful eye on the debt crises occurring in other parts of the world, especially in China where multiple companies are now struggling with debt obligations. What was anticipated to be a year of progress and recovery quickly unraveled into an uncertain mess that clouds future expectations for the economy, investing, and even the state of politics, as lawmakers will soon shift from a legislative mindset to a campaigning mindset for the 2022 midterm elections—if they haven’t done so already.

The Social Security Inflation Problem

Shocked senior man looking at bills copy space
Shocked senior man looking at bills in disbelief, holding his glasses on forehead, copy space

Inflation continues to persist into the early Fall months of 2021 and Americans are facing more economic risks, including higher taxes on top of a reduction in purchasing power. Economists are currently predicting that the Social Security Administration will have to significantly increase social security benefits to counteract the rising rate of inflation. In doing so however, financial experts warn of a potential tax nightmare for retirees who exceed the Internal Revenue Service’s retirement income threshold. The official cost-of-living adjustment is expected to be announced later this month, but retirees should be prepared for the potential tax consequences of receiving increased social security benefits in 2022 and beyond. 

With inflation currently locked in at 5.3% year-over-year in August 2021, the Social Security Administration (SSA) is scheduled to announce what is projected to be the largest cost-of-living adjustment (COLA) to social security benefits in nearly 40 years. Currently, experts are estimating that the increase will exceed 6% to counteract the meteoric rise of inflation during the COVID pandemic. The last time the COLA was increased at a rate this large was in 1982, when the SSA increased benefits more than 7% during a year when inflation stretched above 6%. In recent years, inflation has not posed much of a threat to consumer spending and cost adjustments made by the Social Security Administration have not made a significant impact on received benefits. In fact, in 2019 and 2020, the COLA for social security benefits were increased by less than 2%. 

There are several reasons why this year’s COLA increase may cause some concerns for seniors who receive social security benefits. The first call for concern is the potential that increasing the COLA will subsequently cause retirees taxes to increase. Based on the tax regulation rules from the Internal Revenue Service (IRS), if a single, married, or joint tax filer has a combined income that exceeds the IRS income threshold, then their social security benefit will be subjected to income taxes. There are three income tiers that retirees can fall into in this scenario which dictate what percentage of their social security benefits will be subject to taxes—the first tier is 0% for any single filer that makes less than $25,000 in their combined income each year, or for any married couple who earns less than $32,000 a year. The second and third tier indicates that 50% or 85% of the recipients’ total benefit will be subjected to income taxes. 

Single individuals who have a combined earned income between $25,000 and $34,000 have up to 50% of their social security benefit subjected to income taxation according to IRS rules. Anything above $34,000 would increase the applicable percentage from 50% to 85%. Married couples’ income thresholds are slightly higher. A married couple earning between $32,000 and $44,000 each year would have up to 50% of their benefits subject to income taxes, and up to 85% if they earn more than $44,000 a year. Congress first approved this double tax into social security during the Reagan administration in the 1980s and the tax was later increased during the Clinton administration in the 1990s. 

This double tax is problematic for two reasons. First, Americans worked their entire lives and paid into the social security system with money that was taken from their paychecks with the intention of getting it back in the form of a fixed income when they reach retirement age. Essentially, Americans are paying a fee to the government to hold onto their money and then paying another fee when they activate their income stream—which is no better than how brokers treat retirement nest eggs. Secondly, the IRS income thresholds which determine what percentage of social security benefits are taxable are not inflation adjusted. Therefore, the percentage of households that will pay taxes on their social security benefits will inevitably increase over time unless the IRS either boosts their income thresholds or makes them inflation adjustable. 

As of 2020, the Center for Retirement Research estimated that 56% of households that receive social security benefits are anticipated to pay income taxes on the benefits that they receive. The percentage of households subject to this taxation is only going to increase as time passes because the income tax regulations that dictate when and how much of social security benefits are taxed are not inflation adjusted. As a result, in years with high rates of inflation (such as 2021), it can serve as a double-edged sword for retirees. Additionally, as social security COLA’s increase, so do premiums for Medicare Part B which is funded through social security benefits. In recent history, Medicare Part B premiums have risen at an average rate of 5.9% each year. 

Between inflation, taxes, and the rise of Medicare Part B premiums, the net social security benefit that retirees receive in 2022 may be canceled out, ultimately making a bad economic situation worse. Despite this, social security recipients will soon find out what the COLA will be for 2022 when the Social Security Administration makes their announcement in the next few weeks. One way that concerned or at-risk retirees can preemptively address this financial situation is by establishing a financial plan that reduces their overall tax liability to keep their money out of the government’s pockets and put back into their own. 

Congress Builds on the Foundations of the SECURE Act


Congress is officially set to move forward with legislation that will alter the retirement saving landscape once again, more than a year after passing landmark legislation that rattled Americans in and near retirement as well as their retirement savings plans. Coined as the SECURE Act 2.0, the House Ways and Means Committee unanimously approved a markup of the legislation to be sent to the House floor for a full vote before it makes its way to the Senate Chambers. The legislation’s official title is,
Securing a Strong Retirement Act of 2021 and it looks to advance on much of the progress that was included in the original SECURE Act.

The original SECURE Act, titled Setting Every Community Up for Retirement Enhancement Act, was passed in December of 2019, and was signed into law by former President Donald Trump. At the time of its passing, the legislation was one of the biggest retirement reforms in recent years eliminating the stretch-IRA, raising the required minimum distribution age, and eliminating the age limit for retirement plan contributions, among other items. The new legislation looks to expand on some of these provisions such as increasing the required minimum distribution (RMD) age again, but incrementally over the next ten years.

By raising the RMD age, retirees will have more time to allow their accounts to grow before being mandated to make withdrawals. Prior to 2020, the RMD age was 70 and a half years old which was then raised to 72 in the first SECURE Act. Should the SECURE Act 2.0 pass through Congress and be signed into law by President Biden, the RMD age would immediately increase to 73 as of January 1, 2022. According to the current language of the proposed legislation, it would then take several more years for the RMD age to rise to age 74 on January 1, 2029, and then finally reaching 75 on January 1, 2032. If this legislation does become law, individuals who are 63 or younger in 2021 would be able to delay their RMDs to age 75 once the full increase is in place.

Ultimately, by raising the RMD age investors who have money in traditional IRA vehicles will have more time (if their age qualifies) to increase the total amount of their investment by not having to take withdrawals. Even just a few extra years can help a retiree build their nest egg, especially since traditional IRA accounts are tax deferred. The potential issues that could arise from these incremental increases is confusion among retirees about when to take their RMDs and making sure that they do so correctly to avoid penalties for withdrawing too early or late or simply not accepting their required payments because they have no guidance of when they should take them. If these provisions are rolled out for the public, it will be important for investors to ensure that they are receiving the proper advice to handle their retirement investments and take full advantage of the age increase.

Another important update in the proposed SECURE Act 2.0 is increasing the catch-up contribution which gives older workers over the age of 50 the ability to invest more money, above the limits set by the Internal Revenue Service (IRS), to bolster their nest egg in the years before they reach retirement. The additional benefit of making a catch-up contribution is that investors will also be lowering the amount of taxable income for that tax year, ultimately reducing the amount of money owed to the IRS. As of January 1, 2021, the catch-up contributions set by the IRS are $1,000 for IRA accounts, $6,500 for traditional 401(k) and other workplace retirement plans, and $3,000 for SIMPLE retirement plans. What legislators hope to achieve with the SECURE Act 2.0 is to raise those contribution limits from $6,500 to $10,000 starting at age 62 through 64 and from $3,000 to $5,000 for SIMPLE plans. The legislation would keep current contribution limits starting at age 50 with the additional increases coming into effect starting at age 62.

Legislators have stated that these proposed increases will also be indexed for inflation and will go into effect starting in 2023. It is unclear whether the additional increases will remain after age 65, or if the contribution limits will revert to the original contribution limits for individuals over the age of 50. Now, the language of the proposed legislation seems to indicate that the increases for catch-up contributions will only impact those who have reached the ages of 62 through 64 to provide a few brief years of extra support to strengthen their retirement nest egg.

The SECURE Act 2.0 legislation also looks to expand access to 401(k) plans by setting up automatic enrollment for employees in new company plans along with other provisions dealing with matched contributions to assist with student loan repayments. Currently, the language of this bill is subject to change as it was first sent to the House of Representatives on May 5, 2021 and must go through more legislative channels before it can finally be sent to the Senate and eventually to President Biden’s desk for signature. Proponents of this legislation are confident that the bill will be passed with overwhelming bipartisan support in the Congress, but with the current state of domestic political affairs, bipartisanship is never a given, especially with policy decisions involving economic issues.

Two of the foundational aspects of the SECURE Act 2.0 deals with the raising of the RMD age and the three-year period where investors will be able to contribute exponentially more in terms of a catch-up contribution. This combination will enable retirement investors to grow their nest egg for a longer period than previously allowed which may lessen some of the retirement strain that many Americans have and are currently experiencing. Delaying the RMD age to 75 over the next ten years will create larger income payments for retirees in tandem with their Social Security benefits and any other investments that they may have.

Sponsors of the legislation also anticipate that the SECURE Act 2.0 will help generate more than $27 billion in tax revenues over the next ten years. It is important to remember however that if this legislation is signed into law, individuals already receiving RMDs from their investments will continue as the provisions in the bill are not retroactive to include those who already had their RMDs delayed to age 72. If this legislation does become law, retirees and those nearing retirement should make sure they get educated about the changes that will directly impact their retirement goals to ensure their retirement strategy still aligns with their best interest and to take advantage of boosting their savings if applicable when the time comes.

President Biden Steps-Up on Taxes

President Biden Steps-Up on Taxes

Congress alongside first year President Biden are planning major tax overhauls that would create several issues for beneficiaries. Raising taxes on wealthy Americans has become a focal point of the majority party in Congress and for President Biden, as Democrats plan to increase taxes to address certain inequalities in the economy. At the top of the list is an elimination of the step-up in basis estate tax provision, which is considered by some economists and lawmakers to be a tax loophole that allows individuals to avoid paying taxes on inherited assets. Economists have cited that this provision has allowed billions of dollars each year, that would have otherwise been taxable, to be swept under the rug, exempt from capital gains tax. 

Under the previous administration, President Trump and Republicans in Congress passed the Tax Cuts and Jobs Act (TCJA, 2017), which increased the tax exemption on inherited assets to $11 million and is set to sunset in 2026 unless repealed by the Biden administration. President Biden has repeatedly stated that he would like to see estate tax exemptions reduced to their 2017 levels of $5 million or reduced further to $3.5 million. By reducing the tax exemption cap, more individuals would be subject to pay taxes on estates and gifts by the Internal Revenue Service (IRS), effectively bringing in more revenue for the Federal government to help pay for other initiatives. 

On top of reducing the tax exemption, Biden and Congressional Democrats have proposed the idea of eliminating the step-up in basis provision, which has commonly been used to pass on certain assets to a beneficiary, while avoiding massive capital gains tax burdens. If the basis were to be eliminated, inherited assets like property, equities, collectibles, and gifts would be subject to massive capital gains taxes if they are sold by the beneficiary. For example, a property purchased for $250,000 is passed on to a beneficiary who inherits the property with a current market value of $525,000. The stepped-up basis dictates that if the beneficiary sold the property, their capital gains would be taxed starting at the fair market value of $525,000 instead of the original purchase price — significantly reducing the capital gain tax burden for the beneficiary compared to a carry-over basis, which is applied when a beneficiary has an asset transferred to them before the death of the owner.

If the beneficiary sold the house at the same price that it was inherited, they would not owe any capital gains taxes because the value of the sale would be equal to the inherited price. Therefore, the $275,000 increase in property value prior to being inherited would not be taxable to the beneficiary. Under the current law, if the beneficiary sold the property for $550,000, the stepped-up basis would calculate capital gains on a profit of $25,000 (since the property was inherited at a price of $525,000.) By eliminating the stepped-up basis estate tax law, the beneficiary would have to pay capital gains on any inherited asset that is sold using the original purchase price. As a result, a property that was purchased for $250,000, inherited at $525,000, and then sold by the beneficiary for $550,000 would have to pay capital gains taxes on what would be considered a $300,000 profit (current selling price minus original purchase price). 

When it comes to capital gains taxes, the majority of taxpayers would likely fall into the 15% capital gains tax bracket based on earned income with single and married filers falling in the 20% capital gains tax bracket if they earn more than $450,000 and $502,000 each year respectively. President Biden has also promoted the idea of raising capital gains taxes, specifically targeting filers who earn more than $1 million in income each year by placing a 39% capital gains tax on those individuals. Capital gains are also considered income, so an individual who makes $100,000 a year would have the profit of their capital gains for the year added to their income, which could send them into a higher income tax bracket and, in turn, a higher capital gains tax bracket. An income of $100,000 a year would have a capital gain of $25,000 taxed at a rate of 15%, resulting in capital gains tax of $3,750 and a net profit of $21,250 after selling the inherited asset. 

Purchase PriceFair Market ValueSelling PriceCapital Gains (Step-up)Capital Gain Tax RateTaxes Paid on Capital GainsNet Capital Gain

Single beneficiary inherits an asset using a stepped-up basis with $100,000 annual income. 

Should President Biden eliminate the stepped-up basis, that same individual making $100,000 a year would now be taxed at a rate of 15% on a profit of $300,000. 

Purchase PriceFair Market ValueSelling PriceCapital Gains (No Step-up)Capital Gain Tax RateTaxes Paid on Capital GainsNet Gain

Single beneficiary inherits an asset without a stepped-up basis with $100,000 annual income.  

If the taxpayer were married and jointly earned more than $225,000 for the year, the $300,000 profit added to their income would push the married couple into the 20% capital gains tax bracket resulting in a tax bill of $60,000. Should the Congress and President Biden increase the top capital gains rate from 20% to 39.6%, as they have proposed, the tax bill for this married couple would be a staggering $118,800 and nearly cut their net gain in half. 

Purchase PriceFair Market ValueSelling PriceCapital Gains (No Step-up)Capital Gain Tax RateTaxes Paid on Capital GainsNet Gain

Married beneficiary (filed jointly) inherits an asset without a stepped-up basis with joint annual income of $225,000. 

The step-up in basis provision saves more than $56,000 in taxes for married couples (filing jointly) who inherit assets in this scenario and more than $41,250 for single tax filers. Economists and lawmakers who have audited situations like this have concluded that billions of dollars of taxable income are voided because of the step-up in basis provision and have gone as far as alleging that the provision is a loophole rather than a tax strategy. Eliminating the provision however would cause an immense tax burden for all taxpayers, not just wealthy taxpayers as some lawmakers have purported.

In the previous Democratic administration, President Obama and then Vice President Biden attempted to eliminate the step-up in basis provision but were unsuccessful in large part due to a Republican controlled House and Senate. With a fully controlled legislature and executive branch, this initiative may have a better chance of making its way through Congress along with several other tax hikes and a partial or full repeal of the TCJA. These tax increases and changes are aimed to help finance other programs related to education and student loans, but they will impact how seniors plan to handle their assets and estates as they get older. Although the aim is to prevent mega-wealthy Americans from avoiding taxes, the elimination and reduction of certain provisions and exemption caps will have undue effects on the middle class — especially if step-up in basis is eliminated. 

With the filibuster rule still intact, Senators need more than a simple majority to pass major legislation, such as those dealing with overhauling taxes, making the elimination of the stepped-up basis unlikely — unless the rules are changed. If Democrats in the Senate move to change or dissolve the filibuster, a simple majority vote would pass most if not all of President Biden’s tax agenda, which could cause major tax burdens for seniors and their beneficiaries when passing on legacy assets. A change of this nature can potentially open other loopholes for retirees and those planning for retirement to take advantage of moving assets into other tax favorable accounts like a trust. Should these tax changes be made, many seniors across the country may benefit from updating their plans to pass along assets to their beneficiaries. 

Growing Retirement Concerns

Growing Retirement Concerns

As more data becomes available about the economic impact of the coronavirus on retirement planning, multiple studies have shown that retirees and individuals nearing retirement age were not as negatively impacted through their retirement plans as one might expect. While this is the good news, the bad news is that there still is a retirement crisis taking place in the United States. Prior to the pandemic, Americans nearing retirement were struggling to adequately save, forcing some to delay their retirement plans which has caused stress among individuals in the senior population. Although the pandemic continues to affect the country, mass vaccinations have put the country on a path to recovery and certain indicators have shown a healing economy. 

A 2021 retirement preparedness study found that during the pandemic, setting money aside for retirement was among the top priorities for savers. The lowest priority for respondents was focusing on their investment portfolios with 49% of respondents between the ages of 45 and 75 stating that they did not know how the assets in their investment portfolios were allocated. This statistic is concerning for individuals planning for retirement because it shows that nearly one half of investors nearing the end of their career do not have control over their investments or the knowledge to maintain their investments and are therefore leaving themselves at risk. 

Although saving money was a high priority for individuals in and nearing retirement, according to this study, 60% of respondents felt as if they did not have enough money saved. While the pandemic certainly slowed most working individuals’ ability to put money away for retirement, researchers found that although saving money was a high priority for Americans, not many savers had a retirement plan in place. More than 70% of respondents stated that they did not have enough assets to justify creating a retirement plan. While this data does seem contradictory to respondents saying that saving for retirement was a priority, it shows that there is a lot of confusion about where the economy is heading, what the future will hold for most retirees, and highlights how insecure the process of retiring has become for Americans. The data also lends credence to the importance of working with trusted financial advisors who specialize in retirement planning, which this study did not analyze. 

Furthermore, the same study underscored several retirement issues that respondents were worried about saving for, including higher healthcare costs bankrupting their nest egg, preserving their nest egg in retirement, and protecting themselves from a market crash. After collecting this data, the surveyor’s asked a broad question about living in retirement and 47% stated that they were comfortable, but less than 5% of those who said they were comfortable said that they were living the dream. This study was similarly aligned with data released from the Employee Benefit Research Institute (EBRI) which has conducted several studies throughout the course of the pandemic to analyze respondents’ feelings and preparedness for retirement. Interestingly however, EBRI’s study group was more content with their retirement situations and found that more respondents were staying true to the retirement plan that they had formulated during their working career. 

The EBRI research focused specifically on retirement age individuals between the ages of 62 and 75 and narrowed their focus on how people in this age group spend money during retirement. EBRI found that more than 45% of survey respondents felt that they had saved less money during their working career than the amount that they need to satisfy their retirement needs — 18% felt that they saved more than what they needed. The study also looked at what was most prioritized by the respondents in terms of safeguarding their nest egg in retirement. 81% of the respondents stated that their top priority was maintaining their health in retirement and having enough assets to cover healthcare related expenses. 

It may be some time before economists and researchers have a full range of data to depict the true effects of the pandemic on retirees and their nest eggs, but recent studies have shown that the shutdowns and drop-in economic activity did not have as much of a drastic impact on saving for retirement. The data from both studies indicate that there are still complications with saving and peace of mind as most retirees still find themselves worrying about whether they have enough money to last their lifetime and cover certain expenses. Instead of focusing on traveling and spending time with families, retirees in the EBRI study were focusing on not spending down their assets so they have a high balance to cover unexpected expenses like the high cost of medical care. 

Younger savers like the ones depicted in the first study showed evidence of general confusion when it came to saving for retirement. Saving money was a high priority for respondents during the pandemic, but they did not pay much attention to where their assets were being allocated in their portfolio and did not feel as if having a retirement plan was justifiable if their assets did not reach a certain level. This raises the question about having a financial advisor which neither study covered but could certainly help savers in and near retirement develop a plan regardless of the size of their assets. Retirement preparedness was a large issue for the United States prior to the pandemic of 2020 and going forward it looks like it will continue to be an issue for retirees and those preparing for retirement.

Federal Debt and Your Retirement

Debt and Retirement

Personal debt plays a large role when it comes to saving for retirement and living as a retiree. Soaring debt resulting from increasing medical costs, credit cards, loans, and more limit the amount that workers can save and how much retirees can use in their golden years. Government deficits on the other hand are an elusive form of debt that occurs when annual government expenditures are larger than their yearly revenues. While deficits can have an impact on the short-term outlook of retirement security, the long-term effects of deficits building up over time can be much more damaging, especially if lawmakers continue to ignore the growing problem.

Some politicians and economists have sounded the alarm on the insurmountable level of debt that has been accumulated over the last twenty years, but no significant action has been taken. Since 2009, the national debt has increased $17 trillion dollars and increased rapidly in 2020 as the government spent more than $6 trillion in response to the coronavirus. As a result, the national debt has ballooned to more than $28 trillion and has the potential of reaching $30 trillion before the end of 2021. Not to be confused with the deficit however, which is the yearly amount of debt assumed by the country, the national debt is the accumulation of deficits year after year representing the grand total of money owed by the country. Most Americans pay no mind to how fast the nation’s debt is increasing, while others worry that it could cause the eventual downfall of the United States on the world stage. 

While the thought that the national debt could lead to the eventual downfall of the United States is unlikely to occur, the long-term impact of skyrocketing debt will eventually lead to higher taxes, inflation, and an extremely volatile economy for investors — 2020 highlighted this volatility. As debt substantially increased, the government issued more Treasuries to cover new spending deficits being added from large stimulus packages to keep the economy afloat. Following the basics of supply and demand, as the volume of Treasuries in the market increases, the interest rates paid on those treasuries naturally decreases, ultimately hurting the interest rate environment in the long run. When the interest rate environment takes this kind of a hit, bonds, certificates of deposit, and savings accounts become less attractive for investors. 

Since the onset of the COVID pandemic, banks have offered less than 1% on many of their investment vehicles, such as CDs. This has made it difficult for investors to grow their retirement savings, let alone keep up with inflation especially when the stock market initially crashed in March of 2020. Furthermore, when the interest rate environment struggles, investors turn to the stock market, exposing themselves to market risk and fees while jeopardizing their principal in the process. 2020 and 2021 have been prime examples of how short-term debt obligations can damage and bring uncertainty to the field of retirement investing. 

Although low interest rates have caused the stock market to reach record highs, stocks eventually must come back down. The gradual shift that has taken place on the stock market in recent weeks is a window to the eventual long-term impact of rising debt. Stimulus bills have been the largest expense adding to the massive annual deficit created in responding to the pandemic, but temporary one-time stipends paid to eligible taxpayers has some economists fearing that pent up demand will explode into the market as the country reopens which could cause the economy to overheat. A sudden rise in economic activity could trigger inflation and cause interest rates to rise to reflect stronger economic activity. Recently, Treasuries have risen by a couple basis points which have jolted the stock market into a turbulent selloff. While increasing interest rates would be welcomed news to risk adverse investors with money in bonds and CDs, this shift would correspond with a gradual or rapid decline in the stock market, hurting investors who stayed on board a sinking ship. 

If interest rates increase substantially, consumers would feel the sting in other sectors of the economy as well, specifically relating back to paying down personal debts. Mortgages and student loans would become more expensive with increasing interest rates forcing consumers to focus more of their funds to pay down their own personal debt; this leaves less income available to invest in retirement accounts. Although interest rates and stock market volatility are seen as short-term effects of deficit spending, the long-term effects are dependent on how the debt is addressed by lawmakers. At the end of the day however, the national debt plays a silent but potentially deadly role in the realm of retirement investing.   

Finally, aside from the constant threat of inflation decreasing economic output, consumers could lose purchasing power if the government decides to raise taxes. The largest portion of revenue collected by the federal government is by way of taxes and considering lawmakers are generally reluctant to cut spending, the other avenue frequented by policymakers to address the nation’s debt crisis is to increase revenue. Similarly, to how inflation reduces how far a consumer can stretch a dollar, higher taxes mean less income in the pocketbooks of Americans, which creates a similar ripple effect that limits how much consumers are able to save and spend in their retirement. 

Ultimately, these basic examples highlight how deficits, and the total national debt are more interconnected to retirement saving than many investors realize, and it is a problem that has gone unchecked for far too long. It would be impossible to condense all the nuances of the national debt and how it impacts short term and long-term retirement saving, but it is important for investors to have a general understanding of what dangers potentially lie ahead as the country recovers from the coronavirus pandemic, especially if their retirement funds are left at risk on the volatile stock market. 

The Safety of the Financial Life Insurance Industry

The Safety of the Financial Life Insurance Industry

A spike in annuity sales from the fourth and final quarter of 2020 suggests that there is an increasing trend of investors looking for safer investment alternatives to high-risk stocks, bonds, and mutual funds. Overall annuity sales were up 2% compared to the final quarter of 2019, with certain principal protecting annuities like fixed deferred vehicles skyrocketing 41% in the fourth quarter of 2020 — 8% for the entire year. Companies like American Equity witnessed steady growth in their financially secured instruments, increasing sales of fixed index annuities by 23% at the end of 2020 compared to the final quarter of 2019. One potential explanation for the increase in annuity sales is the safety of the financial life insurance industry and the benefits of guaranteed principal protection, especially for investors who are looking for avenues to secure their retirement funds.

The financial life insurance industry is highly regulated by each individual state throughout the country, as opposed to securities investments, which are governed and regulated by the federal government. Each state elects or appoints an insurance commissioner who is in charge of overseeing the insurance companies in their respective state. If an insurance company fails or cannot meet their financial obligations to policyholders, state guaranty associations step in to protect the invested assets of the policyholders by taking over the insolvent insurance company in a process called receivership. Prior to liquidating the insurance company’s assets, the state insurance commissioner may attempt to revitalize the failing insurer, this is known as rehabilitation. During this process, policyholder’s accounts are kept whole and secure in their investments, which is a stark contrast to Wall Street when the market crashes or a stock loses value.

While investors may be limited in their ability to add or subtract funds from their annuities when an insurance company falls into rehabilitation, they can rest assured that their money is safe. Their assets will be protected up to the state guaranty association’s protection cap, similar to how the Federal Deposit Insurance Corporation (FDIC) insures up to a certain amount of funds invested in a bank. Each state’s guaranty association determines what level of benefits will be protected in the event of an insurer falling into receivership.

Should the state commissioner determine that the failing insurance company cannot be rehabilitated, the company would be declared insolvent, and the assets of the company liquidated. This triggers the state guaranty associations to kick in and provide continued benefits to policyholders until their assets can be successfully transferred to a solvent insurer. In the event of a multi-state insolvency process, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) will coordinate with the participating state commissioners to facilitate the multi-state liquidation process.

Overall, the role of the state insurance commissioner, the state’s guaranty associations, and the NOLHGA is to protect consumers. They do this by ensuring that policyholders continue to receive their policy benefits when an insurance company becomes financially unstable, and to successfully transfer liquidated assets to solvent insurers so that the consumer can continue receiving their invested benefits without hesitation or delay. Unlike the securities industry where investors risk losing all their principal, the financial life insurance industry actively looks to protect their consumers even when there is an issue of insolvency, or failure to meet certain financial obligations to policyholders.

The level of protection and care for the consumer in the financial life insurance industry is unequivocally unmatched and lends reason to why safe annuities — financial life insurance investments — are gaining more attention in the overarching financial industry. It is important for investors to remember that although annuities come from the financial life insurance industry, not all annuities are principal protecting vehicles that guarantee security during a catastrophic economic event, such as a stock market crash. Variable annuities, for example, are insurance products that also happen to be high-risk securities. They are tied to mutual fund portfolios that can leave an investor’s money at risk of losing principal. Furthermore, these vehicles come with costly brokerage fees that erode the value of the investment over time, even more so during down market trends. As a result of their ties to the stock market, these vehicles are regulated by the Securities and Exchange Commission (SEC) and not recommended for retirement planning.

Safer instruments in the financial life insurance industry, like fixed and fixed index annuities, are recommended for retirement planning because they protect investor’s principal. Not only do the vehicles themselves protect the consumer, but they are backed by an industry that has an immense state-by-state safety net that ensures the financial peace of mind of the annuitant policyholders. As a result, these investments are sometimes referred to as Crash Proof Vehicles™ by licensed retirement phase experts in the industry. The reason for this designation is due to the fact that these vehicles are insulated from the volatility of Wall Street and have survived every major stock market crash since the creation of the life insurance industry during the 18th century.

Furthermore, the financial life insurance industry witnessed another major economic event in 2020, surviving the pandemic-induced stock market crash while keeping investors safe, as opposed to individuals who lost significant portions of their retirement nest egg; upwards of 30% at the peak of the market crash. Many investors learned that there is not a safety net for security investments, and in response, protected portions of their assets with Crash Proof® alternatives. These vehicles have security, income guarantees, and are backed by an industry that has the consumer’s well-being in mind to ensure their retirement investments are on solid ground.

The protection of assets is one potential explanation for the increase in annuity sales at the end of the 2020 calendar year. Eliminating market risk and costly fees can expand retirement investing and the spike in sales indicates a shared sentiment among investors to secure their nest egg and have opportunities for growth. The benefits of the financial life insurance industry extend beyond the principal protecting Crash Proof Vehicles™ that are available for investors, and spans across the entire industry which has never gone bankrupt or left consumers at risk. Compared to the stock market, the financial life insurance industry is set up in the best interest of their consumers, whereas the stock market is constructed for the brokers, the money managers, the hedge funds, and more — anything but the individual investors. In the end, when planning for retirement, investors can choose a financial industry riddled with volatility, risk, and corruption, or a financial path of security in an industry with safety nets and guarantees.

IRA Contribution Rules

Woman putting money into piggy bank at table indoors, closeup

When saving for retirement, investors have a multitude of options to save their money. Two popular types of investments for retirement savers are traditional and Roth IRAs. Both traditional and Roth IRAs offer tax-free growth for the life of these vehicles and have unique attributes that can assist investors in achieving retirement security and peace of mind. Each year the rules regulating IRA contributions for both traditional and Roth accounts are updated and play a major role in how investors save. While some of the newer changes are rather minor compared to previous years, some changes can have a significant impact on the IRA environment, specifically by way of taxes.

Most recently in 2020, IRA regulations received a significant overhaul with the passage of the SECURE Act, which ultimately ended the Stretch IRA for designated beneficiaries. In terms of contributions, however, the SECURE Act eliminated the maximum age that an account owner can contribute to an IRA, meaning that as long as an account owner has taxable earned income, they can continue to invest in their IRA, even if they are taking required minimum distributions. While there were not as many changes from 2020 to 2021, it is important that investors in or planning for retirement are aware of the limits and regulations for making contributions to their traditional or Roth IRA accounts.

Traditional and Roth IRAs have similar but unique rules when it comes to contributions, and staying up-to-date with changes puts investors in the best position possible to fully take advantage of the retirement vehicles and avoid any potential pitfalls. Traditional IRAs were introduced to investors in 1975 and offer a tax-deductible contribution that grows tax-deferred for the life of the vehicle with the stipulation that when the investor reaches age 72 they will be mandated by the IRS to take required minimum distributions. This vehicle is popular among working investors saving for retirement because the contributions made to a traditional IRA not only have the benefit of being funded with pre-tax dollars, but also have favorable tax implications that could reduce an investor’s income tax liability in the present date when filing their taxes each year.

When it comes to filing income taxes, investors have to be wary of whether or not they can take a full deduction, limited deduction, or no deduction from their IRA contributions. If the IRA owner is an active participant in a workplace retirement plan — 401(k), 403(b), pension, or a SIMPLE IRA — the amount of income that is filed by the participant will determine whether or not the investor will be able to deduct their traditional IRA contributions when they file their taxes. An IRA owner who is not an active participant in a workplace retirement plan has the ability to deduct their entire IRA contribution for the year. In other cases where the IRA owner does participate in a workplace retirement plan, then they would have to check their tax filing status, which is determined by filing as a single individual, filing jointly with a spouse, or filing separately from a spouse.

Each of these categories contains certain income limits that the filer cannot exceed if they wish to make a full or partial deduction. The traditional IRA income limits and modified adjusted gross income (MAGI) must be examined based on any of the three aforementioned categories to determine the deduction status of an investor’s IRA contributions. Single filing active participants may take a full deduction of their IRA contributions in 2021 if they make less than $66,000. A limited deduction can be made if they make between $66,000 and $76,000 in 2021. Anything above $76,000 would result in the single filer being denied any deductions from their IRA contributions.

Married filers where one or both spouses are active participants in a workplace retirement plan also have income limits that determine if they can make a full traditional IRA deduction or not. In 2021, if both spouses are active participants they would have to jointly earn less than $105,000 a year to take advantage of a full deduction. Anything between $105,000 and $125,000 for joint filers who are both participants would result in a limited contribution, while earned income that is more than $125,000 would disqualify any deductions. On the other hand, if only one spouse is an active participant in 2021, then their income limit for a full deduction would be less than $198,000. To make a limited deduction they will have to make between $198,000 and $208,000; no deduction may be made if their earned income exceeds $208,0000. Active participants who are married but file separately generally do not qualify for any deductions unless they make less than $10,000 — in which case they can make a limited deduction.

Unlike traditional IRAs, Roth accounts came into existence in 1998. Investors with a Roth account do not have the option to make tax deductions because Roth IRAs are funded with after-tax contributions and grow tax-free for the life of the vehicle. Roth IRAs do not mandate required minimum distributions because the invested principal was already taxed. These vehicles operate slightly differently than traditional IRAs when it comes to contributions. Instead of placing deduction limits on investors participating in a workplace retirement plan, Roth accounts have contribution limits that are dependent on the income status of the tax filer.

Similar to traditional IRAs, the income categories for Roth accounts are broken down between single filers, spouses filing jointly, and spouses filing separately. Rather than limiting how much of the contributions can be deducted from their taxes, Roth accounts limit how much can be contributed based on the amount of earned income in these three categories. In order to make a full contribution to a Roth IRA in 2021, a single filer would have to earn less than $125,000. A single filer could make a limited contribution if they earn between $125,000 and $140,000, but if more than $140,000 is earned no contribution can be made. For a married couple filing jointly in 2021, to make a full contribution to their Roth IRA they would have to earn less than $198,000. Furthermore, if they file between $198,000 and $208,000 they can make a limited contribution, but they would not be able to make any contributions if they jointly earned more than $208,000 in 2021. Just like a traditional IRA, however, filing separately from a spouse hinders the investor’s ability to contribute to a Roth IRA, although they can make a limited contribution if less than $10,000 is earned.

For both traditional and Roth IRA contributions the limits are the same. An investor can put up to $6,000 in one or both of these types of vehicles in 2021; however, an investor who has both a traditional and Roth account cannot invest $6,000 into each of the IRAs. Therefore, an investor can split the $6,000 limit between the two accounts, but cannot exceed that limit. Investors over the age of 50 have the ability to add an extra $1,000 into their accounts each year, raising the yearly limit to $7,000 in what is known as a catch-up contribution. Catch-up contributions are important for investors over the age of 50 because it allows them to save more money for retirement in a traditional IRA, Roth, or split between both. On top of catch-up contributions every couple of years to maintain pace with inflation, the IRS will increase the contribution limit by $500 in what is known as a cost of living adjustment (COLA). A COLA has not been applied for 2021 and it is not yet known if an adjustment will be made in 2022.

Another important rule about IRA contributions is that investors have until April 15, 2021, to make a 2020 contribution if they haven’t already exceeded the $6,000 investment threshold — $7,000 if the investor is over the age of 50. Making a contribution before taxes are due on April 15 of any year has financial benefits for those making a contribution into a traditional IRA. Not only can an investor make a tax-deductible contribution to a traditional IRA, but that contribution would also decrease the amount of taxable income for the current tax year, resulting in potentially paying fewer taxes.

Although most of the major IRA changes occurred in 2020 when the SECURE Act went into effect, IRA rules and regulations are updated each and every year. It is important for investors saving for retirement and living in retirement with these vehicles to stay up-to-date with all of the yearly changes that could impact their IRA accounts to ensure that they are taking full advantage of contribution increases and other changes.

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