SAVE – Student Loan Repayment Program

With over 28 million borrowers of Federal student loans resuming payments following a multi-year hiatus, the Biden-Harris Administration released a new income-driven repayment (IDR) plan. Known as the Saving on a Valuable Education (SAVE) plan, this IDR approach calculates monthly payments according to a borrower’s income and family size, ultimately forgiving any outstanding balances after a specified duration.

Outlined below are the major distinctions between the SAVE plan and the former REPAYE plan:

  • Reduces cap on discretionary income. The monthly payment amount is calculated with a maximum of 5% of discretionary income. The cap under the REPAYE plan was formerly 10%.
  • Change in calculation of discretionary income. Discretionary income is now calculated as the difference between Adjusted Gross Income (AGI) and 225% of the U.S. Poverty line, up from 150% under REPAYE. For borrowers with an AGI around or below this threshold, their payments can be as low as $0/month.
  • Loan balances will not grow as long as borrowers make their payments. If a borrower’s calculated monthly payment amount is less than interest accrued on the loan, the government will pay the interest. For example, if a borrower qualifies for payments of $0/month and their loans generate $100/month of interest- the government pays the cost to keep the balance from growing.
  • Early forgiveness for low-balance borrowers. Under the SAVE plan, borrowers whose original principal balances were $12,000 or less will receive forgiveness after 120 payments. For each additional $1,000 borrowed above that level, the plan adds an additional 12 payments for up to a maximum of 20 years for undergraduate debt or 25 years for graduate loans. Therefore, all borrowers who maintain monthly payments under this plan will have their loans forgiven in either 20 or 25 years.

The loans eligible for the SAVE Plan include:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate or professional students
  • Direct Consolidation Loans that did not repay any PLUS loans made to parents.

To sign up for the SAVE plan, federal student loan borrowers can go to the Student Aid website found at this link here: StudentAid.gov/SAVE. If you are already on the Revised Pay As You Earn (REPAYE) plan, you will be automatically enrolled in the new SAVE plan.

If you’re currently weighing your loan repayment options and have questions, contact a Rockbridge advisor.

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IRS Delays Roth Catch-Up Requirement for High Income Earners

There was some good news from the IRS recently for high-income earners making catch-up contributions to their employer-sponsored retirement plans.

The IRS recently issued a notice that they will be postponing one of the new rule changes under Secure 2.0 Act. If you recall, the Act was going to require high-income earners (individuals making over $145,000/year) over the age of 50, to make their catch-up contributions by way of Roth contributions beginning in 2024. As a result, any catch-up contribution made via Roth contribution would have eliminated the tax benefit for the participant for that year.

The IRS has decided to postpone this requirement until 2026 to try and give administrators time to implement the new guidelines and update Plan documentation. As such, the two-year delay allows savers (regardless of income) to continue to make pretax catch-up contributions through the end of 2025 as the agency implements the policy change.

“The administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement.”

With the significant overhaul brought on by Secure 2.0 Act, there were many questions left unanswered. The Treasury Department and IRS are planning to issue further guidance intended to help taxpayers understand aspects of the Secure 2.0 Act and solicited public comment on the subject through October 24, 2023. We will continue to monitor any releases and keep you informed of the potential impact.

Please reach out to your Rockbridge advisor for any additional questions.

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Another IRS Rule Change For RMDs!

The original SECURE Act enacted back in 2019 made two notable changes (among many) for those who owned retirement accounts.

  1. The first major change increased the age at which account owners must begin taking Required Minimum Distributions (RMDs) from their tax-deferred retirement accounts from age 70 ½ to 72.
  2. The second major change addressed how retirement accounts were distributed after the owner’s death. This change aimed to reduce the classes of beneficiaries allowed to stretch out RMDs over their remaining lifetime.  The SECURE Act introduced a new 10-year distribution period for “Non-Eligible Designated Beneficiaries”; those who are NOT a surviving spouse or those who fall under a small number of limited exceptions.

The general industry consensus around this new 10-year distribution period was that beneficiaries were not required to take specific annual distributions so long as the entire account balance was distributed by the end of the 10th year.  The IRS issued new guidance in February of 2022 that further complicated the matter.  The IRS proposed two different distribution regimes based on the age of the decedent.

  1. If the decedent passed away PRIOR TO commencing their own Required Minimum Distributions (the IRS calls this milestone the Required Beginning Date), then the beneficiary needs only to withdraw the entire account balance by the end of the 10th
  2. If the decedent passed away AFTER commencing their own RMDs, then the beneficiary must withdraw the entire account balance by the end of the 10th year AND adhere to the decedents original RMD schedule.

As you can imagine, this caused tremendous confusion amongst account owners and beneficiaries, but also forced the industry to perform a rapid overhaul of its systems and processes to calculate Required Minimum Distributions.  The IRS then issued a notice in October of 2022 that waived any penalties associated with Non-Eligible Designated Beneficiaries missing their RMDs for 2021 and 2022.  Essentially, beneficiaries were given relief from their 2021 and 2022 RMDs.  While helpful, beneficiaries still had to withdraw the entire account balance by the end of their original 10-year period, compressing the distributions schedule across the remaining years.

Fast forward to July of 2023 and the IRS released another notice, which provided another year of relief for Non-Eligible Designated Beneficiaries for decedents that passed away AFTER their Required Beginning Date.  Effectively, this class of beneficiaries are NOT required to take any distributions from their Inherited IRAs in 2023, kicking the can further down the road.  This relief further compresses the 10-year distribution schedule and may not be in the best interest of all clients.  Beneficiaries of inherited IRAs can take voluntary distributions at any time, and you should consult with your advisor to better understand your options for your specific tax situation.

The July IRS notice also provides RMD relief for any retirement account owner turning 72 in 2023 (anyone born in 1951).  When the SECURE Act 2.0 was enacted in late-December 2022, the RMD age was pushed back again from age 72 to age 73 (and ultimately age 75 in year 2033).  This last-minute change caused some confusion for those turning 72 in 2023, so the IRS is excusing 2023 RMDs for anyone turning 72 this year.  Because the most recent IRS notice came out mid-year, the IRS is also allowing these individuals to treat any year-to-date distributions as a rollover and the account owner can return these amounts back to their retirement account.  This is effectively an extension of the 60-day rollover rules and gives account owners until September 30th to return any unwanted year-to-date distributions.

As with many financial planning decisions, it’s important to understand your unique tax situation.  If you have an Inherited IRA or if you’re turning 72 in 2023, please reach out to your Rockbridge advisor to best understand your options.

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Rockbridge Institutional – July 2023 Market Review

Inflation and a “Soft Landing”

Inflation expectations and the economic impact of the Fed’s ratcheting up its Target Interest Rate has been a major source of uncertainty. So far, the trajectory of inflation has been in the right direction and unemployment has remained low. The trailing 12-month change in the Consumer Price Index (CPI) has declined from its peak of 9% in March 2022 to less than 3% this month, while unemployment has remained in the historically low 3.6% range. Equity markets have responded positively. However, this good news notwithstanding, uncertainty seems to persist.

This uncertainty reflects the conventional wisdom that increasing interest rates to fight inflation means a recession. One indicator of an impending recession is a downward sloping Yield Curve (future interest rates expected to be lower). The argument here is that the Fed will have to reduce rates to pull the economy out of a recession. However, the shape could also mean lower future inflation. Interest rates typically include a risk-free rate plus a premium for expected inflation. With inflation coming down, a reduction in that premium could explain the expectation for lower interest rates implied by the downward sloping Yield Curve.

Further confounding the usual link between rising interest rates and a recession, is the extent to which inflation is embedded or transitory. The pandemic not only produced massive deficits to offset unemployment, but it also brought on supply chain disruptions. Additionally, the invasion of Ukraine drove grain prices up. While these factors seem temporary, with the recent 0.25% increase in its Target Federal Funds rate, the Fed seems committed to drive out any embedded inflationary expectations erring on the side of an economic slowdown.

What to do in the face of these uncertainties is always the same – avoid predictions, continue to rebalance to established strategic allocations, and enjoy the ups and endure the downs 

Market Review

Stocks

Stocks up nicely this quarter with returns from 3% to over 6% for small cap value stocks. Diversification helped this quarter as markets other than the S&P 500 picked up the pace. Year-to-date, however, it’s that market (S&P 500), led by the usual Tech companies (Amazon, Apple, Facebook, Google, Microsoft and Nvidia), that turned in returns better than 20%. Nvidia, perhaps the most popular way to jump on the AI bandwagon, more than doubled since the beginning of the year. Other stock markets turned in returns nearing 10% over the year-to-date period.

Bonds

Yields were up resulting in essentially flat bond returns (price reductions offsetting coupon payments) this month. This pickup in yields is consistent with the Fed’s 0.25% increase in its Target Interest Rate.

The Yield Curve (pattern of Treasury yields across several maturities) continues to slope downward, suggesting reduced yields ahead. The jury is still out as to whether this signals a future need for the Fed to reduce rates in response to a recession or reduced inflation expectations. The market’s expectation for inflation, as evidenced by the spread between 5-year nominal and inflation adjusted bond yields, remained at just above 2%. This number is consistent with the Fed’s target and a seemingly positive implication for inflation ahead.

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