OUR NEW TEAM MEMBER
We are pleased to announce the addition of a new member to our team, who joined us at the beginning of January. His name is Garret Rigatti. Garret grew up in Allegheny Township and now lives with his new wife, Dena, in Murrysville. Dena, who is one of our clients, introduced us. (Thank you, Dena.) Garret's hobbies include golfing, fly fishing, and spending time with his husky, Bella.
Garret is a FINRA registered representative and is working to become a registered investment advisor. He will be assisting Laura with providing advice to clients and managing their accounts/ portfolios. You will meet Garret the next time you visit our office and can also expect an introductory phone call from him in the coming months. Garret has always had a passion for the financial services industry and is looking forward to working with our valued clients. We are fortunate to have him on our team, as well as Suzanne and Darcy, who continue to serve as our securities client service representative and annuity service representative, respectively.
MARKET OUTLOOK
In 2022 every investment asset class except cash and some commodities lost money. The three major stock indices ended the year at a loss with the Dow down 8.58%, the S&P 500 down 19.24%, and the Nasdaq down 33.10%. As for stock sectors, all suffered losses except for energy and utilities. Even bonds lost money. In 2022 the Bloomberg U.S. Aggregate Bond index was down 14.98% for the year. This was highly unusual. Stocks and bonds rarely decline in tandem in a calendar year. We can usually count on bonds to provide diversification to a portfolio and hedge against stocks when they are down. But 2022 was the first time since 1969 when we experienced negative returns for both stocks and bonds in the same year. Last year proved to be the worst year for stocks since 2008 (tracking the S&P 500) and the worst year for bonds ever (tracking the Bloomberg U.S. Aggregate Bond index back to 1977). Why was that the case?
To put things in perspective, 2022 returns for stocks weren't necessarily historically or unusually poor. As measured by the S&P 500, the average decline of stocks in a bear market looking back to 1949 has been 33%. What was unusual is that we hadn't experienced losses for stocks in 14 years, other than brief intra-year downturns (i.e. at the beginning of the pandemic). Last year was a year full of many changes and filled with conditions that created the perfect storm. Interest rates continued to be low for a prolonged period of time coupled with unprecedented stimulus from COVID relief packages. Additionally, both the labor shortage and supply-chain bottlenecks continued. Lastly, a global recovery from the pandemic caused an increased demand on energy. All these issues forced inflation to come roaring back in late 2021, which drove stocks prices down as we headed into 2022. Soon to follow, the war between Russia and Ukraine began. The impact the war had on oil prices only exacerbated inflation, sending stock prices even lower.
In order to cool inflation, the Federal Reserve began increasing interest rates in March 2022. It was the first interest rate hike we experienced since December 2018. Six more rate increases followed over the next nine months to end 2022 with a total of 4.25% in rate hikes. As rates continued to rise, the chances of the economy heading into a recession increased, sending stock prices down further. But why did bonds perform so badly last year? It's simple bond math. Bond prices fall when interest rates increase. The problem in 2022 was not only that rates increased, but it was the magnitude and pace at which they rose.
What can we expect for 2023? We are beginning to see signs that inflation is cooling at least in the U.S. That means the Federal Reserve should slow down the rate hikes, which is expected to begin happening by mid year. That will help with bond prices. Bonds should then start acting like bonds and provide diversification against stocks. Just don't expect rates to start coming back down anytime soon. As for stocks, inflation and a slowing economy will have a negative impact on earnings. That is why we have already begun to see a shift in market leadership. Growth sectors, such as technology, have taken a back seat to value sectors. For the foreseeable future, we expect dividends to account for a larger portion of total return than they have in the past. We are also seeing a shift toward deglobalization (or re-localizing supply chains) to help improve the supply-chain problem. Though this will have a negative impact on inflation, it will eventually present new investment opportunities. Lastly, the recession in Europe should present buying opportunities overseas, especially if the U.S. dollar falls.
As for the economy, the likelihood of heading into a recession is increasing. (The magnitude and pace of rate hikes by the Fed could slow down the economy so much that it puts us into a recession.) Fortunately, there is a lot of news that has already been flushed through system. Remember, the markets like certainty. The more we know what to expect, the less of an impact that factor has. As a result, Mike Gitlin, Head of Fixed Income and Global Trading for Capital Group, labels this likely recession as "the most telegraphed recession in 50 years". Because of that, the recession should be a milder, more shallow one. Historically, recessions haven't lasted very long. Looking as far back as 1950, the average length of a recession is about 10 months. But we still have forces at play, like continued supply-chain and labor issues, that will put pressure on the economy.
Despite a looming recession, we could begin to see a market recovery later this year. Remember, stocks typically begin to turn positive before the economic news does. As always, timing the market is impossible but also not necessary. History has shown us that when stocks are down 15% or more, it is a buying opportunity. As investors, we don't need to find the exact bottom. Instead, we should be positioned for the long-term but take advantage of buying opportunities in the short-term. This brings to mind a Charlie Chaplin quote, "You'll never see a rainbow if you're looking down." This is not the time to sit in cash, other than what you should have for emergencies or near-term expenses.
"SECURE ACT 2.0" SIGNED INTO LAW
"Secure Act 2.0" was signed by the President days before Christmas as part of the $1.7 trillion spending bill passed by Congress. Secure Act 2.0 provides additional changes to the original Secure Act passed at the end of 2019 that brought about changes regarding retirement accounts. Though there are over 50 tax-related provisions within Secure Act 2.0, the following are what we feel are changes that may affect many of our clients.
Changes to the "RMD" (required minimum distribution) Age - STARTING IN 2023, the AGE WILL INCREASE TO 73, an increase from the previous starting age of 72. Therefore, if you are turning age 72 in 2023, you can postpone starting mandatory distributions for another year.
Increased Catch-up Contributions - Currently, those over 50 can invest additional money into their 401(k)s and 403(b)s, which is known as the catch-up contribution. Starting in 2025, the catch up will be even higher for those age 60 to 63. As for IRAs, the catch-up amount, currently a flat $1,000, will be increased each year for inflation, starting in 2024.
Reduced RMD Penalty - The penalty for missing an RMD is being reduced from 50% of the withdrawal to 25%. It falls to 10% if the RMD is taken by the end of the next year (the year after it was missed).
No RMDs Required on Roth 401(k)s - Previously, those over age 72 were required to start distributions from Roth 401(k)s if they were no longer employed. These distributions will no longer be required for account holders who are still alive. Fortunately, Roth IRAs continue to avoid any required distributions.
Allows Employer Matching to be Roth - Currently, all employer match in a 401(k) must be made on a pre-tax basis, even if the employee's contributions are Roth. The new legislation will allow employers to offer their match as Roth. In this case, the employee will pay taxes on their Roth match up front so it can be tax-free later (like other Roth money).
Addition of Roth SIMPLE and Roth SEP IRAs - Starting in 2023, you can make Roth contributions in your employer's SIMPLE IRA or SEP IRA. Previously, the Roth option was only available in the employer 401(k)s and 403(b)s.
Raises the SIMPLE IRA Employer Match - The employer match can now be up to 10% of an employee's compensation (up from the current 3%) or $5,000 indexed for inflation, whichever is less. This change starts in 2024.
Allows Unused 529 Funds to Roll Over to a Retirement Account - If a family has leftover funds in a 529 account that will not be used for education, this legislation will allow the beneficiary of the 529 to rollover up to $35,000 into a Roth IRA. The 529 needs to have been open for at least 15 years for a beneficiary to do this. However, the rollover will be subject to the annual contribution limits, so some might need to move funds over multiple years.
Special Needs Trusts Can Have a Charity as the Remainder Beneficiary - Special needs trusts have special RMD rules (the ones that apply to the disabled person who is the beneficiary) but can now list a charity as the remainder beneficiary. This starts in 2023.
UPDATE ON THE ACQUISITON OF TD AMERITRADE BY CHARLES SCHWAB
As a reminder, the integration of TD Ameritrade into Charles Schwab has begun with final conversion scheduled for September 2023. No action or paperwork will be required by our clients. Eventually, clients will receive their statements from Schwab and will have a new website for accessing their accounts. Again, these changes won't occur until September. However, you will not see any changes in the service and advice we provide to you.
In the meantime, if you have opted to receive statements electronically instead of by paper every month, be sure your access to TD Ameritrade's website at www.advisorclient.com is active. If you're not set up and would like to be or have any other questions, please call our office.
RECEVING OUR NEWSLETTER ELECTRONICALLY
If you would prefer to receive this newsletter electronically versus by postal mail, please call our office at (412) 856-7300 and speak with Darcy. Our newsletters are always available, as well, by visiting our website at www.horizonfinancialadvisors.com then clicking on Resources in the upper right-hand corner.
TAXATION UPDATE
The following are CURRENT tax rules and limits for the 2023 tax year. This information can be used to help you plan for the new year.
The tax rates for 2023 are the same as last year, but the income ranges have increased slightly. They are:
The standard deduction for 2023 rises to $27,700 for married filers (plus $1,500 for each spouse age 65 or older), $13,850 for single filers (plus $1,850 if age 65), and $20,800 for heads of household (plus $1,850 if age 65).
The limit for contributions into a 401(k), 403(b) and 457 JUMPS to $22,500 (plus a $7,500 "catch-up" for those age 50 or older). The limit for contributions to a SIMPLE IRA also INCREASES to $15,500 (plus a $3,500 "catch-up" for those 50 or older).
The limit for contributions into a Traditional or Roth IRA also INCREASES. The limit is $6,500 for those under age 50 and $7,500 for those age 50 or older. Also, there is no longer an age limit to contribute. You can contribute at any age as long as you have EARNED income.
Taking the deduction for Traditional IRA contributions may be limited for those who participate in an employer-sponsored retirement plan. The AGI income phase-out increases to $116,000-$136,000 for marrieds, $73,000-$83,000 for singles, and $0-$10,000 for married filing separately. Where only one spouse is active in a plan, the phase-out increases to $218,000-$228,000 but remains $0- $10,000 for married filing separately.
The income limit for making Roth IRA contributions also increases slightly with the phase-out at $218,000-$228,000 for married filers, $138,000-$153,000 for single filers, but $0-$10,000 for married filing separately.
The 0% tax rate on capital gains and qualified dividends still exists. It applies to married filers with income less $89,250 and to single filers with income less than $44,625. After that, the 15% capital gains tax rate applies until income exceeds $553,850 for married filers and exceeds $492,300 for single filers at which time the 20% rate applies.
Social Security recipients are receiving an 8.7% cost-of-living increase in their monthly benefit while Medicare Part B premiums drop in 2023 to $164.90 per month. However, Medicare Part B premiums will be higher for individuals with adjusted gross income above $97,000 and married filers with adjusted gross income above $194,000.
The Social Security wage base for this payroll tax also INCREASES to $160,200 for 2023.
Those collecting Social Security before full retirement age can earn $21,240 in 2023 without losing benefits. But individuals who reach their Full Retirement Age during 2023 can earn up to $56,520 IN THE MONTHS BEFORE reaching FRA without losing benefits.
For individuals who pass away in 2023, the Federal estate and gift tax exemption increases to $12,920,000.
The annual gift tax exclusion INCREASES to $17,000 per recipient.
The child tax credit is once again $2,000 per child UNDER the age of 17. The American Rescue Act of 2021 had expanded them but only for the 2021 tax year.
The American Opportunity Education tax credit holds at $2,500 PER STUDENT for qualifying expenses made within the first four years of post-secondary education. The credit phases out for married filers with income between $160,000—$180,000 and single filers with income between $80,000-$90,000. For those not eligible for the American Opportunity Credit, the Lifetime Learning Education tax credit offers a maximum credit of $2,000 PER RETURN. Income limitations are the same as the American Opportunity credit.
The contribution limit to Health Savings Accounts ("HSAs") increases slightly to $3,850 for single coverage and $7,750 for family coverage. HSA owners age 55 or older can contribute an additional $1,000. As always, you can make the contribution only if you have a "highdeductible health plan", which now means having insurance coverage with an annual deductible of at least $1,500 on single coverage and $3,000 on family coverage. In addition, the out-of-pocket maximum threshold is now $7,500 on single coverage and $15,000 on family coverage. Please be aware that distributions cannot be made to pay for insurance premiums unless for they are paid under COBRA, while receiving unemployment, or if age 65 or older.
Those who inherited IRAs in 2020 and later from someone who was not a spouse must have the IRA paid out within 10 years of the decedent's death. In the meantime, the IRS has NOT required distributions be made on an annual basis . This part of the rule, however, is currently under review. Information on any changes to the rule that might occur will be passed along to those clients who hold Beneficiary IRA accounts (inherited in 2020 or later) when available.
The IRS is postponing the $600 reporting threshold for issuing a Form 1099K. The change was to require anyone, not just a business, who received more than $600 in third-party transactions or third-party settlement payments to receive a Form 1099-K to report such receipts of money. Previously, that reporting requirement applied to a business that had more than 200 third-party transactions or received third-party settlement payments exceeding $20,000. But the IRS has announced they are postponing the new threshold reporting for 2023.
| Tax Rate | SINGLE FILERS Taxable Income Between | MARRIED FILING JOINTLY Taxable Income Between |
| 10% | $0-$11,000 | $0-$22,000 |
| 12% | $11,001-$44,725 | $22,001-$89,450 |
| 22% | $44,726-$95,375 | $89,451-$190,750 |
| 24% | $95,376-$182,100 | $190,751-$364,200 |
| 32% | $182,101-$231,250 | $364,201-$462,500 |
| 35% | $231,251-$578,125 | $452,501-$693,750 |
| 37% | Over $578,125 | Over $693,750 |
All Sources: The Capital Group/American Funds; T. Rowe Price; Marketwatch; Forbes; Bloomberg; Cypress Capital; Internal Revenue National Association of Tax Professionals; Social Security Administration; Centers for Medicare and Medicaid Services.
Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group/Trustmont Advisory Group. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities. Past performance is not a guarantee of future results. Dollar cost averaging does not assure a profit or protect against a loss. Diversification can help an investor manage and reduce the volatility of an asset's price movements; however, no matter how diversified a portfolio is, risk can never be eliminated completely.