Bob’s Journal for 8/31

IRS Delays New 401(k) Catch-Up Contributions Rule

The IRS recently announced that it was delaying the effective date of a rule on catch-up contributions enacted in late 2022 as part of the SECURE Act 2.0.

The new rule provides that any catch-up contribution to a 401(k) or similar plan made by an employee earning more than $145,000 has to be treated as a Roth-type, or after-tax, contribution. The contribution has to be included in their gross income for the year.

Regular 401(k) contributions by all employees still are made on a pre-tax basis, and catch-up contributions made by employees earning less than $145,000 still are pre-tax. That means they will be excluded from gross income in the year of the contribution for income tax purposes, but not for Social Security and Medicare taxes.

The new rule was supposed to take effect at the start of 2024. But employers and retirement plan administrators complained they couldn’t update their systems by the deadline.

Last week the IRS said it was delaying enforcement of the new rule for two years. The change in catch-up contributions for higher-income earners now won’t take effect until after December 31, 2025.

The IRS also issued guidance on a potential problem with all catch-up contributions in the SECURE Act 2.0.

Many tax and retirement plan professionals said the catch-up contribution sections of the law were poorly written and seem to inadvertently ban all catch-up contributions after 2023. The IRS said that language could be ignored and wouldn’t be enforced. Congress plans to amend the language in a future tax law.

(IRS Notice 2023-62, 2023-37 IRB 1)

Why the Banking Crisis Isn’t Over

The effects of the banking crisis that filled the headlines in April aren’t behind us.

You might remember that last spring there was a run on Silicon Valley Bank, resulting in the failure and liquidation of the bank. A few other regional banks also faced extreme depositor withdrawals and failed during the period.

Regulators took action quickly, and headlines about a banking crisis ended.

But the effects of the crisis aren’t behind us. Many banks still are in poor financial shape for the same reasons that Silicon Valley Bank was.

Banks benefited from easy monetary policy before 2022. The Federal Reserve flooded the economy with money, and a lot of that money made its way into uninsured deposit and checking accounts at banks. The banks paid only nominal interest rates on the money because the Fed kept interest rates near zero.

The banks also used a lot of the deposits to buy treasury bonds, partly at the encouragement of the Fed and other regulators.

Once the Fed began raising interest rates in 2022, the banks were in trouble. Depositors began to move their money into money market funds and other vehicles that suddenly were paying much higher yields than the banks.

In addition, rising interest rates caused losses on the treasury bonds, impairing the capital positions of the banks.

Though bank failures aren’t making news, many banks still are suffering from dwindling deposits and bond losses.

Regulations don’t require the banks to show the losses on their books unless they sell the bonds, but their ability to make loans still is impaired.

We essentially have a number of “zombie banks” that are losing money and seeing their capital positions decline. But they aren’t in crisis mode.

The weak banks create problems for the economy. The small and midsize banks that are hurt the most by these trends provide a high percentage of the loans made to small and midsize businesses and commercial real estate owners and developers.

These banks are less able and willing to make new loans and refinance or extend existing loans. That reduces economic growth and makes businesses more vulnerable to losing financing. The banking crisis already has reduced economic growth and will continue to impair growth.

Know the Details of Your State’s Inheritance Tax

Estate planning usually focuses on federal estate and gift taxes. But people in the 19 states and the District of Columbia that still have estate or inheritance taxes need to know the details of those laws.

Two IRA beneficiaries received quite a surprise in a recent Pennsylvania court case because of an oversight in an estate plan.

The deceased had named two of his cousins as beneficiaries of his IRAs, which together were worth almost $1 million.

Pennsylvania has an inheritance tax. An estate tax is computed on the value of the entire estate and assessed against the estate. An inheritance tax is computed on the value of property inherited by an individual.

The question then is: Who pays the inheritance tax?

The will stated that all estate, inheritance, and other death taxes for property passing under the will should be paid out of the estate. The estate executor paid the inheritance taxes on the IRAs from the estate assets.

The state attorney general objected. The attorney general was involved because the bulk of the estate went to charities under the will, and the attorney general protects charities in such cases by overseeing how the estate is settled.

Pennsylvania law states the estate is responsible for paying the inheritance tax on all assets that go through probate. But IRAs don’t go through probate. They are inherited by beneficiaries automatically under the terms of the IRA contract.

Since the IRAs didn’t go through probate, the estate wasn’t responsible for paying the taxes and shouldn’t have paid them, argued the attorney general.

The court agreed. The deceased could have stated in the will that the estate also would pay inheritance taxes on assets that don’t go through probate. But the will didn’t say that, so the estate couldn’t pay the inheritance taxes.

The IRA beneficiaries were liable for the inheritance taxes.

(Estate of Bavol, Superior Court of Pennsylvania, 2023)

The Data

Durable goods orders declined 5.2% in July after increasing 4.4% in June. But after excluding the volatile transportation sector, orders increased 0.5% in July following June’s 0.2% increase.

Orders after excluding defense and transportation, which is considered a good proxy of business investment, increased 0.1% in July after declining 0.4% in June.

The Kansas City Fed Manufacturing Index increased to 12 in August from negative 20 in July. August is the first positive reading for this index since September 2022.

The Dallas Fed Manufacturing Index improved to negative 17.2 in  August from negative 20 in July. The August level is the highest in five months but still indicates the sector is contracting. This index has been negative for more than 12 months.

The Consumer Sentiment Index from the University of Michigan fell to 69.5 at the end of August from 71.2 at mid-month and 71.6 at the end of July.

Assessments of both expectations and current conditions declined, but the decline in expectations was much higher.

The Consumer Confidence Index from The Conference Board declined in August to 106.1 from 114 in July. The move erased the gains that occurred in June and July.

Assessments of both current conditions and expectations for the economy declined. Consumers said inflation returned to being their prime concern.

Pending home sales increased 0.9% in July, an improvement from June’s 0.4% increase. Over 12 months pending home sales declined 14.0% through July, which compares to a 15.6% decline as of the end of June.

Home prices increased 0.9% in June after increasing 1.5% in May, according to the S&P CoreLogic Case-Shiller Home Price Index. June marks the fifth consecutive monthly increase for the index.

Over 12 months, the index declined 1.2% as of June after declining 1.7% through May. The 12-month measure has been negative for four consecutive months.

The FHFA House Price Index increased 0.3% in June after increasing 0.7% in May. Over 12 months the index increased 3.1% through June after increasing 2.9% through May. This index covers only single-family homes that have mortgages guaranteed by one of the federal agencies.

GDP increased at a 2.1% annual rate in the second quarter, according to the second estimate. The first estimate pegged growth at 2.4%. Growth was 2.0% in the first quarter.

There were 177,000 private sector jobs created in August, according to the ADP Employment Report. Over the previous four months, the report found well over 250,000 jobs were created each month.

The number of job openings fell by 338,000 in July to 8.827 million, according to the JOLTS (Job Openings and Labor Turnover Survey) report. That’s the lowest level of job openings since March 2021 and the third consecutive month that the number of openings declined.

The number of people quitting jobs in July declined by 253,000 to 3.549 million. That’s the lowest number in almost two and one half years.

New unemployment claims fell by 10,000 to 240,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.702 million from 1.711 million.

The Markets

The S&P 500 rose 2.51% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.65%. The Russell 2000 increased 2.39%. The All-Country World Index (excluding U.S. stocks) added 3.00%. Emerging market equities advanced 3.59%.

Long-term treasuries rose 3.30% for the week. Investment-grade bonds increased 2.24%. Treasury Inflation-Protected Securities (TIPS) added 0.98%. High-yield bonds gained 1.69%.

The dollar declined 0.14%.

Energy-based commodities increased 1.75%. Broader-based commodities rose 2.15%. Gold gained 2.11%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.