Market Recap
Despite persistent inflation and elevated interest rates, most major asset classes continued to post positive returns during the second quarter of 2024 (see chart below). Here in the U.S., the S&P 500 index reached its 31st all time high of the year in June, however, the results were not positive across the board for stocks. For example, larger AI related growth stocks continued to provide the lion’s share of the index’s total return, while rate sensitive REIT’s and small cap stocks suffered from the reality of a higher for longer interest rate environment. Outside the U.S., developed and emerging market equities delivered positive returns for the quarter as well. Strong economic data out of Japan and historic moves by Chinese authorities to stabilize their struggling property sector were just a few of the primary performance drivers.
Over in fixed income markets, most investors had to endure another quarter of lackluster performance with the Bloomberg US Aggregate Bond Index delivering a return of only 0.07%. Sticky inflation data combined with significantly reduced expectations for central bank rate cuts resulted in mostly negative to flat returns for more interest rate sensitive assets, particularly government bonds. Meanwhile, resilient economic activity kept default rates contained and helped riskier segments of fixed income, particularly high-yield and emerging market debt, deliver positive returns for the quarter.
Q2 2024 | Trailing 12 Months | Trailing 3 Years | Trailing 5 Years | |
S&P 500 | 4.28% | 24.54% | 9.99% | 15.03% |
Russell 2000 | -3.28% | 10.03% | -2.61% | 6.91% |
MSCI All Country World Ex-US | 0.96% | 11.62% | 0.46% | 5.55% |
Bloomberg US Aggregate Bond | 0.07% | 2.63% | -3.02% | -0.23% |
Bloomberg Commodity Index | 2.89% | 5.00% | 5.65% | 7.25% |
Dow Jones Comp. All REIT Index | -0.92% | 5.70% | -1.91% | 3.07% |
SECURE 2.0: Small Business Retirement Plan Tax Credits
Under the SECURE (2019) and enhanced SECURE 2.0 ACT (2022), several changes were enacted to encourage small business owners to offer retirement plans. While the legislation includes a slew of provisions, there are two in particular that offer appealing tax incentives for eligible owners who recently started a retirement plan or those who are considering it. These include a plan startup tax credit and a separate employer contribution tax credit. For eligible small employers that qualify to use at least one or both of these tax credits, the potential tax savings could be significant enough to cover most, if not all, of their retirement plan costs for the first few years. The following is a summary of each credit and the primary requirements to qualify as an eligible employer:
1) Small Employer Plan Startup Costs Tax Credit
This tax credit aims to reduce the financial burden of starting a new retirement plan for small business owners. Eligible employers may be able to claim a tax credit of up to $5,000, during the first three plan years, for qualified plan startup costs. Covered expenses include those paid directly by the employer to set up and administer a 401(k), profit-sharing, defined benefit plan, SEP or SIMPLE IRA plan.
Employer Eligibility Requirements:
- Have at least one plan participant who is a non-highly compensated employee (NHCE).
- Have no more than 100 employees who received compensation of $5,000 or more during the preceding tax year.
- Did not establish or maintain another plan that covered substantially the same employees during the three tax years immediately preceding the first credit year.
Credit Calculation:
- For employers with no more than 50 employees who received at least $5,000 in compensation, the tax credit available is 100% of eligible startup costs, up to the greater of:
- $500 or
- The lessor of:
- $250 multiplied by the number of eligible NHCE’s or
- $5,000
- For employers with 51-100 employees who received at least $5,000 in compensation, the tax credit available is 50% of eligible startup costs, up to the greater of:
- $500 or
- The lessor of:
- $250 multiplied by the number of eligible NHCE’s or
- $5,000
2) Small Employer Contribution Tax Credit
This is a newer tax credit established under SECURE 2.0 that is separate from the start-up costs credit. Eligible employers may be able to claim a tax credit of up to $1,000 per eligible employee (those earning $100,000 or less), during the first five plan years, for employer contributions made to a defined contribution plan, SEP or SIMPLE IRA plan.
Employer Eligibility Requirements:
- Have at least one plan participant who is a non-highly compensated employee (NHCE).
- Have no more than 100 employees who received compensation of $5,000 or more during the preceding tax year.
- Did not establish or maintain another plan that covered substantially the same employees during the three tax years immediately preceding the first credit year.
- Employer contributions to a defined benefit plan do not qualify for this credit.
Credit Calculation:
- For employers with no more than 50 employees who received at least $5,000 in compensation, the tax credit available for contributions made to each eligible employee is:
- Year 1 – 100% of contribution ($1,000 maximum)
- Year 2 – 100% of contribution ($1,000 maximum)
- Year 3 – 75% of contribution ($1,000 maximum)
- Year 4 – 50% of contribution ($1,000 maximum)
- Year 5 – 25% of contribution ($1,000 maximum)
- For employers with 51-100 employees who received at least $5,000 in compensation, the tax credit available for contributions made to each eligible employee is:
- Year 1 – 100% of contribution minus 2% for each employee in excess of 50 ($1,000 maximum)
- Year 2 – 100% of contribution minus 2% for each employee in excess of 50 ($1,000 maximum)
- Year 3 – 75% of contribution minus 2% for each employee in excess of 50 ($1,000 maximum)
- Year 4 – 50% of contribution minus 2% for each employee in excess of 50 ($1,000 maximum)
- Year 5 – 25% of contribution minus 2% for each employee in excess of 50 ($1,000 maximum)
For small employers who want to offer their employees a retirement plan but are concerned about costs, these credits could allow them to establish a new plan with minimal out of pocket expenses for the first few years. However, many of the rules surrounding these credits and the procedure for claiming them can get quite complicated. Therefore, we highly recommend that business owners first consult with a tax professional and CERTIFIED FINANCIAL PLANNER™ professional who can help them through the process.
If you have questions or would like to discuss any of the information contained here in greater detail, please do not hesitate to contact us.
Sincerely,
AJ, Ryan, Gary, Rhonda and Tom
AJ Gilbert, CFP®
Ryan McCafferty, CFP®
Gary Fortier, CPA
Rhonda Gilbert, CPA
Tom Savage, CPA
Disclosures
Keystone Financial Group, Inc. does not provide legal or tax advice
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The indices mentioned are not managed and cannot be invested in directly. Past performance does not guarantee future results. Diversification and asset allocation strategies do not assure a profit or protect against loss.
Sources used for the article:
- *Global Markets Quarterly Update – T. Rowe Price Investment Research
- *Quarterly Market Review – J.P. Morgan Investment Research
- *Retirement Plans Startup Costs Tax Credit, Internal Revenue Service (IRS)