Financial Forum January 2025
Market Commentary – Market Concentration Hits Unprecedented Levels
For the second year in a row, the U.S. stock market put in a strong showing on the heels of its largest market capitalization stocks. In fact, according to Bespoke Investments, the eight largest stocks in the S&P 500 now account for 35.7% of the index’s total market cap. Apple, Nvidia, and Microsoft, alone, now account for 20.6% of the index! In 1999, before the tech bubble collapse, the top eight stocks accounted for 22.2% of the S&P 500. Because of this run, the U.S. share of the global stock market has surged from 40% in 2009 to 64% today. Furthermore, the U.S. is the most expensive it has ever been compared to the rest of the world, with the premium having gone from -11% (a discount) in 2009 to +60% today.
Bottom Line: Markets rallied in 2024 based on soft landing hopes, Fed cutting cycle, falling inflation, solid tech earnings, and pro-business election results. As we start 2025, those positive factors remain broadly in force. However, unlike 2024, the market does not have low expectations or a “wall of worry” to climb. Instead, everything is good right now and, for this to continue, things not only have to stay good, but get better. With the S&P 500 selling at 22 times earnings, concentration risk at record highs, and the 1% rise in the 10-yr Treasury since mid-September, there is little room for disappointment. Expect volatility to be the norm in 2025.
Wealth Management – New Tax Laws Taking Effect in 2025
Age 60-63 Super Catch-Up Contributions – It’s the gift that keeps on giving: The SECURE 2.0 Act! While this legislation was enacted in 2022, some of the changes took effect in future years. Effective January 1, 2025, plans may permit participants aged 60-63 to make super catch-up contributions over their regular catch-up limit.
The Rule: Plans have long been permitted to offer participants, age 50 and older, the opportunity to make catch-up contributions that exceed the general annual deferral limit. This was done to help participants make up for years of inadequate savings or maximize their tax-advantaged retirement funds.
For 2024, the standard annual deferral limit was $23,000, and the catch-up contribution limit for those age 50 and older was $7,500. That means an active participant, 50 or older, could contribute up to $30,500.
Starting this year, SECURE 2.0 enhances catch-up contributions for certain older adults. If you’re 60, 61, 62, or 63 in 2025, you may be able to leverage this provision to make additional catch-up contributions up to $3,750 per year. This would allow you to contribute an additional $11,250 over the general annual deferral limit of $23,000 (for 2024) for a total of $34,250. (Note: the standard annual limit is projected to increase by $500 in 2025.) One last item to note, once participants turn 64, they revert to the standard age 50+ catch-up contribution limit ($7,500 in 2024).
Optional or Mandatory? Just because the law has changed doesn’t necessarily mean that your plan must accept super catch-up contributions. There’s been some discussion in the industry about whether this new super catch-up limit is optional for those plans that already permit the general age 50 catch-up option. Regulations on this topic were written prior to Secure 2.0 and, as always, nothing is simple with the IRS. Therefore, if you are eligible for super catch-ups, check with your employer to see if they are offering it.
Roth Catch-Up Rule for High Earners
SECURE 2.0 also includes new provisions regarding Roth contributions for high earners. Once again, the IRS has postponed this provision to 2026, but we still want to make you aware of it. When this provision kicks in, if a participant's wages exceed $145,000 in the previous year (subject to cost-of-living adjustments), they must make catch-up contributions on a Roth basis.
Making catch-up contributions on an after-tax Roth basis means paying taxes on your retirement savings during years when you sometimes earn more.
New 10-Year Rule for Inherited IRAs Takes Effect
In general, for most beneficiaries, the new rules are fairly simple. If you inherited an IRA from someone who died on or after January 1, 2020, you are required to withdraw all funds in the IRA no later than December 31 of the tenth full calendar year following the death of the individual from whom you inherited the IRA.
This rule did away with the “stretch-out IRA” strategy that allowed owners of IRAs to pass along the assets in the account from one generation to the next, while taking advantage of prolonged tax-deferred growth of the assets by using a lifetime distribution period.
However, there are exceptions for inherited IRAs and the following four types of beneficiaries can still utilize the “stretch-out IRA”:
Surviving spouses
A child of the decedent under the age of 21
A beneficiary who is not more than 10 years younger than the decedent
An individual who is disabled or chronically ill
If you are one of the four types of beneficiaries described above, you must still withdraw funds from the inherited IRA over your lifetime beginning in the year following the decedent’s death. A surviving spouse can transfer the inherited funds from the IRA into your own IRA and is not required to start withdrawing funds from your own IRA until you reach your “required beginning date” (“RBD”).
Failure to take your RMD from your inherited IRA is very penal. Starting in 2025, a 25% penalty will be assessed for those who do not take their RMD.
Quarterly thought…Happy New Year!
The magic in new beginnings is truly the most powerful of them all.” – Josiyah Martin.
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Works Cited
Internal Revenue Service | An official website of the United States government, 2024, http://www.irs.gov. Accessed 6 January 2025.
Berkowitz, Bram. “34% of the S&P 500's Value Comes From Just 8 Stocks.” The Motley Fool, 29 December 2024, https://finance.yahoo.com/news/34-p-500s-value-comes-121500211.html. Accessed 6 January 2025.
Jennewine, Trevor. “The Stock Market Is Doing Something It Has Done Only 2 Times Since 1985, and History Is Clear About What Happens Next.” Yahoo Finance, 11 December 2024, https://finance.yahoo.com/news/stock-market-doing-something-done-103500626.html. Accessed 6 January 2025.
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Securities offered through Private Client Services, Member FINRA/SIPC. Advisory products and services offered through Pinnacle Wealth Management Group, Inc., a Registered Investment Advisor. Private Client Services and Pinnacle Wealth Management Group, Inc., are unaffiliated entities.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
