Over the years, you’ll experience many personal and professional milestones. Each of these can be satisfying, but they may also bring challenges – especially financial ones. That’s why you may want to seek the guidance of a financial professional. . . .
It might not be on your calendar, but Aug. 14 is Social Security Day. Since it was enacted on Aug. 14, 1935, Social Security has provided some financial support for millions of Americans during their retirement years. While Social Security benefits, . . .
The word “estate” conjures images of great wealth, which may be one of the reasons so many people don’t develop estate plans – after all, they’re not rich, so why make the effort? In reality, though, if you have a family, you can probably . . .
Once again, it’s time for fireworks, picnics and parades as the nation celebrates Independence Day. Collectively, we enjoy many liberties, but some freedoms can be elusive – and financial freedom is one of them. What actions can you take to help . . .
You should always be able to ask as many questions as you’d like when working with your financial advisor. So, before you have your annual review, think carefully about what you’d like to ask. Here are a few suggestions:
Are my goals still . . .
If you are, or will be, a caregiver for elderly parents or another close family member living with Alzheimer’s disease, you may experience some emotional stress – but you also need to be aware of the financial issues involved and what actions you . . .
We’re getting close to the tax-filing deadline. For many of us, this means it’s that time of year when we get our biggest financial windfall – a tax refund. If you have recently received a refund, or are expecting to get one in the next few weeks, . . .
Spring is here – and for many of us, that means it’s time for some spring cleaning. This year, in addition to tidying up your home, why not try brightening your financial environment? Some of the same moves you make to clean your surroundings may . . .
When it’s time to do your estate planning – and it’s actually never too soon to begin – you may find the process, at first, to be somewhat bewildering. You’ll have many questions: What sort of arrangements should I make? Who should get what? . . .
As you work toward achieving your goals in life, you will need to make moves that contain financial, tax and legal elements, so you may want to get some help – from more than one source.
Specifically, you might want to put together a team comprised . . .
Think about your loved ones. What will their future be like? Can you picture them living in your house many years from now? Can you picture your children going to college? Can you picture your spouse or partner enjoying a comfortable retirement? These . . .
When interest rates rise, the value of your fixed-income investments, such as bonds, will typically fall. If this happens, how should you respond?
First of all, it’s important to understand this inverse correlation between interest rates and bond . . .
As the year winds down, you may want to look ahead to see which areas of your life you can improve in 2019. Perhaps you’ll decide to exercise more, eat healthier foods, reconnect with old friends or volunteer at a school or charitable organization. . . .
Winter is here again – which may make you wish you were somewhere else. You might be thinking how pleasant it would be to become a snowbird and move to a warmer climate for the season. Of course, your stage of life will help determine if you are . . .
There’s no right answer, but here are some factors to consider:
Comfort in investing – If you take your pension as a lump sum, you can invest it yourself – but you’ll be solely responsible for making the money last throughout your retirement. To help ensure your lump sum is invested in a way that’s appropriate for your goals and risk tolerance, you may want to work with a financial professional.
Other sources of retirement income – If you don’t think you will have enough money from other sources – such as Social Security and your investment portfolio – to meet your essential living expenses during retirement, you may want to consider taking your pension funds as a lifetime annuity. (Keep in mind that the lifetime income payments from an annuity are subject to the issuer’s ability to meet its commitments.) Conversely, if you think your retirement income will be more than sufficient to meet your living expenses, you could take the lump sum and put it in a mix of investments, some of which could offer long-term growth potential.
Projected longevity – If you come from a long-living family and you are in good health at the time of your pension buyout, you may want to annuitize your pension to provide a source of income you can’t outlive. However, if you anticipate a shorter life span, possibly due to your family’s medical history, you might be better off by taking the lump sum.
Wealth transfer goals – You might not be able to transfer a pension’s annuity payments to your children or grandchildren. On the other hand, by taking the lump sum and investing it, you might have assets remaining at the time of your death – and you can include these assets in your estate plans.
Taxes – If you take your pension buyout as a lump sum, it will be taxable as ordinary income, unless you roll it over to an IRA or an employer’s qualified retirement plan. A direct rollover from your employer’s pension plan to your IRA provider won’t incur immediate taxes and can allow your investment to grow on a tax-deferred basis. Consult with your tax advisor before making this rollover. (Eventually, you will be taxed on the withdrawals, and withdrawals made before you reach 59 ½ may be subject to a 10% tax penalty.)
It’s worth noting that some pension plans may allow you to split your benefit between an annuity and a lump sum, although these plans seem to be in the minority.
Clearly, you’ll have much to consider if you’re offered a buyout of your pension. So, take your time, evaluate all the factors, and work with your tax, legal and financial professionals to reach the decision that makes the most sense for you.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Add to your IRA. For the 2018 tax year, you can put up to $5,500 into your traditional or Roth IRA (assuming you are eligible), or $6,500 if you’re 50 or older. If you haven’t reached this limit, consider adding some money. You have until April 15, 2019, to contribute to your IRA for 2018, but why wait until the last minute?
Increase your 401(k) contributions. You already may be investing in your 401(k) or similar employer-sponsored retirement plan, but you might be able to bump up your contributions for the rest of the year, if it’s allowed. Of course, you should always put in enough to earn your employer’s matching contribution, if one is offered.
Take your RMDs. If you are 70½ or older, you must start taking withdrawals – called required minimum distributions, or RMDs – from your traditional IRA and your 401(k) or similar retirement plan. Generally, you must take these RMDs by December 31 every year. But if you turned 70½ in 2018, you can wait until April 1, 2019, until you take your first RMD. However, you will then have to take a second RMD (the one for age 71) by December 31, 2019. Taking two RMDs in one year could give you an unexpectedly large taxable income for the year, possibly bumping you into a higher tax bracket and affecting the amount of your Social Security benefits subject to taxes. So, if you are considering delaying your first RMD, consult with your tax advisor.
Make changes in response to life events. In 2018, did you experience a major life event, such as a marriage, divorce or addition of a child? Or did you change jobs or retire? Any of these events could lead you to adjust your investment plans, so now may be the time to do so, possibly with the help of a financial professional.
Review your investment mix. At least once a year, it’s a good idea to review your investment mix to ensure it’s still suitable for your goals and risk tolerance. Sometimes, even without your taking any action, your portfolio might change in ways you hadn’t expected. For example, suppose you wanted your portfolio to contain 60% stocks and 40% bonds and other investments. After a period of rising prices, though, the value of your stocks may have increased so much that they now occupy 65% of your portfolio – which means you may be taking on more risk than you had originally intended. Consequently, you may need to rebalance your portfolio to get back to your original 60% to 40% ratios. (Keep in mind that these figures are just for illustration; everyone’s ideal portfolio mix will depend on their individual situations.)
These aren’t the only year-end moves you may want to consider, but they can help you close out 2018 on a positive note. Plus, they can serve as a reminder that you need to be vigilant as you keep working toward your financial goals.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Let’s look at the first question first. What caused the steep drop in stock prices we experienced on a few separate days?
Essentially, two main factors seem to be responsible. First, some good economic news may actually have played a significant role. A 17-year low in unemployment and solid job growth have begun to push wages upward. These developments have led to fears of rising inflation, which, in turn, led to speculation that the Federal Reserve will tighten the money supply at a faster-than-expected rate. Stocks reacted negatively to these expectations of higher interest rates.
The second cause of the market volatility appears to be simply a reaction to the long bull market. While rising stock prices lead many people to continue buying more and more shares, some people actually need to sell their stocks – and this pent-up selling demand, combined with short-term profit-taking, helped contribute to the large sell-offs of recent days.
Now, as for the question of how concerned you should be about this volatility, consider these points:
Sell-offs are nothing unusual. We’ve often experienced big sell-offs, but they’ve generally been followed with strong recoveries. Of course, past performance is not a guarantee of future results, but history has shown that patient, persistent investors have often been rewarded.
Fundamentals are strong. While short-term market movements can be caused by a variety of factors, economic conditions and corporate earnings typically drive performance in the long term. Right now, the U.S. economy is near full employment, consumer and business sentiment has risen strongly, manufacturing and service activity is at multi-year highs, and GDP growth in 2018 appears to be on track for the best performance since 2015. Furthermore, corporate earnings are expected to rise this year.
So, given this background, what’s your next move? Here are some suggestions:
Review your situation. You may want to work with a financial professional to evaluate your portfolio to determine if it is helping you make the progress you need to eventually achieve your long-term goals.
Reassess your risk tolerance. If you were unusually upset over the loss in value of your investments during the market pullback, you may need to review your risk tolerance to determine if it’s still appropriate for your investment mix. If you feel you are taking on too much risk, you may need to rebalance your portfolio. Keep in mind, though, that by “playing it safe” and investing heavily in vehicles that offer greater protection of principal, but little in the way of return, you run the risk of not attaining the growth you need to reach your objectives.
Look for opportunities. A market pullback such as the one we’ve experienced, which occurs during a period of economic expansion and rising corporate profits, can give long-term investors a chance to add new shares at attractive prices in an environment that may be conducive to a market rally.
A sharp market pullback, such as we’ve seen recently, will always be big news. But if you look beyond the headlines, you can sometimes see a different picture – and one that may be brighter than you had realized.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Over the course of their lives, many people pick up a variety of financial accounts from multiple sources. They might have a few IRAs from different providers, a couple of old 401(k) plans from past employers, an insurance policy (or two) purchased many years ago, and a scattershot of stocks, bonds, certificates of deposit and other investments.
If this picture describes your situation, you may want to think about consolidating. For one thing, having a variety of accounts can run up a lot of fees. Furthermore, you’ll have lots of paperwork to keep track of all your accounts, including several different tax statements. Plus, just by having so many accounts, you risk forgetting about some of them – and if you don’t think you’d ever forget about your own money, consider this: Well over $40 billion in unclaimed cash and property, including 401(k)s, pensions and IRAs, is awaiting return to the rightful owners, according to the National Association of Unclaimed Property Administrators.
But beyond reducing your possible fees, paperwork and potential for lost assets, consolidating your accounts with one provider can give you a centralized, unifying investment strategy, one that can help you in the following ways:
Diversification – If you own several different financial accounts, including IRAs, 401(k)s and online accounts, you might have many similar investments within them. You might even own a cash-value insurance policy containing investments that closely track the ones you have in the other accounts. This type of duplication can be harmful, because if a market downturn primarily affects one type of asset, and your portfolio is dominated by that asset or similar ones, you could take a big hit. But if you have all your investments in the same place, a financial professional can review your holdings and recommend appropriate ways to diversify your investment dollars. (Be aware, though, that while diversification can reduce the impact of market volatility on your portfolio, it can’t guarantee profits or protect against all losses.
Staying on track – With all your accounts in one place, you’ll find it easier to keep the big picture in mind and make the moves necessary to help you progress toward your financial goals. Two main actions include buying or selling investments and adjusting your portfolio to make it more aggressive or conservative, depending on your situation.
Avoiding mistakes – If you own several separate accounts, you could see a loss in one or more of them and overreact by selling investments that could still be valuable to you. But with a consolidated investment platform, you can see more clearly that the impact of a loss may be small, relative to the rest of your holdings.
As we’ve seen, consolidating your investment accounts with a single provider can have several advantages. So think carefully about bringing everything together – you may find that there’s strength in unity.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Here is (not quite) a bushel of ideas:
• Plant the right “seeds.” When farmers plant specific crops, they know about what to expect – how long it will take for them to grow, how much yield they’ll produce, and so on. When you invest, you too need to plant “seeds” by choosing investments that are designed to help meet your goals. For example, to accumulate enough money for a comfortable retirement, you will probably need to own a reasonable percentage of growth-oriented vehicles, such as stocks – you generally can’t expect the type of growth you need by investing solely in fixed-income investments, such as bonds and certificates of deposit.
• Nurture your “crops.” Agricultural workers are diligent about cultivating their crops through proper irrigation, fertilization and weed control. And if you want to keep your investment portfolio healthy, you also must find ways to nurture it. First of all, you will need to keep adding new dollars regularly, because the larger your overall investment base, the more you can expand its growth potential. But you might also need to do some “weeding” of your own, because over the years, you may have purchased some investments that, for one reason or another, are now no longer suitable for your needs. If that’s the case, you might be better off by selling these investments and using the proceeds for new ones that could fill gaps in your portfolio.
• Diversify. Farmers may plant a mix of crops: corn, soybeans, flax, legumes, fruits, and so on. Consequently, if one crop fails, it won’t sink the farmer’s entire business. As an investor, you, too, need to diversify, because if you only own one type of asset class, and a financial downturn hits that asset, your portfolio can take a big hit. But spreading your dollars among stocks, bonds, cash and other investments can help reduce the impact of market volatility on your holdings. (However, diversification can’t guarantee profits or protect against all losses.)
Thus far, we’ve looked at ideas on how you can create a healthy investment crop. But once it’s time to actually start harvesting your portfolio – that is, once you begin liquidating parts of it to support yourself during your retirement years – you also need to act carefully. Specifically, you need to establish a withdrawal rate that’s appropriate for your situation, based on your age, lifestyle, income sources and other factors. You could be retired for two or three decades, so it’s essential you don’t withdraw so much during your early years of retirement that you risk outliving your money. A financial professional can help you determine the rate that’s right for you.
The agricultural harvest season only lasts a few weeks. But doing a good job of growing and managing your investment crop can help you reap the rewards far into the future.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
You will find few “off the rack” solutions for dealing with the financial challenges associated with Alzheimer’s. For one thing, family situations can vary greatly, both in terms of the financial resources available and in the availability and capabilities of potential caregivers. Furthermore, depending on the stage of the disease, people living with Alzheimer’s may have a range of cognitive abilities, which will affect the level of care needed.
Here are some general suggestions that may be useful to you in your role as caregiver:
• Consult with family members and close friends. It’s extremely hard to be a solo caregiver. By consulting with other family members or close friends, you may find that some of them have the time and ability to help.
• Consider obtaining durable power of attorney. If you possess a durable power of attorney for finances, you can make financial decisions for the person with Alzheimer’s when he or she is no longer able. With this authority, you can help the individual living with the disease – and your entire family – avoid court actions that can take away control of financial affairs. And on a short-term basis, having durable power of attorney can help you take additional steps if needed. You’ll find it much easier to acquire durable power of attorney when the individual living with Alzheimer’s is still in the early stage of the disease and can willingly and knowingly grant you this authority.
• Gather all necessary documents. You’ll be in a better position to help the individual living with Alzheimer’s if you have all the important financial documents – bank statements, insurance policies, wills, Social Security payment information, deeds, etc. – in one place.
• Get professional help. You may want to consult with an attorney, who can advise you on establishing appropriate arrangements, such as a living trust, which provides instructions about the estate of the person for whom you’re providing care and names a trustee to hold title to property and funds for the beneficiaries. You also might want to meet with a financial advisor, who can help identify potential resources and money-saving services. And a tax professional may be able to help you find tax deductions connected to your role as caregiver.
Finally, use your experience as a caregiver to reminder yourself of the importance of planning for your own needs. For example, a financial professional can suggest ways of preparing for the potentially huge costs of long-term care, such as those arising from an extended stay in a nursing home.
Caring for an individual living with Alzheimer’s has its challenges. But by taking the appropriate steps, you can reduce uncertainties – and possibly give yourself and your family members a greater sense of security and control.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Here’s some background: In recent months, the Federal Reserve has raised short-term interest rates several times, and given its generally favorable outlook on the economy, it has indicated it may continue bumping up interest rates gradually over the next year or so. The Fed doesn’t control long-term interest rates, but these rates often follow the lead of short-term movements. However, longer-term rates haven’t yet risen as much as shorter-term ones, which means the difference between short- and long-term rates is relatively small, historically speaking.
This doesn’t mean you should make drastic changes to your portfolio. You still need to stick with the asset allocation that’s suitable for your situation, which typically involves owning a certain percentage of growth-oriented vehicles, such as stocks, and a certain percentage of fixed-income securities, such as bonds. However, if you do have space in the fixed-income part of your portfolio, you may find the higher interest rates offered by short-term bonds and certificates of deposit (CDs) to be attractive. To take advantage of this opportunity, though, you will need to have the cash available to invest.
Some people hold too much in cash, waiting for interest rates to rise, or as protection against the risk of a market decline. But holding excess cash involves its own risk – the risk of not investing. So, if you have your cash needs covered, you may want to consider investing any excess cash.
To determine if you are holding excess cash, you’ll need to review your entire cash situation. For example, do you have enough cash, or cash equivalents, to create an emergency fund of three to six months’ worth of living expenses? This fund can be vital in helping you pay for things like a major car repair or an unexpected medical bill without dipping in to your long-term investments. And, of course, you need enough liquidity to provide for your lifestyle, including your regular spending needs – your mortgage, utilities, groceries and so on. Also, you may want to set aside enough cash for a goal you want to reach in the next year or so, such as a vacation.
But if you have taken care of all these needs and you still have excess cash, you may want to consider putting this cash to work, possibly by investing in short-term fixed-income vehicles now being issued at higher interest rates.
And keep in mind that regardless of where interest rates are going, bonds and other fixed-income investments can offer some key benefits to investors. In addition to providing a source of regular income, these types of investments can help reduce the effects of volatility on your portfolio. While bonds can, and will, fluctuate in value, they typically can provide more stability to your portfolio and tend to behave differently than stocks over time.
After years of historical lows, shorter-term rates now have risen to levels that are more attractive to investors. Take the time to review your situation, perhaps with the help of a financial professional, to determine if taking advantage of these rates may be appropriate for you.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Everyone’s story is different, involving a range of variables. But here are a few issues to consider:
Insurance – If your kids are through school, your mortgage is nearly paid off and your spouse has accumulated a reasonable amount of money in an employer-sponsored retirement plan, you may not need life insurance to replace income or pay off debts. However, you might start thinking about other goals, such as ensuring your savings will last your lifetime or leaving a legacy to your loved ones or a charity. Life insurance may be able to help in these areas.
Downsizing – Deciding whether to downsize your living space isn’t just a financial decision – it’s also a highly personal one. Still, downsizing can offer you some potential economic benefits. For one thing, if you still are paying off your mortgage, a move to a smaller place could free up some of your monthly cash flow, which, again, you could use to boost your retirement accounts. Furthermore, if your home has greatly appreciated in value, you might make a sizable profit by selling. (If you are single, you may be able to exclude $250,000 of the gain on the sale of your home; married couples may have a $500,000 exemption. Some restrictions exist on this exemption, though, so you’ll need to consult with your tax advisor before selling.)
Estate plans – Years ago, you might have made various arrangements in a will or a living trust that dealt with taking care of your children if something should happen to you and your spouse. For example, you might have established a trust and directed it to make payments to your children at certain times and for certain purposes, such as education. But once your children are grown and have left your home, you may need to review and update your estate plans.
Keep in mind, though, that “empty nester” status is not always permanent. You’ve no doubt heard about “boomerang” kids who return home after college and stay until they can afford a place of their own.
If your children become “boomerangers,” even for a short while, will it greatly affect your financial situation? Probably not. However, if your children are going to drive your car, you may want to be sure that they are listed on your car insurance. Also, if they are going to bring guests to your home, you might want to consider an “umbrella” insurance policy, which typically provides you with significantly greater liability protection than your regular homeowners policy. (In fact, it may be a good idea to purchase an umbrella policy even if you don’t have grown kids at home, as this coverage offers you wide-ranging protection from potentially devastating lawsuits that could arise from injuries on your property or through an auto accident in which you are involved.)
You may have mixed feelings about becoming an empty nester, but, like most people, you will adjust. And by making the right financial moves, you can get off to a good start on this new phase of your life.
Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Here are some relocation costs to consider:
Housing – Not surprisingly, the larger the city, the more expensive the housing is likely to be. Also, locations near an ocean or the mountains tend to be more costly. But the type of housing you select – house, apartment or condominium – also can affect your financial picture in terms of initial expense, maintenance and possible tax benefits. Plus, you can now find newer types of arrangements, such as senior cooperative housing, in which you own a share of the community and have a voice in how it’s run.
Health care – If you are 65 or older when you retire, you’ll have Medicare to cover some of your health care costs, though you’ll still likely need to purchase some type of supplemental coverage. However, out-of-pocket health care expenses may vary in different parts of the country, so this is something else you’ll want to check out before relocating. Of course, the availability of good medical facilities may be just as important to you as health care costs.
Taxes – You may hear about people moving to a different state to lower their tax burden during retirement. A few states don’t have personal state income taxes, and many others offer favorable tax breaks on retirement income, so, if taxes are a major concern, you’ll want to research the tax situation of prospective retirement locations. You may also want to consult with your tax advisor.
These aren’t all the areas you will need to consider when estimating your total cost of living in a retirement destination, but they should give you a good idea of what you can expect. And your choice of where to live as a retiree can affect your financial strategy in at least two ways: how you invest today and how much you can withdraw from your retirement accounts when you’re retired.
Regarding how you invest today, you should evaluate whether your current investment strategy is likely to produce the resources needed to support you adequately in the retirement location you’ve chosen. So, for example, if you think you’re going to live in a fairly expensive place, you may need to reduce your expenses, delay retirement or work part time.
Your choice of a retirement destination also may affect how much money you withdraw each year from your 401(k) and IRA. When choosing an appropriate withdrawal rate, you’ll need to consider other variables – your age, the amount of money in your retirement accounts, other available assets, etc. – but your cost of living will be a key factor. A financial professional can help you determine the withdrawal rate that’s right for you.
When you retire, it can be a great feeling to live where you want, but you’ll enjoy it more if you’re fully aware of the costs involved – and the financial steps you’ll need to take.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones, its employees and financial advisors cannot provide tax advice.
Are my goals still realistic?
When you first began working with your financial advisor, you may well have articulated a number of financial goals. For example, you might have said that you wanted to pay for most of your children’s college educations, or that you wanted to retire at a certain age, or that you wanted to travel for two months each year during your retirement. In fact, you could have many different goals for which you’re saving and investing. When you meet with your financial advisor, you’ll certainly want to ask if you’re still on track toward meeting these goals. If you are, you can continue with the financial strategies you’ve been following; but if you aren’t, you may need to adjust them.
Am I taking on too much – or too little – risk?
The financial markets always fluctuate, and these movements will affect the value of your investment portfolio. If you watch the markets closely every day and track their impact on your investments, you may find yourself fretting considerably over your investments’ value and wondering if you are taking on too much investment risk for your comfort level. Conversely, if you think that during an extended period of market gains your own portfolio appears to be lagging, you might feel that you should be investing more aggressively, which entails greater risk. In any case, it’s important that you know your own risk tolerance and use it as a guideline for making investment choices – so it’s definitely an issue to discuss with your financial advisor.
How will changes in my life affect my investment strategy?
Your life is not static. Over time, you may experience any number of major events, such as marriage, children, new jobs and so on. When you meet with your financial advisor, you will want to discuss these types of changes, because they can affect your long-term goals and, consequently, your investment decisions.
How are external forces affecting my investment portfolio?
Generally speaking, you will want to create an investment strategy that’s based on your goals, risk tolerance and time horizon. And, as mentioned above, you may need to adjust your strategy based on changes in your life. But should you also make changes based on outside forces, such as interest rate movements, political events, new legislation or news affecting industries in which you have invested substantially? Try not to make long-term investment decisions based on short-term news. Yet, talk with your financial advisor to make sure your investment portfolio is not out of alignment with relevant external factors.
By making these and other inquiries, you can help yourself stay informed on your overall investment picture and what moves, if any, you should make to keep advancing toward your goals. A financial advisor is there to provide you with valuable expertise – so take full advantage of it.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
A Roth IRA can be a great way to save for retirement. You can fund your IRA with virtually any type of investment, and, although your contributions are not deductible, any earnings growth is distributed tax-free, provided you don’t start withdrawals until you are 59-1/2 and you’ve had your account at least five years. In 2018, you can contribute up to $5,500 to your Roth IRA, or $6,500 if you’re 50 or older.
But here’s where your “just married” status can affect your ability to invest in a Roth IRA. When you were single, you could put in the full amount to your Roth IRA if your modified adjusted gross income (MAGI) was less than $120,000; past that point, your allowable contributions were reduced until your MAGI reached $135,000, after which you could no longer contribute to a Roth IRA at all. But once you got married, these limits did not double. Instead, if you’re married and filing jointly, your maximum contribution amount will be gradually reduced once your MAGI reaches $189,000, and your ability to contribute disappears entirely when your MAGI is $199,000 or more.
Furthermore, if you are married and filing separately, you are ineligible to contribute to a Roth IRA if your MAGI is just $10,000 or more.
So, as a married couple, how can you maximize your contributions? The answer may be that, similar to many endeavors in life, if one door is closed to you, you have to find another – in this case, a “backdoor” Roth IRA.
Essentially, a backdoor Roth IRA is a conversion of traditional IRA assets to a Roth. A traditional IRA does not offer tax-free earnings distributions, though your contributions can be fully or partially deductible, depending on your income level. But no matter how much you earn, you can roll as much money as you want from a traditional IRA to a Roth, even if that amount exceeds the yearly contribution limits. And once the money is in the Roth, the rules for tax-free withdrawals will apply.
Still, getting into this back door is not necessarily without cost. You must pay taxes on any money in your traditional IRA that hasn’t already been taxed, and the funds going into your Roth IRA will likely count as income, which could push you into a higher tax bracket in the year you make the conversion.
Will incurring these potential tax consequences be worth it to you? It might be, as the value of tax-free withdrawals can be considerable. However, you should certainly analyze the pros and cons of this conversion with your tax advisor before making any decisions.
In any case, if you’ve owned a Roth IRA, or if you were even considering one, be aware of the new parameters you face when you get married. And take the opportunity to explore all the ways you and your new spouse can create a positive investment strategy for your future.
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.