Client New Year Q&A
Happy New Year! Each new year brings new challenges in the market and new rules issued by Congress! The following are real questions posed by real clients. We hope that you find an answer to some of your questions here as well. Continue sending questions to any of our advisors to make this regular newsletter section up-to-date and relevant for other clients.
ROTH IRA’s 2018 versus 2019
What is the maximum contribution amount allowed for Roth IRAs in 2018 and 2019 and what are the income limits?
- Bob H.
This is a good annual question. From 2013-2018, taxpayers were limited to $5,500. In 2019, they may contribute up to $6,000.Taxpayers over the age of 50 may contribute an additional $1000 for both 2018 and 2019.
Income limits are another issue. In 2018, a single person (or head of household) could maximize their contribution to a Roth IRA if they had Adjusted Gross Income (the number at the bottom of page 1 of Form 1040) of less than $120,000. They could contribute a reduced amount until their income reached $135,000. For married couples filing a joint tax return, their range was $189,000 to $199,000. For 2019, Single taxpayers have a range of $122,000 - $137,000; while
Married Taxpayers have a range of $193,000 - $203,000.
Can you still contribute if you earn too much?Maybe. The answer varies considerably depending on other factors.Contact your advisor to get a complete and accurate answer. For a full listing of account contribution limits for 2019, see Emily Agosto’s article Meeting Your Savings Goals: Contribution Limits for 2019.
You might be interested to know that Traditional IRAs were the first individually-owned retirement plan and were created in 1975 with a $1500 maximum contribution limit. Roth IRAs were first available in 1998.The contribution limits have increased at a glacial pace over the years, with most of the increases occurring since 2005. The following chart reflects the history for IRAs and Roth IRAs contribution limits.
Because your contribution may be dependent upon your income, you are allowed to make contributions for a calendar year until the tax filing due date of the following year (if you file an extension, you still must make your contribution by the first due date).
|Roth IRA Maximum Contribution|
Over age 50
Bonds vs Stocks in Negative Stock Markets
Since the stock market values are dropping, should I switch from stocks to bonds?
- asked by several clients in the past couple months
We completely understand our clients’ concerns when they see the market values of their portfolios declining. David Vaught does an excellent job of explaining the tools we have available to us to protect your principal during the downturn period in a market cycle. See his article titled, “The Art of Preserving Capital When the Market is Sinking.”
First and foremost, as David points out in his article, we create portfolios based on overall income needs and risk tolerances for every client regardless of the point in the market cycle that we find ourselves. In short, the Plan for you was created knowing full well that a market decline would happen at some point. Overall, we intend to stick with the Plan.
Regardless of how good The Plan sounds when the market is up, clients get nervous when the market goes down – thus, the stocks vs bonds question. My answer to that question depends on who asks it. For instance, I was very directly asked this question by two different clients recently. One was in his mid-30s and has many years of working ahead of him. One was approaching 60, still working, but planning on retiring in a couple years.
To our younger (under the age of 50-55) clients: In general, we feel that you have at least one market cycle ahead of you. That means, we think that any stock market declines that are wreaking havoc on your portfolio now will have time to recover well before we need to worry about creating income for you from your retirement accounts.
To our older or near-retirement clients: This is the time when we start thinking less in terms of generic percentage allocations to bonds and stocks based on personal risk tolerance and more on producing real income numbers. What dollar amount in your portfolio is in fixed income (bonds and cash)? Do we still feel that amount is appropriate to cover your possible income needs in the next 5 years?
Our job is to worry as much about the 65-year-old version of our client who begins taking withdrawals as we do about the 80-year-old version of that client who may start bleeding funds to pay for healthcare 15-20 years from now. As frustrating as it is to watch the stock market decline, we usually prefer to give that stock portion of your portfolio time to recover and grow to pay increasing bills down the road. If we moved all of your portfolio to bonds, would there be enough to pay all of your anticipated expenses for the rest of your life? If the answer is yes, then maybe we can move to bonds. If the answer is no, we encourage you to hang in there and roll with the stock market punches for the immediate term in hopes of being rewarded years later.
As always, this is a very client-specific discussion to have with your advisor. Never hesitate to reach out via phone or email or request an in-person meeting to discuss your concerns or any changes in your life that may dictate an amendment to your Plan.
College Savings Accounts
What is the difference between a Coverdell Education IRA and a 529 plan? Can the account(s) be opened BEFORE a child is born in order to get a head start on saving?
- Joe D.
Excellent questions, Joe! Coverdells and 529 plans are the two most commonly used types of accounts that are specifically designed for education savings. The Tax Cuts and Jobs Act signed into law in December 2017 made these types of accounts much more similar than they had been.
Similarities: Both accounts allow contributions to grow tax-free, allow distributions to be tax-free as long as used for a qualified educational purpose (including K-12 education expenses, not just college – restrictions apply, of course), allow you to switch beneficiaries to family members once per year, and are owned by an adult who manages the fund for the beneficiary.
Differences: Coverdell contributions are subject to an income limit for the owner of $110,000 for individual tax payers and $220,000 for married filing jointly tax payers.Coverdells are restricted to a maximum contribution per beneficiary of $2000 per year. Coverdell account funds must be distributed by age 30 unless the beneficiary is special needs. The 529 has no limits on any of these. (State tax laws may have an impact on 529 and Coverdell withdrawals.)
529 plans are run by the states and participants are severely restricted in their investment options. Some states give owners the benefit of a state tax reduction for contributions into their plans. (see How much is your state's 529 plan tax deduction really worth?) Coverdells, on the other hand, can invest in anything. Want to buy a particular stock? You can do that in a Coverdell.
Can I open an account before I have children?
Yes. You can open it and make yourself a beneficiary until a child is born. Once a new baby has a social security number, you can switch the beneficiary to that child.