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Investing Fundamentals: Simplifying the most common retirement options for couples

Updated: Feb 24

Table of Contents


Common Investment Tax Shelters

Investing Fundamentals: Simplifying the most common retirement options for couples

Employer Based Plans


Traditional 401(k) Plans


A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax income to a retirement account. Contributions grow tax-deferred until withdrawal, typically during retirement.


Roth 401(k) Plans


Similar to Roth IRAs, Roth 401(k) plans allow employees to make after-tax contributions to their retirement accounts. Withdrawals from Roth 401(k) accounts in retirement are tax-free.



403 (b) Plans


A 403(b) plan is a retirement savings account available to employees of certain tax-exempt organizations and public schools, similar to a 401(k) plan for employees of for-profit organizations. Contributions to a 403(b) plan are typically made on a pre-tax basis, allowing employees to save for retirement while potentially reducing their taxable income.



457 Plans


A 457 plan is a type of deferred compensation plan available to employees of state and local governments and certain non-profit organizations. It allows participants to defer a portion of their salary into the plan on a pre-tax basis, with penalty-free access to the funds at any separation of service, which could be before retirement or retirement age.


Learn more: 457 plan


Investing Fundamentals: Simplifying the most common retirement options for couples

Individual Plans


Individual Retirement Accounts (IRAs)


IRAs are retirement accounts that individuals can establish on their own. Traditional IRAs offer tax-deferred growth, meaning contributions are tax-deductible, and earnings are not taxed until withdrawal. 


Roth IRAs, on the other hand, offer tax-free growth, allowing qualified withdrawals in retirement.


Back Door Roth IRA


A Backdoor Roth IRA involves contributing to a traditional IRA, then converting the funds to a Roth IRA, typically to bypass income limits for direct Roth contributions, allowing high-income earners to benefit from the advantages of a Roth IRA.



529 College Savings Plans


529 plans are tax-advantaged savings accounts designed to help families save for future education expenses. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses.


Starting in 2024, you can roll unused 529 assets—up to a lifetime limit of $35,000—into the account beneficiary's Roth IRA, without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income.



The Spousal IRA


For purposes of having earned income allowing one to make an IRA contribution (tradition and/or Roth), a non-working spouse can use their spouse’s earned income for purposes of making either (or both) a traditional IRA or a Roth IRA contribution.


Learn more: The Spousal IRA


Investing Fundamentals: Simplifying the most common retirement options for couples

Key Principles


Coordinate With Your Spouse


One in four married couples miss out on their employer's matching contributions because they don't coordinate their retirement contributions. Researchers estimate that the average foregone match is nearly $700 per year.


You know this, but just a reminder, the company will only make contributions to your retirement if you make contributions, this is an employer match.


If a thirty-year-old married couple retires at 65, it would be over $200,000 of lost free money.


Invest As Much As You Can, As Young As You Can



Understand Investment Risks


Investing Fundamentals: Simplifying the most common retirement options for couples

All investments carry some risk, including the potential loss of principal. Understanding the risks associated with each investment and considering your risk tolerance before investing is essential.


Timing the market typically leads to underperforming the market averages. On the other hand, spending more time in the market leads to higher returns because the stock market will go up over long periods of time, on average, 8% inflation-adjusted.


78% of the stock market's best days occur during a bear market or the first two months of a bull market. If you missed the market's 10 best days over the past 30 years, your returns would have been cut in half. Missing the best 30 days would have reduced your returns by an astonishing 83%.


Play the “Time the market” game.


Research Investments


Before investing, research the investment opportunity thoroughly. Evaluate factors such as the fees and the investment's alignment with your financial goals.


Fees


The 2019 average total advisory fee, including all underlying investment products of manager fees, is 1.17%. The range is between .1% to 3%. Here is the impact of those fees over 35 years, assuming $10,000 is invested annually and it earns the inflation-adjusted average of 8%.


Option A: 0.15% in fees


Ending portfolio value (net fees): $1,797,513.07

Ending portfolio value (gross): $1,861,036.27

Cost of fees: $63,523.20


Option B: 1.17% in fees


Ending portfolio value (net fees): $1,423,155.00

Ending portfolio value (gross): $1,861,036.27

Cost of fees: $437,881.27


Option C: 3% in fees


Ending portfolio value (net fees): $948,368.74

Ending portfolio value (gross): $1,861,036.27

Cost of fees: $912,667.53



Watch Out for Investment Scams


Be cautious of investment offers that promise high returns with little or no risk. Always verify the credentials of individuals and firms offering investment opportunities and be wary of unsolicited investment offers.


Beware of Political Bias


Investing Fundamentals: Simplifying the most common retirement options for couples
Image created by The Personal Finance Club

A September 2018 study by the National Bureau of Economic Research revealed that Republicans increased the exposure of their investments to the U.S. stock market relative to Democrats following the election. Political bias even affects professional investors such as pension managers and fund managers


Investment Types


Index funds


An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund provides broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets. 



Target date funds


A target date fund is an investment fund that automatically adjusts its asset allocation based on the investor's target retirement date. As the retirement date approaches, the fund gradually shifts towards a more conservative investment strategy, reducing risk exposure to better protect the investor's savings.



Mutual funds


A mutual fund is an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities managed by a professional fund manager. Investors in mutual funds share proportionally in the fund's gains, losses, income, and expenses, providing a convenient way to access a diversified investment portfolio without directly managing individual securities.



Investing Fundamentals: Simplifying the most common retirement options for couples

 


 

Key Investment Terms


Explore the SEC Investor Glossary for unfamiliar terms: SEC Investor Glossary


Investor Quiz


Take the SEC Investor quiz of the month to assess what you know. 


Sean Mullaney, CPA: Retirement Tax Shelter Fundamentals



Sean Mullaney is an advice-only financial planner and the President of Mullaney Financial & Tax, Inc. Through Mullaney Financial & Tax, Sean provides advice-only financial planning for a flat fee.


Sean previously worked for Deloitte & Touche and PwC. He is a Certified Public Accountant licensed in California and Virginia. He is a member of the American Institute of Certified Public Accountants.


Sean has been quoted in media outlets such as The New York Times and Forbes. He writes the Plutus Award-winning blog FITaxGuy.com on the intersection of tax and financial independence.


Transition to Marriage Toolkit


This post is a glimpse into what to expect if you purchase the Transition to Marriage Toolkit. The backgrounds of the 50+ national content experts who contributed to the Toolkit are below:



Designed for engaged and recently married couples, it is the ideal resource for those who want to manage money and the home as a team.



 

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