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Michael Christodoulou

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

The financial markets always go through periods of instability. And we may see more of that now, given concerns about tariffs, inflation and the economy. As an investor, how can you deal with this volatility?

Some investors try to take advantage of market ups and downs by attempting to follow the age-old advice to “buy low and sell high” — that is, they seek to buy stocks when they feel prices have bottomed out and they sell stocks when they think the market has reached a high point. In theory, this is a great idea, but in practice, it’s essentially impossible, because no one can really predict market highs and lows. 

Rather than trying to anticipate highs and lows, your best strategy for coping with the price fluctuations of the financial markets is to diversify your investment portfolio by owning a mix of stocks, bonds and other types of securities. Different types of financial assets can move in different directions at any given time — so, for example, stocks may be up while bonds are down, or vice versa. If you only owned one of these types of assets, and the market for that asset class was down, your portfolio could take a bigger hit than if you owned a variety of asset types.

And you can further diversify within individual asset categories. Stocks can be domestic or international, large-company or small-company — and these groupings can also move in different directions at the same time, depending on various market forces. As for bonds, they too don’t always move in a uniform direction, or at least with the same intensity — for instance, when interest rates rise, bond prices tend to fall, but longer-term bonds may fall more than shorter-term ones, which are closer to maturity with fewer interest payments remaining. Conversely, when rates are falling, longer-term bonds may be more attractive because they lock in higher yields for a longer time. Consequently, one diversification technique for bonds is to build a “ladder” containing bonds of varying maturities.

Some investments, by their nature, are already somewhat diversified. A mutual fund can contain dozens, or even hundreds, of stocks, or a mixture of stocks and bonds. And different mutual funds may have different investment objectives — some focus more on growth, while others are more income-oriented — so, further diversification can be achieved by owning a mix of funds.

Furthermore, some investors achieve even greater diversification by owning alternative investments, such as real estate, commodities and cryptocurrencies, although these vehicles themselves are often more volatile than those in more traditional investment categories. 

Financial companies have been designing newer securities which help lower the volatility within the security, while allowing the investor to have upside potential and significant monthly income.

While a diversified portfolio is important for every investor, your exact level of diversification — the percentages of your portfolio devoted to stocks, bonds and other securities — will depend on your individual risk tolerance, time horizon and financial goals. I highly recommend you consult with a financial professional about creating the diversified investment mix that’s right for your needs. The tools available today for investors have significantly changes to help manage the volatility. 

Ultimately, while diversification can’t guarantee profits or protect against all losses, it can help you reduce some of the risks associated with investing and better prepare you to deal with the inevitable volatility of the financial markets — two key benefits that can help you over the many years you’ll spend as an investor.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

Going through a divorce is emotionally painful and can disrupt one’s life in many ways — but does it also have to be financially devastating? Not necessarily. You can help yourself greatly by making a series of moves. Here are some to consider: 

Before the divorce is final …

Determine how you’ll cover the cost of the divorce. To meet the costs of a divorce, which can be tens of thousands dollars, you may need to tap in to your income stream and savings accounts, or even explore alternative options, such as borrowing from your retirement plan, if it’s allowed by a divorce court judge.

Create a budget. You may want to build a temporary budget. Your divorce attorney can advise you on how long your separation period may last in a contested case.

Start building separate bank and brokerage accounts. Consult with your divorce attorney on ways to establish independent bank and brokerage accounts without harming your spouse.

Understand your retirement benefits. Know the value of your and your spouse’s 401(k) or similar plans, IRAs, pensions, stock options and other employer benefits. Also, you might need to negotiate the splitting of retirement benefits through a qualified domestic relations order (QDRO). A tax professional and a financial advisor can help you understand how different QDRO proposals can affect your retirement goals.

After the divorce is final …

Finish building your separate financial accounts. You may want to close any joint accounts or credit cards, change online access to financial accounts, remove your name from bills for which you are no longer responsible and complete any agreed-upon asset transfers, such as dividing retirement assets. 

Create a new budget. You can now create a longer-term budget, incorporating any spouse or child support you receive as income. You may also need to adjust your spending to reflect items in the divorce agreement, such as expenses now covered by your former spouse and court-ordered responsibilities for paying college education expenses for dependent children and possibly the attorneys’ fees for a former spouse.

Review your protection plans. You may need to review your life, homeowners and auto insurance policies. And if you were covered under your spouse’s health insurance plan, you may want to apply for COBRA to stay on that plan up to 36 months or switch to your own employer’s plan, if available. If you don’t have access to an employer’s health insurance, you may want to explore a marketplace plan from the Affordable Care Act or contact a health insurance broker.

Review your estate plans. To reflect your new marital status, you may need to work with your legal professional to change some of your estate-planning documents, such as a will, living trust, advanced health care directive or power of attorney. Also, review the beneficiary designations on life insurance policies, IRAs, annuities and investment accounts, as these designations can likely supersede instructions on your will or trust. 

See your tax professional. You may need to consult with your tax professional on issues such as changing your tax return filing status, claiming a child as a dependent and dealing with tax implications of assets received in the divorce.

Going through a divorce is not easy — but by taking the appropriate steps before and after the divorce is finalized, you can at least help put yourself in a more secure and stable financial position to begin the next phase of your life.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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By Michael Christodoulou

Michael Christodoulou

As you may know, some businesses pass along part of their profits to investors in the form of dividends. If you own shares of these companies, either directly in stocks or more indirectly through mutual funds, you may have a choice: Should you take the dividends as cash or reinvest them into the stocks or funds?

There’s no one correct answer for everyone. So, let’s look at some reasons for both choices — reinvesting or cashing out.

Reinvesting dividends offers at least two related benefits. First, reinvested dividends make up part of a stock’s total return, along with price appreciation. And second, when you reinvest dividends, you are buying more shares of the investment — and share ownership is a key to building wealth. Keep in mind that dividends can be increased, decreased or eliminated without notice.

It’s also easy to reinvest dividends. Through a dividend reinvestment plan, or DRIP, your dividends are automatically used to buy more shares of a company. And these new shares will generate more dividends that can be reinvested. 

Consequently, it’s fair to say that dividend reinvesting is an economical way to grow your portfolio. However, a DRIP does not guarantee a profit or protect against loss, so you’ll need to consider your willingness to keep investing when share prices are declining.

If you’re mainly investing for long-term growth, you may well want to reinvest your dividends. But under what circumstances wouldn’t you want to reinvest them?

For starters, of course, you may simply need the dividends to help support your cash flow. This may be especially true in your retirement years. 

But there may be other reasons to cash out dividends, rather than reinvesting them. You might already own a considerable number of shares in a stock, mutual fund or exchange traded fund and you don’t want to buy more of the same. By not reinvesting these dividends, you can use the money to help broaden your investment mix. 

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You also might want to consider taking the cash, rather than reinvesting, if the company that pays the dividends appears to be struggling or has an uncertain future. Again, you could then use the money to fill gaps in your portfolio. 

Regardless of whether you reinvest your dividends, you’ll pay taxes on them if your investments are held in a taxable account. Ordinary dividends are taxed at your ordinary income tax rates, while qualified dividends are taxed at the capital gains rate, which is 0%, 18%, or 20%, depending on your income. (A dividend is considered qualified if you’ve held the stock for a certain length of time.) 

If your dividend-paying investments are held in a traditional IRA or a 401(k), you won’t have to pay taxes on the dividends until you begin taking withdrawals from these accounts, typically at retirement. And if you have a Roth IRA or Roth 401(k), you may not pay taxes on the dividends at all, provided you’ve had the account at least five years and you don’t take withdrawals until you’re at least 59½. 

In any case, you may find that dividends, whether reinvested or taken in cash, can play a role in your overall financial strategy. So, follow your dividend payments carefully — and make the most of them. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC.

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 or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.

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By Michael Christodoulou

Michael Christodoulou

In life, you often get second chances — and the same is true with investing. To illustrate: You might not have been able to contribute to a Roth IRA during your working years due to your income level, but you may get that opportunity as you near retirement, or even when you are retired — through a Roth conversion.

Why is a Roth IRA desirable for some people? Here are the key benefits:

 Tax-free withdrawals 

You put in after-tax dollars to a Roth IRA, so you can withdraw your contributions at any time, free of taxes and penalties. And if you’ve had your account for at least five years and you’re at least 59½, you can also withdraw your earnings free of taxes.

No RMDs 

With a traditional IRA, you’ll have to start taking withdrawals — called required minimum distributions, or RMDs — when you turn 73, or 75 if you were born in 1960 or later. But there’s no RMD requirement with a Roth IRA — you can essentially leave the money intact as long as you like.

Tax-free legacy for your heirs 

When your heirs inherit your Roth IRA, they can withdraw the contributions without paying taxes or penalties, and if the account has been open at least five years, they can also withdraw earnings tax free.

But even if you were aware of these advantages, you might not have been able to invest in a Roth IRA for much of your life. For one thing, you might have earned too much money — a Roth IRA, unlike a traditional IRA, has income limits. Also, a Roth IRA has only been around since 1998, so, in the previous years, you were limited to a traditional IRA.

As you approach retirement, though, you might start thinking of just how much you’d like to benefit from a Roth IRA. And you can do so by converting your traditional IRA to a Roth. While this sounds simple, there’s a major caveat: taxes. You’ll be taxed on the amount in pre-tax dollars you contributed to a traditional IRA and then converted to a Roth IRA. (If you have both pre- and after-tax dollars in your traditional IRA, the taxable amount is based on the percentage of pre-tax dollars.)

If you have large amounts in a traditional IRA, the tax bill on conversion can be significant. The key to potentially lowering this tax bill is timing. Generally speaking, the lower your income in a given year, the more favorable it is for you to convert to a Roth IRA. So, for example, if you have already retired, but have not started collecting RMDs, your income may be down.

Timing also comes into play with the financial markets. When the market is going through a decline, and the value of your traditional IRA drops, you could convert the same number of shares of the underlying investments and receive a lower tax bill or convert more shares of these investments for what would have been the same tax bill.

Finally, you could lower your tax bill in any given year by stretching out your Roth IRA conversions over several years, rather than doing it all at once.

You’ll want to consult with your tax advisor before embarking on this conversion — but if it’s appropriate for your situation, you could find that owning a Roth IRA can benefit you and your family for years to come.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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By Michael Christodoulou

Now that the calendar has flipped, it’s time for some New Year’s resolutions. You could decide you’re going to exercise more, lose weight, learn a new skill, reconnect with old friends — the possibilities are almost limitless. This year, why not add a few financial resolutions to your list?

Here are a few to consider:

Reduce your debts. It may be easier said than done, but if you can cut down on your debt load, you’ll increase your cash flow and have more money available to invest for your future. So, look for ways to lower your expenses and spending. You might find it helpful to use one of the budgeting apps available online. 

Boost your retirement savings. Try to put in as much as you can afford to your IRA and your 401(k) or other employer-sponsored retirement plan. If your salary goes up this year, you’ve got a good opportunity to increase your contributions to these retirement accounts. And once you turn 50, you can make pre-tax catch-up contributions for your 401(k) and traditional IRA. You might also want to review the investment mix within your 401(k) or similar plan to determine whether it’s still providing the growth potential you need, given your risk tolerance and time horizon.

Build an emergency fund. It’s generally a good idea to maintain an emergency fund containing up to six months’ worth of living expenses, with the money kept in a liquid, low-risk account. Without such a fund, you might be forced to dip into your long-term investments to pay for short-term needs, such as an expensive auto or home repair. 

Keep funding your non-retirement goals. Your traditional IRA and 401(k) are good ways to save for retirement — but you likely have other goals, too, and you’ll need to save and invest for them. So, for example, if you want your children to go to college or receive some other type of post-secondary training, you might want to invest in a tax-advantaged 529 education savings plan. And if you have short-term goals, such as saving for a wedding or taking an overseas vacation, you might want to put some money    away in a liquid account. For a short-term goal, you don’t necessarily need to invest aggressively for growth — you just want the money to be there for you when you need it. 

Review your estate plans. If you haven’t already created your estate plans, you may want to do so in 2025. Of course, if you’re relatively young, you might not think you need to have estate plans in place just yet, but life is unpredictable, and the future is not ours to see. If you have already drawn up estate plans, you may want to review them, especially if you’ve recently experienced changes in your life and family situation, such as marriage, remarriage or the addition of a new child. Because estate planning can be complex, you’ll want to work with a qualified legal professional.

You may not be able to tackle all these resolutions in 2025. But by addressing as many of them as you can, you may find that, by the end of the year, you have made progress toward your goals and set yourself on a positive course for all the years to come.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

As we enter the holiday season, your life may well become busier. Still, you might want to take the time to consider some financial moves before we turn the calendar to 2025.

Here are a few suggestions:

Review your investment portfolio. As you look at your portfolio, ask these questions: Has its performance met my expectations this year? Does it still reflect my goals, risk tolerance and time horizon? Do I need to rebalance? You might find that working with a financial professional can help you answer these and other questions you may have about your investments.

Add to your 401(k) and HSA. If you can afford it, and your employer allows it, consider putting more money into your 401(k) before the year ends — including “catch-up” contributions if you’re 50 or older. You might also want to add to your health savings account (HSA) by the tax-filing deadline in April. 

Use your FSA dollars. Unlike an HSA, a flexible spending account (FSA) works on a “use-it-or-lose-it” basis, meaning you lose any unspent funds at the end of the year. So, if you still have funds left in your account, try to use them up in 2024. (Employers may grant a 2½ month extension, so check with your human resources area to see if this is the case where you work.) 

Contribute to a 529 plan. If you haven’t opened a 529 education savings plan for your children, think about doing so this year. With a 529 plan, your earnings can grow tax deferred, and your withdrawals are federally tax free when used for qualified education expenses — tuition, fees, books and so on. And if you invest in your own state’s 529 plan, you might be able to deduct your contributions from your state income tax or receive a state tax credit.

 Build your emergency fund. It’s generally a good idea to keep up to six months’ worth of living expenses in an emergency fund, with the money held in a liquid, low-risk account. Without such a fund in place, you might be forced to dip into your retirement funds to pay for short-term needs, such as a major car or home repair. 

Review your estate plans. If you’ve experienced any changes in your family situation this year, such as marriage, remarriage or the birth of a child, you may want to update your estate-planning documents to reflect your new situation. It’s also important to look at the beneficiary designations on your investment accounts, retirement plans, IRAs and insurance policies, as these designations can sometimes even supersede the instructions you’ve left in your will. And if you haven’t started estate planning, there’s no time like the present.

Take your RMDs. If you’re 73 or older, you will likely need to take withdrawals — called required minimum distributions, or RMDs — from some of your retirement accounts, such as your traditional IRA. If you don’t take these withdrawals each year, you could be subject to penalties.

These aren’t the only moves you can make, but they may prove helpful not only for 2024 but in the years to come.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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By Michael Christodoulou

Michael Christodoulou

You can find several ways to make charitable gifts — but if you’re looking for a method that can provide multiple tax benefits, along with an efficient platform for giving year after year, you might want to consider a donor-advised fund.

Once you open a donor-advised fund (DAF), you can contribute many types of assets, including cash, publicly traded stocks, bonds, CDs or non-cash items such as closely held business interests, art or collectibles. You can then decide how to invest the money, possibly following a strategy suggested by the DAF sponsor organization you’ve selected. The next step involves choosing which charities to support, how often to provide support (such as once a year) and how much to give each time. You’re essentially free to direct the money to any charities you like, provided they’re IRS-approved charitable organizations.

Now, let’s look at the possible tax advantages offered by a DAF:

IMMEDIATE TAX DEDUCTION

A few years ago, changes in tax laws resulted in a vastly increased standard deduction, which, in turn, led to far fewer people itemizing on their tax returns and having less incentive, at least from a tax standpoint, to contribute to charities. But if you don’t typically give enough each year to itemize deductions, you could combine several years’ worth of giving into one contribution to a DAF and take a larger deduction in that tax year. And you can claim that deduction, even though the DAF may distribute funds to charities over several years.

TAX-FREE GROWTH OF EARNINGS

Once you contribute an asset to a DAF, any earnings growth is not taxable to you, the DAF or the charitable groups that receive grants from the DAF. 

AVOIDANCE OF CAPITAL GAINS TAXES

When you donate appreciated stocks or other investments — or for that matter, virtually any appreciated asset — to a DAF, you can avoid paying the capital gains taxes that would otherwise be due if you were to simply sell the asset and then donate the proceeds to charitable organizations. Plus, by receiving the appreciated asset, rather than the proceeds from a sale, the charitable groups can gain more from your contribution. And you can also take a tax deduction for your donation. 

While these potential tax benefits can certainly make a DAF an attractive method of charitable giving, you should be aware of some potential tradeoffs. Once you contribute assets to a DAF, that gift is irrevocable, and you can’t access the money for any reason other than charitable giving. Also, your investment options are limited to what’s available in the DAF program you’ve chosen. And DAFs can incur administrative costs in addition to the fees charged on the underlying investments.  

You may want to consult with your financial professional about other potential benefits and tradeoffs of DAFs and whether a DAF can help you with your charitable giving goals. Also, different DAF sponsors offer different features, so you will want to do some comparisons. And because DAFs can have such significant implications for your tax situation, you should consult with your tax professional before taking action.

If a DAF is appropriate for your situation, though, consider it carefully — it might be a good way to support your charitable giving efforts for years to come. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

If you work for a midsize or large company, you may soon be able to review your employee benefits package, as we are entering the open enrollment season. So, consider your options carefully, with an eye toward making changes appropriate for your needs. Here are some of the key areas to look at:

RETIREMENT PLAN

Depending on your employer, you could change your 401(k) or similar retirement plan at any time of the year, but you might want to use the open enrollment season to review your contribution amounts. If your salary has gone up over the past year, you might want to boost your pre-tax contributions (including catch-up contributions beginning at age 50). At a minimum, try to put in at least enough to earn your employer’s match, if one is offered. At the same time, look over how your contributions are allocated among the various investment options in your plan. You’ll want your investment mix to reflect your goals, risk tolerance and time horizon. 

LIFE INSURANCE

If your employer offers group life insurance at no cost as an employee benefit, you may want to take it — but be aware that it might not be enough to fully protect your family should anything happen to you. You may have heard that you need about seven to 10 times your annual income as a life insurance death benefit, but there’s really no one right answer for everyone. Instead, you should evaluate various factors — including your mortgage, your income, your spouse’s income (if applicable), your liabilities, the number of years until your retirement, number of children and their future educational needs — to determine how much insurance you need. If your employer’s group policy seems insufficient, you may want to consider adding some outside overage.

DISABILITY INSURANCE

Your employer may offer no-cost group disability insurance, but as is the case with life insurance, it might not be sufficient to adequately protect your income in case you become temporarily or permanently disabled. In fact, many employer-sponsored disability plans only cover a short period, such as five years, so to gain longer coverage up to age 65, you may want to look for a separate personal policy. Disability policies vary widely in premium costs and benefits, so you’ll want to do some comparison shopping with several insurance companies.

FLEXIBLE SPENDING ACCOUNT

A flexible spending account (FSA) lets you contribute up to $3,200 pre-tax dollars to pay for some out-of-pocket medical costs, such as prescriptions and insurance copayments and deductibles. You decide how much you want to put into your FSA, up to the 2025 limit. You generally must use up the funds in your FSA by the end of the calendar year, but your employer may grant you an extension of 2½ months or allow you to carry over up to $640. 

HEALTH SAVINGS ACCOUNT

Like an FSA, a health savings account (HSA) lets you use pre-tax dollars to pay out-of-pocket medical costs. Unlike an FSA, though, your unused HSA contributions will carry over to the next year. Also, an HSA allows you take withdrawals, though they may be assessed a 10% penalty. To contribute to an HSA, you need to participate in a high-deductible health insurance plan.  

Make the most of your benefits package — it can be a big part of your overall financial picture. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

Michael Christodoulou

The movement of the financial markets can seem mysterious — and yet, if we look back over long periods, we can see definite patterns that consistently repeat themselves. As an investor, how should you respond to these market cycles?

When stock prices begin falling dramatically, it can appear that your only option is to sell to limit losses. But we disagree — if you’re a long-term investor, the difference between success and failure may be determined by your actions during a stock market decline.

To begin with, it’s useful to know something about the nature of a market cycle and its connection to the business or economic cycle, which describes the fluctuations of the economy between periods of growth and contraction. Issues such as employment, consumer spending, interest rates and inflation can determine the stage of the business cycle. On the other hand, the market cycle refers to what’s happening in the financial markets — that is, the performance of all the different types of investments. 

The market cycle often anticipates the business cycle. In other words, the stock market may peak, or hit bottom, before the business cycle does the same. That’s partially because the financial markets are always looking ahead. If they foresee an event that could boost the business cycle and help the economy, such as the Federal Reserve lowering interest rates, they may become more “bullish” on stocks, thus driving the market up. 

Conversely, if the markets think the business cycle will slow down and the economy will contract, they may project a decline in corporate earnings and become more “bearish” on stocks, leading to a market drop.

Once you’re familiar with the nature of market cycles, you won’t be surprised when they occur. But does that mean you should base your investment strategy on these cycles?

Some people do. If they believe the market cycle is moving through a downward phase, they may try to cut their perceived losses by selling stocks — even those with strong fundamentals and good prospects — and buying lower-risk investments. While these “safer” investments may offer more price stability and a greater degree of preservation of principal, they also won’t provide much in the way of growth potential. And you’ll need this growth capacity to help reach your long-term goals, including a comfortable retirement. 

On the other hand, when investors think the market cycle is moving upward, they may keep investing in stocks that have become overpriced. In extreme cases, unwarranted investor enthusiasm can lead to events such as the dotcom bubble, which led to a sharp market decline from 2000 through 2002. 

Rather than trying to “time” the market, you may well be better off by looking past its cycles and following a long-term, “all-weather” strategy that’s appropriate for your goals, risk tolerance, time horizon and need for liquidity. And it’s also a good idea to build a diversified portfolio containing U.S. and foreign stocks, mutual funds, corporate bonds, U.S. Treasury securities and other investments. While diversification can’t protect against all losses, it can help protect you from market volatility that might primarily affect just one asset class.

Market cycles often draw a lot of attention, and they are relevant to investors in the sense that they can explain what’s happening in the markets. Yet, when it comes to investing, it’s best not to think of cycles but rather of a long journey – one that, when traveled carefully, can lead to the destinations you seek. Market declines can test the nerves of even the most patient investors. If you own a diversified mix of quality investments, resist the temptation to sell or make changes based on short-term events.

The next time the market has a hiccup, take a deep breath and remember: 

• Market declines are normal, frequent and not a reason to sell quality investments. 

• Market declines begin and end without warning. 

• Market declines provide an opportunity to buy quality investments at lower prices.

• Market declines return investments to their rightful owners: those who understand why they own what they own.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC. This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

Once you’re retired, you will likely need to draw on several types of income for your living expenses. You’ll need to know where these funds are coming from and how much you can count on, but you should also be aware of how this money is taxed — because this knowledge can help you plan and budget for your retirement years.  

Here’s the basic tax information on some key sources of retirement income:

Social Security:  Many people don’t realize they may have to pay taxes on their Social Security benefits. Whether your benefits will be taxed depends on how much other taxable income you receive from various sources, such as self-employment, stock dividends and interest payments. You’ll want to check with your tax advisor to determine whether your income reaches the threshold where your Social Security benefits will be taxed. The lower your total taxable income, the lower the taxes will be on your benefits. The Social Security Administration will not automatically take out taxes from your monthly checks — to have taxes withheld, you will need to fill out Form W-4V (Voluntary Withholding Request). Again, your tax advisor can help you determine the percentage of your benefits you should withhold. 

Retirement accounts: During your working years, you may have contributed to two basic retirement accounts: an IRA and a 401(k) or similar plan (such as a 457(b) plan for state and local government employees or a 403(b) plan for educators and employees of some nonprofits). If you invested in a “traditional” IRA or 401(k) or similar plan, your contributions may have been partially or completely deductible and your earnings grew on a tax-deferred basis. But when you start taking withdrawals from your traditional IRA or 401(k), the money is considered taxable at your normal income tax rate. However, if you chose the “Roth” option (when available), your contributions were not deductible, but your earnings and withdrawals are tax-free, provided you meet certain conditions. 

Annuities: Many investors use annuities to supplement their retirement income. An annuity is essentially a contract between you and an insurance company in which the insurer pays you an income stream for a given number of years, or for life, in exchange for the premiums you paid. You typically purchase a “qualified” annuity with pre-tax dollars, possibly within a traditional IRA or 401(k), so your premiums may be deductible, and your earnings can grow tax deferred. Once you start taking payouts, the entire amount — your contributions and earnings — are taxable at your individual tax rate. 

On the other hand, you purchase “non-qualified” annuities with after-tax dollars, so your premiums aren’t deductible, but just like qualified annuities, your earnings grow on a tax-deferred basis. When you take payments, you won’t pay taxes on the principal amounts you invested but the earnings will be taxed as ordinary income. 

We’ve looked at some general rules governing different sources of income, but you should consult your tax professional about your specific situation. 

Ultimately, factors such as your goals, lifestyle and time horizon should drive the decisions you make for your retirement income. Nonetheless, you may want to look for ways to control the taxes that result from your various income pools. And the more you know about how your income is taxed, the fewer unpleasant surprises you may experience. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIP

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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