Traditional vs. Roth IRA

Traditional Individual Retirement Accounts (IRA), which were created in 1974, are owned by roughly 36.6 million U.S. households. And Roth IRAs, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 27.3 million households.1

Both are IRAs. And yet, each is quite different.

Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions to their account(s). Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.2,3

For individuals covered by a retirement plan at work, the deduction for a traditional IRA in 2023 is phased out for incomes between $116,000 and $136,000 for married couples filing jointly, and between $73,000 and $83,000 for single filers.4

Also, within certain limits, individuals can make contributions to a Roth IRA with after-tax dollars. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.

Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2023, contributions to a Roth IRA are phased out between $218,000 and $228,000 for married couples filing jointly and between $138,000 and $153,000 for single filers.4

In addition to contribution and distribution rules, there are limits on how much can be contributed each year to either IRA. In fact, these limits apply to any combination of IRAs; that is, workers cannot put more than $6,500 per year into their Roth and traditional IRAs combined. So, if a worker contributed $3,500 in a given year into a traditional IRA, contributions to a Roth IRA would be limited to $3,000 in that same year.4

Individuals who reach age 50 or older by the end of the tax year can qualify for “catch-up” contributions. The combined limit for these is $7,500.4

Both traditional and Roth IRAs can play a part in your retirement plans. And once you’ve figured out which will work better for you, only one task remains: open an account.5

* Up to certain limits

** Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.

*** To qualify, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.

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1. ICI.org, 2022
2. IRS.gov, 2023. In most circumstances, once you reach age 73, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). You may continue to contribute to a Traditional IRA past age 70½ as long as you meet the earned-income requirement.
3. Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into their account(s). Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.
4. IRS.gov, 2023
5. The Tax Cuts and Jobs Act of 2017 eliminated the ability to "undo" a Roth conversion.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2024 FMG Suite.

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Student Loan Borrowers Rush to Pay Down Debt as Freeze Ends

By Ryan O’Donnell and Mike O’Donnell

Student loan borrowers in the United States are taking proactive measures to tackle their debt as the federal freeze on payments and interest comes to an end. A recent report by Goldman Sachs reveals that borrowers have been actively reducing their outstanding balances in anticipation of the resumption of student loan payments.

After a three-year hiatus, interest on federal student loans began accruing again, and borrowers are required to start making payments from October onwards. This change has spurred a significant increase in loan repayments, with borrowers using their savings to reduce their debt burdens.

Many borrowers had initially hoped for debt forgiveness plans proposed by President Joe Biden. However, when the Supreme Court invalidated the president's program to eliminate up to $20,000 per borrower, many borrowers decided that waiting while interest continued to accumulate was not a viable option.

In August, an impressive $6.4 billion was transferred from the Department of Education to the US Treasury, marking the highest monthly transfer since February 2020. This substantial movement of funds underscores the urgency with which borrowers are approaching their student loan obligations.

Despite these efforts, many borrowers are expected to encounter difficulties in meeting their monthly repayment obligations, especially considering that the average monthly bill stands at around $400. Some borrowers may not immediately resume repayments, choosing to defer their payments until they are in a more financially stable position.

The Goldman Sachs report also notes that the end of the student loan payment moratorium is likely to have repercussions for consumer spending in the fourth quarter. As borrowers allocate more of their funds to loan repayments, there may be less disposable income available for other expenditures, which could impact the overall economy.

In conclusion, the impending end of the federal freeze on student loan payments has led to a flurry of activity among borrowers, as they strive to reduce their outstanding balances. While this demonstrates a proactive approach to managing their debt, it also underscores the financial challenges many borrowers face in fulfilling their obligations. The potential impact on consumer spending highlights the significance of student loan debt in the broader economic landscape.

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Consumer Sentiment Shifts Amidst Stable Inflation Expectations

By Ryan O’Donnell and Mike O’Donnell

Inflation has been a hot topic in the United States, and the latest insights from a survey by the Federal Reserve Bank of New York reveal some interesting trends in consumer sentiment. In August, US consumers' inflation expectations remained relatively stable, but concerns about their financial well-being and job market pessimism increased.

In terms of inflation expectations, median one-year-ahead inflation expectations inched up slightly to 3.6% from 3.5% in July. Expectations for inflation at the three-year horizon dipped to 2.8% from 2.9%, and the outlook for inflation in five years saw a slight increase to 3.0% from 2.9%.

Financial concerns were also notable. Both current credit conditions and expectations about future conditions deteriorated. More households reported it was either "much harder" or "somewhat harder" to access credit compared to a year ago, reaching the highest level since the survey began in June 2013. Additionally, more people anticipated that it would become even more challenging to acquire credit in the coming year.

Regarding the job market, respondents expressed concerns. They believed it was increasingly likely that the unemployment rate would rise in the next year. The perceived odds of losing a job over the next year also saw a significant increase, reaching the highest reading since April 2021. On the flip side, the odds of changing jobs voluntarily over the next year rose, which could be interpreted as both a sign of labor market flexibility and uncertainty.

These trends were most pronounced among individuals with a high school education or less and annual incomes below $50,000.

The backdrop to these findings is the Federal Reserve's ongoing efforts to manage inflation. Over the past 18 months, Fed officials have raised interest rates significantly in an attempt to curb inflation and cool down the economy. However, as inflation appears to be moderating, the pace of rate increases is slowing. The Fed is widely expected to maintain its benchmark rate in the range of 5.25% to 5.5% in their upcoming meeting.

The goal for the Fed is to achieve a "soft landing" for the economy, avoiding excessive rate hikes while returning inflation to their 2% target. As we await an update on consumer prices, it's clear that policymakers are closely monitoring economic indicators to strike the right balance between managing inflation and supporting economic growth.

These insights provide valuable perspective on the complex dynamics at play in the US economy, where inflation and consumer sentiment continue to be closely watched by both policymakers and the general public.

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A Game Changer: Roll Your 529 Plan to a Roth IRA from 2024 Onwards

Paying for college is a significant concern for many parents. With rising tuition costs, finding affordable ways to save for education has become essential. One popular option has been the 529 plan, a tax-favored account for education expenses. However, there have been limitations and uncertainties regarding what to do with unused funds if college plans change.

In 2024, a game-changing rule will take effect as part of the SECURE Act 2.0. This new legislation allows parents to roll any unused 529 plan funds into a Roth IRA without incurring penalties. This provision offers more flexibility and potential for growth, easing parents' worries about funds that might not be used for education.

While 529 plans have restrictions on contributions and usage, most account balances are relatively small compared to the rising cost of education. SECURE Act 2.0 addresses this issue by providing an option to transfer funds to a Roth IRA, where they can continue to grow tax-free.

When considering this option, it's crucial to understand the rules involved:

• The Roth IRA must be established for the student (beneficiary) of the 529 plan.

• The maximum lifetime cap for transferring funds is $35,000 per beneficiary.

• Standard Roth IRA annual contribution limits apply, without a maximum cap on income eligibility.

• The 529 plan must be in place for at least 15 years before making the transfer.

Parents have until 2024 to prepare for this change, allowing them to consult financial and tax advisors to make informed decisions. This newfound flexibility empowers families to navigate potential changes in college plans and use their savings wisely.

Overall, the ability to roll unused 529 plan funds into a Roth IRA offers parents greater control over their college savings and financial security. It's an opportunity to make the most of tax-efficient accounts and secure a brighter future for their children.

Navigating the Cooling Labor Market: A Financial Perspective

By Ryan O’Donnell and Mike O’Donnell

As the dust settles from the tumultuous employment shifts catalyzed by the pandemic, recent reports indicate a marked decrease in the number of Americans quitting their jobs. With this trend peaking in November 2021, we are witnessing an evolving labor market, gradually settling down from its red-hot tempo.

At its zenith, the quit rate reached an unprecedented 4.5 million. Fast-forward to May 2023, and the Labor Department recorded a figure closer to four million. The quit rate, denoting the number of resignations relative to total employment, descended from 3% in April 2022 to an average of 2.5% from March to May this year. That is a number slightly above the pre-pandemic level, but it nonetheless signifies a cooling trend.

Despite the diminished quit rates, top-line hiring remains robust. Through May this year, employers added an average of 314,000 jobs per month. Furthermore, ADP estimates that private-sector employers introduced nearly half a million jobs in June. This burgeoning employment data underscores the notion that further rate increases from the Federal Reserve are necessary to maintain economic equilibrium.

The pandemic brought a flurry of job transitions with workers seeking higher wages, fully remote roles, and re-evaluating their career paths. This phenomenon, coupled with the labor shortages in various industries, forced employers to grapple with an unpredictable labor market. Now, with the recent cooldown, economists anticipate a potential softening of demand for workers, reflecting lower confidence among employees about finding better job opportunities.

From a broader economic standpoint, the indicators are hinting at a slowing economy. After a promising start to the year, consumer spending cooled in May, and the imports, acting as a barometer of expected demand, recorded their lowest level since late 2021.

A slowing labor market could be a silver lining for the Federal Reserve in its mission to contain inflation by slowing the economy through higher interest rates. While employees switching jobs often secure bigger raises, potentially fueling price increases, these pay gains have begun to dwindle recently.

As we traverse this ever-changing economic landscape, it's crucial for businesses and employees alike to remain nimble and adaptable. The economic upheavals of the pandemic era have highlighted the need for strategic planning and foresight in both financial and human resource spheres.

In the post-pandemic world, employers who continue to value their employees, offering competitive pay, attractive benefits, and flexible working conditions, will likely navigate the cooling labor market most successfully. For employees, it's essential to balance the allure of job-switching against economic stability and personal career aspirations.

As your trusted financial partners, we remain committed to helping you make sense of these dynamic market trends and advising you on the best strategies to adapt and thrive in this cooling labor market.

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