No timing needed

Help overcome market timing and loss aversion with dollar-cost averaging.

Dollar-cost averaging — regularly investing money in the market — is an age-old strategy for mitigating investment price risk. Commonly applied by 401(k) plan savers, it could also be a useful strategy for experienced investors with larger sums, especially during periods of uncertainty or when emotional reluctance is high.

Dollar-cost averaging: the theory behind the practice

Dollar-cost averaging involves regularly investing a consistent amount of money to purchase a specific asset, or group of assets, regardless of their price. For example, an employer-sponsored 401(k) plan is set up this way. With each paycheck, you invest a regular percentage of your earnings in defined assets, generally mutual funds, that you have previously selected.

This strategy helps prevent you from stressing over decisions on when to invest in the market. With the regular-investment approach, you don’t focus on whether the asset you’re purchasing is at a good price for purchase. Rather than try to time the market, you buy it each week or month or whatever the interval is.

The theory underpinning this strategy is that asset prices will go up and down in unpredictable ways, and if you buy shares regularly, the average share price you pay – that is, the dollar-cost average – won’t be too high. When prices are lower, your money will buy more shares than the same amount will buy when prices are higher, bringing down your price-per-share cost. This, in turn, can help reduce the impact of market volatility on your portfolio.

Potential benefits and limitations of dollar-cost averaging

In addition to the theoretical benefit of avoiding an overly high purchase price, dollar-cost averaging presents other potential benefits.

For relatively early savers, regularly investing in the market builds the investing habit and may help you feel more at ease with investing in general.

For those with large cash balances, it can be a way to invest – or reinvest. Cash tends to lose value over time due to inflation. Especially as interest rates go down, cutting into your cash’s return potential, dollar-cost averaging can help address the emotional challenge of loss aversion, which often has the potential to lead to inaction.

However, dollar cost averaging could also leave some returns on the table when markets are rallying, and it does not mitigate some other investment risks.

Another approach: lump-sum investing

Given that time in the market is often an advantage, investing all your money at once could be more effective than investing it incrementally over time. This all-in approach is known as lump-sum investing.

Lump-sum investing can be an effective strategy given certain market conditions. For example, in a rising market, particular assets will rise in price on average, so investing a lump sum at the outset can enable you to acquire more shares, and therefore more value, compared to investing fixed amounts over time.

But if you invest all your money at once, and the price drops, you may suffer losses that could persist for a few years or longer. Under these conditions, dollar-cost averaging would lead to owning more shares.

With dollar-cost averaging, you can avoid the risk that you’ve mistimed the market.

Choosing the right strategy for you

There’s no one-size-fits all answer when it comes to your investment strategy. Whether dollar-cost averaging is the right strategy for your investment goals depends on multiple factors, including the time horizon to your financial goal, your available cash, market conditions, and investment opportunities.

Your financial advisor can help you weigh these different considerations and make a choice that feels right for you.

There is no assurance any investment strategy will be successful. Investing involves risk including the possible loss of capital. Dollar cost averaging does not assure a profit and does not protect against loss. It involves continuous investment regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue purchases through periods of low-price levels..

Sources: forbes.com; cnbc.com; etrade.com; ndvr.com; aarp.org

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Through the back door to bigger retirement savings

“Backdoor” strategies let you enjoy the benefits of a Roth while getting around some of the limitations.

For people looking to build a balanced retirement savings portfolio, a Roth IRA can serve as a great companion to an employer plan such as a 401(k). But if you earn too much money, you may not qualify to invest fully – or at all – in a Roth IRA. And no matter how much you earn, you may find that contribution limits prevent you from building as fat a fund as you’d like.

Fortunately, there are “backdoor” strategies that may help you get around these limitations. Here’s what you need to know.

Backdoor Roth IRA
Once your modified adjusted gross income (MAGI) tops $161,000 for single filers or $240,000 if married and filing jointly, the IRS begins phasing out your ability to invest directly in a Roth IRA.

But you can contribute after-tax dollars to a traditional IRA, then shortly thereafter convert those funds to a Roth IRA. Because there are no income limits restricting your ability to put after-tax dollars in a regular IRA, you can use this backdoor strategy to build a Roth IRA no matter how much you earn.

You can’t go through this backdoor if you own any IRAs with any pretax dollars in them. The reasons for that are complicated, but it all boils down to two IRS rules (the pro rata rule and the aggregation rule). Consulting your financial advisor and tax professional prior to doing a backdoor Roth is a smart move, to ensure that you’re following every rule.

Mega backdoor Roth IRA
If your problem is not how much you earn but the size of contribution limits, there’s a mega backdoor strategy that could help boost your savings.

For 2024, the limits on how much you can contribute to an IRA are $7,000, or $8,000 if you’re over 50. A mega backdoor strategy may empower you to put away much more than that.

Your current employer must offer a 401(k) or 403(b) plan, and you must pay into it. Whichever of those plans you use must also allow employees to make after-tax contributions into the plan, which count above and beyond employee elective deferral limits.

This is simplest to achieve if your employer offers a Roth option attached to its retirement plans, one that supports in-plan conversions to the Roth – that’s your mega backdoor to a bigger retirement fund.

There are plan-specific limits on how much you may contribute in after-tax dollars to convert into the Roth, and are other rules affecting whether you can apply a backdoor strategy and how big a fund you can build. Again, a chat with your financial and tax advisors is an essential step in any backdoor plan.

Pros of backdoor Roth IRAs:

• You may still be able to fund a Roth IRA even if your income is above IRS limits.
• If you have access to an employer plan with a Roth feature, you may be able to save more than the usual IRA limits.
• Because the money going into the Roth has already been taxed, you can take tax-free distributions in retirement.

Cons of backdoor Roth IRAs:

• Not everyone will be eligible to apply a backdoor or mega backdoor approach.
• Typically, only high earners benefit.
• Both require careful planning with a tax professional.

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

The 10-year rule for retirement accounts: How new guidelines could impact your IRA beneficiaries

In 2020, The SECURE Act changed the IRA inheritance landscape – terrain that would shift again in 2022 with the passage of the SECURE Act 2.0. Over the summer, that new ground was firmed up as the IRS finalized regulations that will go into effect January 1, 2025. Here’s a look at the rules and how they could impact your wealth and wealth transfer planning.

One of the biggest changes brought by the original SECURE Act was the introduction of the “10-year rule” for designated beneficiaries, which sought to stem the amount of time inherited money could grow tax-free.

Implemented in January 2020, the 10-year rule requires most non-spouse beneficiaries to withdraw the entire balance of an inherited IRA within 10 years. It also set parameters around timing, distributions and beneficiary categories.

SECURE Act 1.0:
Required with some exceptions, that the entire balance of an inherited retirement account be distributed within 10 years of the owner’s death; raised the age when RMDs must be taken:

RMDs begin at 72 for those born between July 1, 1949 and 1950.

SECURE Act 2.0:
Maintained the 10-year rule; further raised the age at which RMDs must be taken:

RMDs begin at 73 for those born between 1951 and 1959 and at 75 for those born after 1960.

Key guidelines

Required minimum distributions (RMDs)
The minimum amount that must be withdrawn from a retirement account each year after the account owner reaches the designated age.

Required beginning date (RBD)
The date by/on which the first RMD must be taken. This date is April 1 of the year after an IRA owner reaches their applicable RMD start age (currently 73).

Eligible designated beneficiaries (EDBs)
Beneficiaries who may take distributions over their life expectancy – but may also choose to apply the 10-year rule, depending on their situation, including:

• Spouses
• Individuals not more than 10 years younger than the retirement plan account or IRA owner (this includes an individual older than the IRA owner)
• Minor children of the retirement plan account or IRA owner only (note: these must be children of the account owner – not a grandchild, niece, nephew, etc. – and after they reach age 21, the account must be depleted within 10 years)
• Disabled individuals
• Chronically ill individuals

Non-eligible designated beneficiaries (NEDBs)
Beneficiaries who are subject to the 10-year rule, including:

• Those not falling into any of the above groups, who inherited from someone who died before their RBD.
• Those not falling into any of the above groups, who inherited from someone who died after their RBD.

“The changes will have the biggest impact for beneficiaries of larger accounts, further exacerbated if those beneficiaries are successful themselves and taxed at higher rates. This compressed time period could force distributions into higher taxer brackets,” said Jim Kidney, CPA®, CPWA®, who supervises the financial planning consulting practice at Raymond James. “Before the 10-year rule, the ‘stretch IRA’ strategy enabled inheritors to spread distributions – and the tax impact – across their life expectancies.”

While that possibility is much more limited now, there are alternative strategies for maximizing IRA funds in line with current regulations.

Considerations for IRA owners

Roth conversion
Converting a traditional IRA to a Roth IRA before an account owner reaches their RBD can keep those converted dollars at a lower tax bracket compared to if they were forced to take it as an RMD from the Traditional IRA later. Furthermore, the converted dollars and associated earnings will be tax free to the owner and ultimately to a beneficiary, provided several conditions are met.

Life insurance
A somewhat more involved planning strategy is to consider using distributions from a pre-tax retirement account to purchase life insurance, allowing the policy holder to name as beneficiary the same person they intended to inherit their retirement account.

Considerations for IRA beneficiaries

Inheritance circumstances
The finer points of how a beneficiary inherits an account will impact how the 10-year rule is applied and how RMDs are managed.

If the account owner dies before their RBD:

A non-eligible beneficiary will need to deplete the account by December 31 of the tenth year following the owner’s death but will not have to take RMDs.

If the account owner dies after their RBD:

A non-eligible designated beneficiary will need to take RMDs in years one through nine, with a final distribution in year 10. This RMD requirement is generally based on the single life expectancy of the beneficiary.

Missed RMDs
Because final guidance regarding the 10-year rule has been shared four years after the rule’s introduction, some beneficiaries could have needed to take RMDs in the intervening period. In many of these cases, the IRS is issuing waivers for missed RMDs. This waiver only applies to non-eligible designated beneficiaries under the 10-year rule who inherited from an IRA owner who died after their RBD.

Distribution timing
For beneficiaries in high tax brackets, it’s important to weigh strategic timing options for distribution. For example, if a beneficiary plans to retire five years after inheriting, it may be most efficient to take minimum distributions while they’re still working and increase payments to deplete the account in their first five years of retirement.

While this rule is settled, the climate is sure to change again, inviting new tax and financial planning implications. To keep your footing, work closely with your financial advisor and, when appropriate, experienced estate planning and tax professionals.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Raymond James does not provide tax or legal advice. Please discuss these matters with the appropriate professional. Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59.5 a 10% federal penalty tax may apply.

Rolling from a traditional IRA into a Roth IRA may involve additional taxation. When converted to a Roth, you pay federal income taxes on the converted amount, but no further taxes in the future. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Each converted amount is subject to its own five-year holding period, unless the owner is 59.5 or older.

Investments & Wealth Institute™ (The Institute) is the owner of the certification marks “CPWA®” and “Certified Private Wealth Advisor®.” Use of CPWA and/or Certified Private Wealth Advisor signifies that the user has successfully completed The Institute’s initial and ongoing credentialing requirements for investment management professionals.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Dispelling Medicare misconceptions

Between its parts and plans and supplements, many pre-retirees find Medicare hard to navigate without some guidance. Here are the facts about five common Medicare myths:

Myth: Medicare offers free healthcare.

Fact: The Affordable Care Act allows Medicare beneficiaries an annual wellness check at no charge. Beneficiaries also are entitled to free recommended preventive screenings, such as mammograms and colonoscopies, annual wellness visits and personalized prevention plans. For most people, Medicare Part A – which covers hospital stays and services up to certain limits – does not require a premium. But that’s it. You’re still responsible for copays, coinsurance and deductibles.

Medicare Part B, which covers medically necessary and preventive services, has monthly premiums that start at $174.70 for individuals earning less than $103,000 in 2024 up to $594.00 for individuals earning more than $500,000. Part D, which covers prescriptions, has added surcharges for those making more than $103,000.

Many Medicare beneficiaries also purchase a Medigap supplemental insurance plan to help cover out-of-pocket costs.

Myth: Medicare covers everything.

Fact: Not true. Dental, vision and hearing are not covered by Medicare. Prescription drug coverage is only offered through Part D and Medicare Advantage plans. What’s more, you are responsible for the premiums, deductibles and copayments associated with the coverage you choose.

Myth: A Medicare Advantage plan or Part D coverage will fill gaps in my coverage.

Fact: Medicare can be complicated. Medicare Advantage plans – sometimes known as Part C – offer optional coverage through private insurance companies. Many of these plans cover dental, vision, hearing and prescription drug costs not covered by Parts A and B, which the government sometimes calls “Original Medicare.” However, the plans may have limited networks to keep costs down and beneficiaries will have cost-sharing structures that may vary with different plans.

Part D is optional prescription drug coverage that has myriad variables, such as premiums, copays, coverage gaps and coinsurance. You can choose which prescription drug plan best fits your needs.

Myth: Medicare may not cover me.

Fact: One major advantage of original Medicare is that you can’t be rejected for coverage or be charged higher premiums because you’re sick. However, if you’re a high earner, you’ll pay higher premiums for Medicare Part B and Part D. In addition, the Affordable Care Act now prohibits discrimination based on a pre-existing condition. However, private “medigap plans” can have underwriting after the initial guaranteed issue period.

Myth: I will be notified when it’s time to sign up for Medicare.

Fact: No. Unless you are already receiving Social Security benefits, you must apply for Medicare. You will not receive any official notification on when or how to enroll.

If you’re over 65, still working and covered by employer healthcare, you may want to delay enrollment in Part B to avoid paying for coverage you don’t need. Once you stop working, you must enroll within eight months to avoid permanent late penalties. COBRA Or retiree benefits are not considered creditable coverage and you will be penalized if you have COBRA and sign up for Medicare past the age of 65.

For those without employer coverage, it’s a good idea to sign up when you’re first eligible for Part B.

Source: Medicare.gov

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

As we approach new economic changes, the "what-if monster" rears its head again. This time, we're hearing worried whispers, "What if the Fed changes interest rates?"

What happens if the FED decides to raise, lower, or hold the interest rate? Any change, or even stasis, could potentially have an impact on your finances. After all, the FED plays a critical role in the economy, and interest rates have far-reaching consequences. It's only natural to worry, but with preparation for financial stability, you can make sure the "what-if monster" doesn't keep you up at night.

How the Fed Affects Interest Rates

The Federal Reserve, or "The Fed," uses interest rates as a tool to keep the economy healthy. Interest rates can be used to control inflation, stimulate economic growth, or keep a hot economy from overheating. In the past few years, interest rates have been increasing rapidly to combat inflation. If the Fed changes interest rates, what next?

Will the Fed raise, lower, or hold the rate — and what effects might these choices have?

• Rate Increases: If the interest rates rise, borrowing becomes more expensive. This can impact mortgages, credit cards, and business loans. However, it also means higher returns for savings and interest-bearing accounts.
• Rate Decreases: If the interest rate drops, it can boost economic activity because borrowing becomes more affordable. However, it will lower returns on savings and bonds.
• Holding Rates Steady: If interest rates remain steady, this can indicate economic stability. However, uncertainty can still cause fluctuations in other aspects of the market.

What It Means for Investments If the Fed Changes Interest Rates

Fed decisions regarding the interest rate are often accompanied by market volatility. While that volatility can be the cause or result, long-term investment strategies work best when investors hold fast. Long-term strategies are crafted with volatility as a known factor. Markets may rise and fall, and interest rates may fluctuate, but long-term strategies are designed for profitability and stability through many shifting economic trends.

• Stocks: Rate hikes increase borrowing costs, which can cause short-term dips in stock prices. However, markets typically recover when companies adapt to new economic conditions.
• Bonds: Higher rates reduce bond values, but lower rates increase them. New bonds may also offer higher yields at the new rate. Diversification can help to offset fluctuations in bond values over time.
• Real Estate: Higher interest rates impact mortgage affordability. This may dampen buyer activity in housing markets, but it simultaneously opens new opportunities for buyers in the long run once the spikes in demand settle.

The most important thing to remember is that focusing on long-term goals will result in financial stability. You won't need to react emotionally to short-term market changes if you have a diversified portfolio built on long-term investment strategies.

Preparing for Uncertainty

Although economists often have well-developed theories, no one can accurately foresee the Fed's next move. However, you can take steps to fortify your financial plans and ensure you are ready to weather uncertain market conditions.

1. Review Your Portfolio: At CrossleyShear, we specialize in helping clients build diversified portfolios tailored to their unique goals and risk tolerance. Our personalized approach is designed to strategically align investments to support your financial success.
2. Strengthen Your Emergency Fund: In case rates go up, build up a cash reserve to prepare for higher costs and unexpected expenses. This provides long-term stability and short-term well-being.
3. Evaluate Debt: Interest rates can have a significant impact on debt conditions. If you have variable-rate loans or lines of credit, explore your options for refinancing or paying down debt to help reduce your risk of higher interest costs.
4. Focus on Goals: Short-term changes to the interest rate are less worrying when you build long-term financial plans and goals built to withstand unpredictable changes to market conditions.

Keep the "What-if Monster" Quiet

When you can't predict changes to the interest rate, it's natural to feel unsettled. However, these changes don't have to impact your long-term financial plans. The key to financial confidence and economic stability is to be prepared. A solid strategy and our team of trusted financial advisors can help you face market uncertainty confidently.

If you worry about the impact of potential rate changes, we are here to help. Let's review your plan and ensure it's built to weather any shifts the Fed might bring. Don't let the "what-if monster" keep you up at night. Contact us today to build a plan that gives you peace of mind in any financial landscape.

Any opinions are those of Dale Crossley and Evan Shear and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification.