9 compelling reasons to consider a Roth IRA

Get tax-free growth potential, tax-free withdrawals, and even more.

Fidelity Viewpoints

Key takeaways

• Contributions to a Roth IRA are made on an after-tax basis. You can withdraw your contributions at any time and any potential earnings can be withdrawn tax-free¹ in retirement.
• You aren't required to take distributions from a Roth IRA as you are with a traditional IRA.
• Contributing to a Roth IRA gives you tax flexibility in retirement.

Do you want to help lower your taxes in retirement and increase your retirement savings? A Roth IRA, with its tax-free growth potential and tax-free withdrawals for you and your heirs, is a way you may be able to do just that (as long as certain requirements are met).¹ And those are just a few of the benefits of a Roth IRA.

One important note: Not everyone can contribute to a Roth IRA, because of IRS income limits. If your income is over the limits, you still may be able to have one by converting existing money in a traditional IRA or other retirement savings account. (See the section "If you earn too much to contribute," at the end of the article.)

1. Money may grow tax-free; withdrawals are tax-free, too

You contribute money that has already been taxed (after-tax dollars) to a Roth IRA. There's no tax deduction as there can be with a traditional IRA. But, any growth or earnings from the investments in the account—and any distributions you take out in retirement—are free from federal taxes (and may also be free from state and local taxes too), with a few conditions.¹

2. There are no required minimum distributions

Roth IRAs do not have required minimum distributions (RMDs) for the original owner. Traditional IRAs and, generally, 403(b)s, Roth and traditional 401(k)s, and other employer-sponsored retirement savings plans do. If you don't need your distributions for essential expenses, RMDs may be hard to keep track of. The RMDs have to be calculated and withdrawn each year, and may result in taxable income. Because a Roth IRA eliminates the need to take RMDs, it may also enable you to pass on more of your retirement savings to your heirs (see below).

3. Leave tax-free money to heirs

In many cases, a Roth IRA has legacy and estate planning benefits, but you need to consider the pros and cons—which can be subtle and complex. Be sure to consult an attorney or estate planning expert before attempting to use Roth IRAs as part of an estate plan. While RMDs are required for inherited Roth IRAs, as they are for inherited traditional IRAs, distributions from inherited Roth IRAs generally remain tax-free.

4. Tax flexibility in retirement

You've already paid the taxes on the contributions to a Roth IRA, so as long as you follow the rules, you get to take out your money tax-free. Mixing how you take withdrawals between your traditional IRAs and 401(k)s, or other qualified accounts, and Roth IRAs may enable you to better manage your overall income tax liability in retirement. You could, for example, take withdrawals from a traditional IRA until your taxable income reaches the top of a tax bracket, and then take additional money you need from a Roth IRA.

5. Help reduce or even avoid the Medicare surtax

A Roth IRA may potentially help limit your exposure to the Medicare surtax on net investment income. This is because qualified withdrawals from a Roth IRA don't count toward the modified adjusted gross income (MAGI) threshold that determines the surtax. RMDs from traditional (i.e., pre-tax) accounts such as a workplace retirement plan—like a traditional 401(k)—or a traditional IRA, are included in MAGI and do count toward the MAGI threshold for the surtax. So depending on your income in retirement, RMDs could expose you to the Medicare surtax, and using Roth accounts might help you avoid it.

6. Hedge against future tax hikes

Will tax rates rise in the future? There's no way to know for certain, but the top federal income tax rate remains far below its historical highs, and if you think it might go up again, a Roth IRA may make sense.

7. Use your contributions at any time

A Roth IRA enables you to take out 100% of what you have contributed at any time and for any reason, with no taxes or penalties. Only earnings and converted balances in the Roth IRA are subject to restrictions on withdrawals. Generally, withdrawals from a Roth IRA are considered to come from contributions first. Distributions from converted balances and earnings—which can be taxable and/or subject to penalties if the conditions are not met—begin only when all contributions have been withdrawn.

8. If you're older, you can continue to contribute as long as you work

As long as you have earned compensation, whether it is a regular paycheck or 1099 income for contract work, you can contribute to a Roth IRA—no matter how old you are. There is no age requirement for contributions, but you must be within the income limits in order to contribute to Roth IRA.

Learn more on Fidelity.com: IRA contribution limits

9. If you're young, your income is likely to rise

Generally speaking, the younger you are, the greater the chance that your income will be higher when you retire than it is now. For instance, if you're under age 30, it's possible that your income and spending during retirement will be significantly higher than it is now, at the beginning of your career. And the greater the difference between your income now and your income in retirement, the more advantageous a Roth account can be.

If you earn too much to contribute

In order to contribute to a Roth IRA, you must have employment compensation, and there are also income limits. If your income (as measured by MAGI) is over the IRS limits, the only way you can take advantage of a Roth IRA is by converting money from an existing retirement account, such as a traditional IRA.² There is a cost, though. You'll generally need to pay taxes on what you convert, but if you have made after-tax contributions to a traditional account, some or all of your conversion may not be taxable. The rules are complex, so if you have made after-tax contributions to a traditional account and you're interested in conversion, be sure to consult with a tax advisor.

It comes down to taxes

No matter what your age, because a Roth IRA may improve your tax picture, it makes sense to take the time to see whether you would benefit from one.

6 habits of successful investors

Planning, consistency, and sound fundamentals can improve results.

Fidelity Viewpoints

The power of investing to build wealth and achieve long-term goals has been proven time and again. But not everyone takes full advantage. What separates the most successful investors from the rest?

Here are the 6 habits of successful investors that we've witnessed over the years—and how to make them work for you.

Develop a long-term plan—and stick with it

Tall tales about the lucky investor who hit it big with a stock idea may be entertaining. But for most people, investing isn't about getting rich quick, or even making as much money as possible. It’s about reaching their goals—be they owning a home, sending a kid to college, or having the retirement they have long imagined.

Successful investors know that this means developing a plan—and sticking with it. Why does planning matter? Because it works.

A Fidelity analysis of 401(k) participants found that engaging in planning, either with a Fidelity representative or using Fidelity's online tools, helped some people identify opportunities to improve their plans, and take action.¹

Roughly 40% of the people who took the time to look at their plan decided to make changes to their saving or investing strategy. The most common change was to increase savings, with an average increase of roughly 2.6% of pay.² The next most common action was a change in investments (see illustration below).

A plan doesn't have to be fancy or expensive. You can do it alone, or with the help of a financial professional or an online tool like those in Fidelity's Planning & Guidance Center. Either way, by slowing down, focusing on your goals, and making a plan, you are taking the first and most important step.

Be a supersaver

While lots of attention is paid to how much your investments earn, the most important factors that determine your financial future may be how much and how often you save.

Fidelity's Retirement Savings Assessment analyzed financial information for more than 4,500 families and found that on average, the single most powerful change that millennials and Gen Xers could make to improve their retirement outlooks was saving more. For workers closer to retirement, a combination of delaying retirement and saving more would have made the biggest difference, on average.²

How much should you save for retirement? As a general rule of thumb, Fidelity suggests putting at least 15% of your income each year, which includes any employer match, into a tax-advantaged retirement account, though your individual situation may be different.

"You can’t control the markets, but you can control how much you save," says Fidelity vice president and CFP^® Ann Dowd. "Saving enough, and saving consistently, are important habits to achieve long-term financial goals."

Stick with your plan, despite volatility

When the value of your investments falls significantly, it's only human to want to run for shelter due to our inherent aversion to suffering losses. And it can certainly feel better to stop putting additional money to work in the market. But the best investors understand their time horizon, financial capacity for losses, and emotional tolerance for market ups and downs, and they maintain an allocation of stocks they can live with in good markets and bad.

Remember the financial crisis of late 2008 and early 2009, when stocks dropped nearly 50%? Selling at the top and buying at the bottom would have been ideal, but unfortunately that kind of market timing is nearly impossible. In fact, a Fidelity study of 3.9 million workplace savers found that those who stayed invested in the stock market during the downturn far outpaced those who went to the sidelines.³

From the fourth quarter of 2008 through the end of 2015, investors who stayed in the markets saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%. That's twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.³ More than 25% of the investors who sold out of stocks during that downturn never got back into the market—missing out on all of the recovery and gains of the following years. The vast majority of 401(k) participants did not make any asset allocation changes during the market downturn, but for those who did it was a fateful decision that had a lasting impact.

If you are tempted to move to cash when the stock market plunges, consider a more balanced, less volatile asset mix that you can stick with. Imagine 2 hypothetical investors—an investor who panicked, slashed his equity allocation from 90% to 20% during the bear markets in 2002 and 2008, and subsequently waited until the market recovered before moving his stock allocation back to a target level of 90%; and an investor who stayed the course during the bear markets with a 60%/40% allocation of stocks and bonds.⁴

As you can see below, the disciplined investor significantly outperformed the more aggressive investor who pulled back his equity exposure radically as the market fell. Assuming a $100,000 starting portfolio 20 years ago, the patient investor with the 60% stock allocation would have had about $540,000 by October 2018, versus $410,000 for the impatient investor. In dollar terms, a difference of $130,000.

Be diversified

An old adage says that there is no free lunch in investing, meaning that if you want to increase potential returns, you have to accept more potential risk. But diversification is often said to be the exception to the rule—a free lunch that lets you improve the potential trade-off between risk and reward.

Successful investors know that diversification can help control risk—and their own emotions. Consider the performance of 3 hypothetical portfolios in the wake of the 2008–2009 financial crisis: a diversified portfolio of 70% stocks, 25% bonds, and 5% short-term investments; a 100% stock portfolio; and an all-cash portfolio.

By the end of February 2009, both the all-stock and the diversified portfolios would have declined sharply (50% and 35%, respectively), while the all-cash portfolio would have risen 1.6%. 5 years after the bottom, the all-stock portfolio would have been the clear winner: up 162%, versus 100% for the diversified portfolio and just 0.3% for the cash portfolio. But over a longer period—from January 2008 through February 2014—the diversified and all-stock portfolios would have been neck-and-neck: up 30% and 32%, respectively.

This is what diversification is about. It will not maximize gains in rising stock markets, but it can capture a substantial portion of the gains over the longer term, with less volatility than just investing in stocks. That smoother ride will likely make it easier for you to stay the course when the market shakes, rattles, and rolls.

A good habit is to diversify among stocks, bonds, and cash, but also within those categories and among investment types. Diversification cannot guarantee gains, or that you won’t experience a loss, but does aim to provide a reasonable trade-off of risk and reward for your personal situation. On the stock front, consider diversifying across regions, sectors, investment styles (value and growth) and size (small-, mid-, and large-cap stocks). On the bond front, consider diversifying across different credit qualities, maturities, and issuers.

Consider low-fee investment products that offer good value

Savvy investors know they can't control the market—or even the success of the fund managers they choose. What they can control is costs. A study by independent research company Morningstar found that expense ratios are the most reliable predictor of future fund performance—in terms of total return, and future risk-adjusted return ratings. (Read details of the study.) Fidelity research has also shown that picking low-cost funds is one way to improve average historical results of large-cap stock funds relative to comparable index funds.

Fidelity has also found great variation among brokers in terms of commission and execution—by comparing the executed price of a security with the best bid or offer at the time of the trade. The cost of trading impacts your returns. Learn more about using price improvement for trading savings.

Focus on generating after-tax returns

While investors may spend a lot of time thinking about what parts of the market to invest in, successful investors know that's not the end of the story. They focus not just on what they make, but what they keep after taxes. That's why it is important to consider the investment account type and the tax characteristics of the investments that you have.

Accounts that offer tax benefits, like 401(k)s, IRAs, and certain annuities, can change to have the potential to help generate higher after-tax returns. This is what is known as "account location"—how much of your money to put into different types of accounts, based on each account’s respective tax treatment. Then consider "asset location"—which type of investments you keep in each account, based on the tax efficiency of the investment and the tax treatment of the account type.

Consider putting the least tax-efficient investments (for example, taxable bonds whose interest payments are taxed at relatively high ordinary income tax rates) in tax-deferred accounts like 401(k)s and IRAs. Put more tax-efficient investments (low-turnover funds like index funds or ETFs, and municipal bonds, where interest is typically free from federal income tax) in taxable accounts.

Read Viewpoints on Fidelity.com: Why asset location matters

Consider the example in the chart. A hypothetical $250,000 portfolio is invested and returns 6% annually for 20 years. The different tax treatments of a brokerage, annuity, and tax-deferred IRA, along with fees for those accounts, could create a significant difference in the final value of the investment.

The bottom line

There is a lot of complexity in the financial world, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and beware of taxes, you will have adopted some of the key traits that may lead to investing success.

Retirement plans for small businesses

Understanding your options may help you save more for retirement and lower taxes.

Fidelity Viewpoints

Key takeaways

• Do you have, or expect to have, any "common law employees"?
• Do you want your employees to be able to contribute their own money too?
• Which is a higher priority—maximum contributions or simple administration?

As a small-business owner, you're probably used to handling a lot of responsibility—everything from drawing up detailed business plans to creating a budget. So it should come as no surprise that funding your retirement will likely fall on your shoulders.

But what type of retirement plan is the right fit for your business? There are several types to choose from and the options can be confusing. For example, some small-business retirement plans are better for sole proprietors, while others may be more appropriate for businesses with up to 100 employees.

"Many small-business owners say they want to set up a 401(k) plan because that is the plan they are most familiar with," says Ken Hevert, senior vice president, retirement products, at Fidelity. "However, after reviewing their situation, small-business owners often conclude that perhaps another plan type, such as a SEP IRA or a Self-Employed 401(k), may be more appropriate."

Basically, there are 4 types of retirement plans that small-business owners might consider:

1. Simplified Employee Pension Plan (SEP IRA)
2. Savings Incentive Match Plan for Employees (SIMPLE IRA)
3. Self-Employed 401(k) plan
4. 401(k) plan (better for larger companies given setup costs, administration, fiduciary responsibilities, etc.)

We will focus only on the first 3, which are generally more suitable for very small businesses—typically, 100 employees or less. Each of these plans has different characteristics—such as the ability to cover employees, contribution limits, and administrative responsibility, to name a few. To choose the right plan for your business, you need to understand the nuances of these plans and match them to your priorities (e.g., higher contributions or simpler administration).

Understanding the differences in the plan types is an important exercise. If you have been operating a plan that doesn't match your business needs, you could be missing out on important tax benefits, or possibly making mistakes regarding employee contributions.

Why have a small-business retirement plan?

Here are 3 very compelling reasons:

• Your plan not only helps secure your future—it may be the primary way your employees can help secure theirs.
• Offering a plan helps make your business competitive when it comes to attracting and keeping good employees.
• There are potential tax benefits to offering a plan, because plan contributions for the business owner are deductible as a business expense.

Consider your options

Each of the 3 small-business retirement plans may offer certain tax advantages, including:

• Tax-deferred growth potential, which allows contributions to grow without being reduced by current taxes
• The potential to deduct employer contributions as a business expense
• A tax credit of up to $500 for certain expenses incurred while starting and maintaining the plan each of the first 3 years, if this is your first time offering a plan

But this is where the similarities end, particularly about whether the plans cover employees and, if so, who is responsible for making contributions.

• A SEP IRA is for self-employed people and small-business owners with any number of employees. Contributions are made by the employer only and are tax-deductible as a business expense.
• A SIMPLE IRA is for businesses with 100 or fewer employees and is funded by tax-deductible employer contributions and pretax employee contributions [similar to a 401(k) plan].
• A Self-Employed 401(k) plan is a tax-deferred retirement plan for self-employed individuals that offers the most generous contribution limits of the 3 plans, but is suitable only for businesses with no "common law" employees, meaning any person working for the business who does not have an ownership interest.

Choosing the right plan takes careful consideration

"If you know what you are trying to accomplish with a retirement plan, it may be relatively straightforward to determine which plan is most appropriate for the business," Hevert says. "For example, is ease of administration an important consideration? Is it critical that employees be able to contribute to the plan? Knowing what you want and need ahead of time is a key component, because each plan has its advantages and disadvantages."

The chart below compares the 3 plans in detail.

Fidelity's small-business retirement plans at a glance

Matching a retirement plan to your business

As you consider the specific features of each plan, it's important to remember that there are always trade-offs. Think very carefully about your priorities.

Here are some factors that may be helpful as you consider the right retirement plan for your business:

Covering employees
If you have no employees other than you and your spouse (or business partner) and want the highest possible contribution limits, consider a Self-Employed 401(k). If, however, additional employees are a possibility in the future, you may need to choose between a SEP IRA and a SIMPLE IRA, both of which can cover employees. Then it's a matter of deciding whether you want to fund your employees' accounts by yourself (SEP) or you want your employees to contribute (SIMPLE).

Contributions: How much and who pays?
Next, think about how much flexibility you want in terms of contribution limits and who is responsible for making such contributions.

A Self-Employed 401(k) plan offers the largest possible contributions because it recognizes that self-employed people wear 2 hats—as an employee and as an employer. In fact, as an employee, you can make elective deferrals of up to $19,000 for 2019. As an employer, you can make a profit-sharing contribution of up to 25% of compensation, up to a maximum of $56,000 for 2019. (Total contributions as employer and employee cannot exceed $56,000 for 2019.) The plan also allows catch-up contributions of up to $6,000 for those who are age 50 or older in 2019. You are also eligible for added tax breaks. If your business is not incorporated, you can generally deduct contributions for yourself from your personal income. If your business is incorporated, the corporation can generally deduct the contributions as a business expense.

If you have a business with variable income and you want more flexibility, you might consider a SEP IRA. Just remember that, if you have employees in years you contribute, you have to contribute the same percentage for them as you contribute for yourself. As an employer, you can contribute up to 25% of compensation, up to a maximum of $56,000 in 2019. And you don’t have to contribute every year.

On the other hand, if you want your employees to help fund their retirement account, you may want to consider a SIMPLE IRA, available to businesses with up to 100 employees. With a SIMPLE IRA, employees can make salary deferral contributions of up to 100% of compensation, not to exceed $13,000 in 2019. You, as the employer, must also contribute to their accounts—you can either match the employees' contributions dollar for dollar up to 3% of compensation (contributions can be reduced to as little as 1% in any 2 out of 5 years), or contribute 2% of each eligible employee's compensation. The SIMPLE IRA also allows employees age 50 or older to make catch-up contributions of up to $3,000 in 2019.

Time and money
The good news is that all 3 of these plans are relatively low cost and easy to administer. Neither the SEP IRA nor the SIMPLE IRA requires annual plan filings with the IRS, just certain employee notifications. The Self-Employed 401(k) plan involves a little more effort, requiring an annual Form 5500 filing once plan assets exceed $250,000. To make the most of this retirement savings opportunity—both for yourself and your employees—make sure it's the right plan for your small business before you set one up.

7 things you may not know about IRAs

Make sure you aren't overlooking some strategies and potential tax benefits.

Fidelity Viewpoints

Key takeaways

• IRAs are available to nonworking spouses.
• IRAs allow a "catch-up" contribution of $1,000 for those 50 and up.
• IRAs can be established on behalf of minors with earned income.

It's the time of year when IRA contributions are on many people's minds—especially those doing their tax returns and looking for a deduction. The deadline for making IRA contributions for the 2018 tax year is April 15, 2019. Residents of Massachusetts and Maine have until April 17, 2019 to make 2018 IRA contributions.

Chances are, there may be a few things you don't know about IRAs. Here are 7 commonly overlooked facts about IRAs.

1. A nonworking spouse can open and contribute to an IRA

A non-wage-earning spouse can save for retirement too. Provided the other spouse is working and the couple files a joint federal income tax return, the nonworking spouse can open and contribute to their own traditional or Roth IRA. A nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family. For 2018 the IRA contribution limit is $5,500, or $6,500 for those over age 50. For 2019, the limit is $6,000, or $7,000 if you're over 50. The amount of your combined contributions can't be more than the taxable compensation reported on your joint return.

2. Even if you don't qualify for tax-deductible contributions, you can still have an IRA

If you're covered by a retirement savings plan at work—like a 401(k) or 403(b)—and your 2018 or 2019 modified adjusted gross income (MAGI) exceeds applicable income limits, your contribution to a traditional IRA might not be tax-deductible.¹ But getting a current-year tax deduction isn't the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money and earnings to grow tax-free until the time of withdrawal. You also have the option of converting those nondeductible contributions to a Roth IRA (see No. 7, below).

3. After 2018, alimony will not count as earned income to the recipient

Unless the new tax rule changes, you will likely not be able to use money received as alimony to fund an IRA after tax year 2018.

That's due to changes in the law introduced by the Tax Cuts and Jobs Act of 2017: After 2018, alimony payments will no longer be considered taxable income to the recipient—and the source of IRA contributions must be taxable earned income.

4. Self-employed, freelancer, side-gigger? Save even more with a SEP IRA

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.

Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA. The SEP IRA is similar to a traditional IRA where contributions may be tax-deductible—but the SEP IRA has a much higher contribution limit. The amount you, as the employer, can put in varies based on your earned income. For SEP IRAs, you can contribute up to 25% of any employee's eligible compensation up to a $55,000 limit for 2018 contributions and $56,000 for 2019. Self-employed people can contribute up to 20%² of eligible compensation to their own account. The deadline to set up the account is the tax deadline—so for 2018 it will be April 15, 2018 (for a calendar-year filer). But, if you get an extension for filing your tax return, you have until the end of the extension period to set up the account or deposit contributions.

5. "Catch-up" contributions can help those age 50 or older save more

If you're age 50 or older, you can save an additional $1,000 in a traditional or Roth IRA each year. This is a great way to make up for any lost savings periods and make sure that you are saving the maximum amount allowable for retirement. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $44,000 more in your account than someone who didn't take advantage of the catch-up contribution.³

6. You can open a Roth IRA for a child who has taxable earned income⁴

Helping a young person fund an IRA—especially a Roth IRA—can be a great way to give them a head start on saving for retirement. That's because the longer the timeline, the greater the benefit of tax-free earnings. Although it might be nearly impossible to persuade a teenager with income from mowing lawns or babysitting to put part of it in a retirement account, gifting money to cover the contribution to a child or grandchild can be the answer—that way they can keep all of their earnings and still have something to save. The contribution can't exceed the amount the child actually earns, and even if you hit the maximum annual contribution amount of $6,000 (for 2019), that's still well below the annual gift tax exemption ($15,000 per person in 2018 and 2019).

The Fidelity Roth IRA for Kids, specifically for minors, is a custodial IRA. This type of account is managed by an adult until the child reaches the appropriate age for the account to be transferred into a regular Roth IRA in their name. This age varies by state. Bear in mind that once the account has been transferred, the account's new owner would be able to withdraw assets from it whenever they wished, so be sure to educate your child about the benefits of allowing it to grow over time and about the rules that govern Roth IRAs.

7. Even if you exceed the income limits, you might still be able to have a Roth IRA

Roth IRAs can be a great way to achieve tax diversification in retirement. Distributions of contributions are available any time without tax or penalty, all qualified withdrawals are tax-free, and you don't have to start taking required minimum distributions at age 70½.⁵ But some taxpayers make the mistake of thinking that a Roth IRA isn't available to them if they exceed the income limits.⁶ In reality, you can still establish a Roth IRA by converting a traditional IRA, regardless of your income level.

If you don't have a traditional IRA you're still not out of luck. It's possible to open a traditional IRA and make nondeductible contributions, which aren't restricted by income, then convert those assets to a Roth IRA. If you have no other traditional IRA assets, the only tax you'll owe is on the account earnings—if any—between the time of the contribution and the conversion.

However, if you do have any other IRAs, you'll need to pay close attention to the tax consequences. That's because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account.

Read Viewpoints on Fidelity.com: Answers to Roth conversion questions

Key takeaways

• Housing is primarily a lifestyle choice, not an investment. But unlocking equity and lowering the ongoing costs of ownership can improve finances.
• To overcome high transaction costs, aim to downsize by 25% or more if you are moving to improve your finances.
• Consider downsizing early in your retirement to maximize the benefit of cost savings.

When you buy a place to live, people often remind you it could be the biggest investment you will ever make. But a home is a lot more than just an investment. A home is shelter, to start with, but also an important part of your lifestyle, memories, and more. The many roles of a home make converting the value of your property into income a lot more complex than selling a stock and tallying up any profits.

Still, for many Americans, their home is their most valuable asset and a large portion of their total wealth (see chart). It’s also a big part of spending—accounting for almost a third of all money spent. That makes it worth considering the financial side of homeownership, along with the other facets of your home, as you build your retirement plan. For many people looking to decrease the risk of running out of money in retirement, deciding to work longer and choosing a home are the decisions with the greatest potential impacts.

If you want to consider using home equity, your options include a reverse mortgage and a home equity line of credit. But perhaps the most common approaches to reducing your housing expenses are downsizing to a smaller home in the same area, or relocating to a less expensive area, or combining elements of both—relocating to a smaller home in a less expensive area.

To really understand the financial impact a move might have, you have to consider more than just the potential sale price or equity in your home. The price of a new home, the taxes and costs connected with the transaction, changes in the cost of ownership, the cost of living (COL) in the new area, and other factors will all help determine just how much of a difference a move could make for your retirement income.

"Housing plays a huge role in personal finances and wealth," says Andrey Lyalko, vice president at Fidelity. "The impact of reduced costs on retirement planning, and the potential to walk away with some cash from the sale of a home, make housing a key part of a retirement income strategy."

The overlooked impact of costs

If you have owned a home for a long time, you may have seen the value of your home rise significantly. What’s more, you might have built up equity as you paid off a lot of your mortgage. If you sell and walk away with some cash, you can convert that into a stream of income. But it is easy to overlook the common costs of a real estate transaction. Along with the price of a new home, realtor fees, closing costs, moving fees, and the money that goes into redecorating all take bites out of your sale price. Estimates suggest these costs could average as much as 13% of the sale price of a home.

The impact of transaction and moving costs on profits will be even greater. Consider the sale of a home worth $500,000 and then a purchase of another home for $400,000. If costs add up to 13% of your sale price of $500,000, you have spent $65,000 by the time you are moved into your new home. That’s 65% of the profit you were going to use for retirement.

To overcome the high costs of moving, we suggest looking for a house that costs at least 25% less than your current home. This big reduction in price should mean that the savings from the move can ultimately be worth more than the added expenses. A 25% reduction may still not leave you with a huge cash inflow, but it is not the only benefit to downsizing.

Some major expenses drop when you move to a less expensive residence. Taxes, insurance, utilities, and maintenance costs all tend to scale with the price of a home, as they may average more than 4% of the sale price of a home each year. Reducing those ongoing costs could go a long way toward improving your retirement picture. If you relocate, the potential cost-of-living changes can make a big difference too.

"People tend to focus on differences in the prices of homes, while transaction costs and ongoing expenses tend to be overlooked," says Lyalko. "But for a retirement plan, those lower costs can make a big difference, sometimes far more than the lump sum realized by selling."

A case study: A move to save

To see just how much of an impact a move might have, let’s look at a hypothetical example. A couple is able to generate approximately $5,000 per month in retirement income and they are finding it is not providing the lifestyle they want. However, they own a home worth $750,000 with no mortgage. Let’s suppose they sell the house, and buy a smaller home for $500,000, again without a mortgage. The deal would produce a $250,000 gross profit, but they need to make changes to the new house, buy furniture, pay the realtor, the taxes, the movers, etc. We estimate that this would end up costing about $87,500, or roughly a third of the profit, leaving them with a $162,500 lump sum.

What does that mean for their retirement income? Assume that their taxes and cost of living stay the same. Also assume that they want to make their savings last, so they decide to spend about 4% of their savings each year. In this case, the lump sum could mean an extra $500 a month for the rest of their lives. But, the move will also result in lower ongoing expenses. Repairs, insurance, heating, cooling, taxes... all of those costs should drop as well. In fact, we estimate that these cost savings could total about $700 per month. That means the couple’s retirement cash flow could improve by an estimated total of $1,200 a month.

Taking it one step further, what if they bought a $500,000 home in a part of the country with a lower cost of living? Let’s suppose they relocated to another state with a 11% lower cost of living. The decreased costs in the new location could allow them to improve their standard of living by the equivalent of $2,200 a month. These additional monthly savings could mean even more in a place that costs less, and so could their existing retirement income. In total, the increased retirement income from the sale of the home, combined with the lower cost of living, could feel like a $7,200-a-month lifestyle. Put another way, this couple could increase the purchasing power of their retirement income by almost 50%, by downsizing and relocating.

Bottom line

Where to live is more than a financial decision. Leaving your memories may be difficult. Family and friends will likely also influence where you relocate in retirement. However, because housing is such a large part of our expenses and such a large store of wealth for so many people, it can be a powerful lever when it comes to the financial side of retirement. That’s why it’s critical to consider carefully where you will live as you map out your retirement income plan.

5 important rollover questions

Consider cost, investments, services, and convenience.

Fidelity Viewpoints

Key takeaways

• When you leave a job, having a plan for your 401(k) can help ensure that your retirement savings continue to work hard for your future.
• As you think about your options, these considerations may be top of mind: investment choice, fees and expenses, services, convenience, and when you'll need the money.

Your retirement savings are important. After all, the money you've saved will likely provide a large part of your income in the future. Managing your savings well will mean more choices for you after you stop working.

Take your time to make good decisions for an old 401(k). Before you make any moves, take stock of your options and choose the best one for you.

• Leave the money in your previous employer's plan
• Roll your savings to your new employer's plan (if permitted)
• Roll your savings to an IRA
• Cash out your savings and close your account

Most people who are still working should eliminate cashing out as a choice: Consider it only if you desperately need money to pay immediate, essential expenses. The reason? Taxes and penalties make cashing out enormously expensive. You'll owe income taxes on withdrawals from pre-tax funds, and typically you must pay an additional 10% penalty if you are under age 59½.

Even if you are already over that age and in retirement, there are still good reasons to keep your retirement savings in a tax-advantaged account—namely the benefit of deferring tax payments and keeping your money invested for your future.

Here are important things to consider as you decide which option may be right for you:

1. What are my investment choices?

Not all retirement accounts provide the same investment options. Some 401(k)s and 403(b)s offer a menu of investments, chosen by the plan's administrator—typically, mutual funds. Some include lower-cost, custom funds not available outside the employer-sponsored plan, and company stock. Plus, some employer-sponsored plans offer a self-directed brokerage option that allows access to brokerage investment options through the plan. Brokerage IRAs typically provide access to a wide variety of mutual funds, exchange-traded funds, stocks, bonds, and other investments. Whatever you decide, make sure that you choose an account option that meets your investment needs.

2. How much are fees and expenses?

Every retirement account—an employer-sponsored plan like a 401(k) or 403(b), or an IRA—has costs, such as administrative fees for maintaining the account, management expenses charged by each investment, and transaction costs associated with trades and other account activity.

After you leave your job, some 401(k) or 403(b) plans may also charge annual or quarterly account recordkeeping fees. On the other hand, large employers might offer institutional-class shares that are less expensive than shares of the same mutual fund in an IRA.

On the IRA side, some providers offer an account with no maintenance fee or annual cost. But there are costs associated with investing in an IRA. You could choose low-cost ETFs, but still be charged a fee for buying and selling them. There may also be costs associated with the purchase of mutual funds. If you're interested in trading stocks, there are costs associated with that as well.

Be sure to examine the total costs associated with each option carefully—even a small difference in fees can have a big impact.

3. What services do I care about?

Many employer-sponsored plans and IRA providers offer online tools that provide education and advice to help you plan and manage your investments. Managed account solutions that provide investment advisory services to help you invest more effectively have also become more common across many employer-sponsored plans and IRA offerings. Other examples of services you may want to consider when deciding what to do with an old 401(k) are check-writing and wire transfers.

4. When do I expect to need the money?

Workplace retirement plans and IRAs may have different rules for withdrawals. For example, sometimes a 401(k) or 403(b) won't be subject to required minimum distributions (RMDs) while you're still working.

• If you plan to continue working after age 70½, you might consider a rollover to your new employer's plan.
• If you're age 55 or older when you leave your job, and you don't plan to go back to work, you might consider leaving the money in your old 401(k), which may allow you to take penalty-free distributions, even if you haven't reached 59½ yet. (Taxes will still apply.) You should contact your plan administrator for rules governing your plan.

5. Is convenience important?

Having your retirement savings in one place could make it easier to track and manage your investments, evaluate fees, and manage distributions in retirement—particularly if you have more than one old workplace retirement account. If you prefer to manage all your finances in one place, you might consider consolidating your savings in a new employer's retirement plan or an IRA.

It's your choice

Everyone has different needs and circumstances. Regardless of your unique situation, make sure to consider costs, investment choices, service, convenience, and other factors, to help determine what may be right for you. Be sure to consider all available options and the applicable fees before moving your retirement assets. And, as always, consult a tax advisor for help with this important decision.

How to take care of aging parents and yourself

Protect your financial future while caring for aging loved ones.

Fidelity Viewpoints

Key takeaways

• Understand the long-term impact of caring for an aging loved one.
• Explore all your options to keep working and saving for retirement.
• Beware of taking on too many caregiving responsibilities on your own.
• Find time for yourself.

Caring for an aging parent is a compassionate—but often stressful—undertaking. It can take a huge emotional toll on everyone in a family, but for women, who are far more likely to be caregivers vs. men, the financial impact can hit especially hard. "Women who become caregivers for an elderly parent or friend are more than twice as likely to end up living in poverty than if they aren't caregivers," says Cindy Hounsell, president of the Women's Institute for a Secure Retirement (WISER). If caregivers take time off work, not only do they lose pay, but also those lost wages can affect their Social Security, pension payouts, and other savings—threatening their future finances.

Nearly half of caregivers report experiencing high emotional stress.¹ So what can women do to take care of themselves while they care for others? While helping an aging loved one can easily become all-consuming, there are steps you can take to protect your finances and your retirement. And because women tend to live longer, every penny counts.

Watch our webcast: "Role Reversal: Taking Care of Older Loved Ones" and hear from a panel of experts discussing all aspects of caring for loved ones as they get older—without losing sight of your own goals.

Understand the long-term impact

"For many women, fewer contributions to pensions, Social Security, and other retirement savings vehicles are the result of reduced hours on the job or fewer years in the workforce," explains Ann Dowd, vice president at Fidelity. "Women caregivers are likely to spend an average of 12 years out of the workforce raising children and caring for an older relative or friend."

Women enter and exit the workforce more often than men, usually to care for their children or their parents. Others make some sort of workplace accommodation, such as going in late or leaving early, shedding job responsibilities, dropping back to part-time status, or opting for reduced hours, when possible. This can mean lower wages, lost income, and missing out on potential promotions, which can add up.

Consider this example: Laura, age 56, left a $70,000-a year job to care for her mother for 3 years. The cost to her-$218,000 in lost salary and $63,000 in lost Social Security benefits, for a total of $281,000.² The long-term price can be even higher. You lose the opportunity to contribute to a 401(k) plan- (or other workplace retirement saving plan), as well as to receive contributions from your employer. Those periodic absences also significantly slice into your Social Security benefits.

Balancing work and family

If you are caring for an aging parent, what can you do to soften the effect of these financial changes?

Because leaving a job means losing not only your paycheck but also your benefits, try to continue working at least until you're vested in your company's pension or profit-sharing plan. You may be able to scale back your hours, but put in enough time to continue to get benefits like health insurance or retirement plan contributions. Also, check with your employer's human resources manager to see whether the company offers services to employees who are also caregivers.

You can also consult Eldercare Locator (www.eldercare.gov), sponsored by the US Administration on Aging, to find local services that might help you find a way to balance your job with your caregiving responsibilities.

If you are still able to work for a while longer, then be sure to participate fully in your employer's 401(k) plan and matching contributions. Remember, if you are over age 50, you can make additional contributions.

If your employer also offers a high-deductible health plan (HDHP) paired with a health savings account (HSA), the HDHP can play a valuable role in your financial future. Generally, an HDHP with an HSA enables you to set aside pretax dollars—many employers offer this as a payroll deduction—that can accumulate tax-free and can be withdrawn tax-free to pay for current or future qualified medical expenses,³ including those in retirement. Since health care is likely to be among your largest expenses in retirement, planning for medical expenses both now and in the future can be an important part of your overall savings plan.

If you must give up your current job in order to become a full-time caregiver, consider asking your family to pay you as an independent contractor for the care you are providing. If you are paid, you can set up a self-employed pension plan, such as a Simplified Employee Pension Plan (SEP), or an IRA. If you are married and have the support of your spouse, take advantage of a spousal IRA contribution (available to non-working spouses) to help keep your retirement savings growing. And, fund these accounts to the limit, if you can.

Beware of taking on too much on your own

While sons and daughters care more or less equally for their parents, a MetLife study⁴ found that daughters tend to take care of physical caregiving, while sons tend to help financially. Despite this, the disparity comes with long-term financial consequences for daughters. For example, if you're a woman providing more hands-on assistance, you're likely to be the first to notice that the supply of nutritional supplements is running low or that it's time for your father to begin using a walker. And, if you're providing more hands-on assistance, it's natural to reach for your own wallet to cover the costs. Yet, such miscellaneous expenses can cost an average of $12,000 a year, according to MetLife research, and can seriously eat into the money available to set aside for your retirement.

Some 3 in 10 US adults (29%) have a child younger than 18 at home, and 12% of these parents provide unpaid care for an adult as well. These so-called multigenerational caregivers provide more than 2.5 hours of unpaid care a day, on average, according to a new Pew Research Center analysis of Bureau of Labor Statistics data.⁵

"Do not be a martyr," warns WISER's Hounsell. "Ask for financial help from brothers and sisters." Work with a financial advisor to create a budget that encompasses both present and future care needs, as well as a system to record all costs to prevent family disputes.

Tip: Don't forget to tap into resources from advocacy groups such as the National Council on Aging which help people aged 60+ meet the challenges of aging by partnering with nonprofit organizations, government, and businesses.

Find time for yourself

Research from the National Alliance for Caregiving shows that, on average, adult caregivers spend nearly 19 hours a week in their helping role—or nearly 3 hours a day. So finding ways to save time is essential for reaching your personal and financial goals.

Investors interested in something to assist parents in handling their financial affairs might consider a managed account. For an annual fee, a professional advisor manages the assets, freeing the family from spending time on administrative chores—or having to justify their decisions to other family members. That's what Polly Walker, from the Boston area, chose to do when she took charge of her mother's care and finances 10 years ago. Although she is a Chartered Financial Consultant® and a financial writer, having a managed account gave her important peace of mind, she says, "Because it eliminated any concerns among my brothers and sisters about who was making the investment decisions."

Finally, with that bit of extra time you've gained, remember to protect your own health. That's especially important for women, who are more likely than men to feel the emotional stress of giving care, says the National Alliance for Caregiving study. Stress can affect your mental and physical health, as well as your ability to work productively—with unpleasant repercussions for your financial health too.

While it's natural for women to want to do all they can for their aging loved ones, the most important lesson to take to heart is this: Taking care of yourself first will enable you to do a better job of taking care of others.

Tip: Know when to get involved. "On average, children step in when parents are 75 years old—often after a loved one has made a direct request for financial assistance, when the parents' health becomes a significant factor, or when you notice a change in your parents' ability to handle daily living tasks," explains Dowd.

Answers to Roth conversion questions

Learn about Roth conversions and taxes.

Fidelity Viewpoints

Key takeaways

• There are pros and cons to converting early in the year versus later.
• Your tax liability depends on whether you're converting pre-tax or after-tax money and your marginal tax rate.
• If you are over age 70½, you may need to take a required minimum distribution (RMD) the year you convert.

Who wouldn't want tax-free growth potential and tax-free withdrawals in retirement? That's what a Roth IRA can offer.

However, because of income limits, not everyone can contribute to one. But you still may be able to benefit from a Roth IRA's tax-free growth potential and tax-free withdrawals by converting existing money in a traditional IRA or other retirement savings account.*

Either way, here are some answers to common questions on Roth conversions. Always consult a tax advisor about your specific circumstances.

Section 1: Roth conversion basics

Does time of year matter?

• Converting earlier in the year generally provides more time to pay the tax.
• Taxes aren't due until April 15 of the following year, so you may have more than 15 months to pay the taxes on your converted balances. (Note: If you pay estimated taxes, you may need to make some payments sooner.)

Converting later in the year also has several benefits, and of course its own disadvantages.

• Pro: You may benefit from the conversion 5-year rule. You'll pay a 10% penalty if you make nonqualified withdrawals of converted balances from a Roth IRA within 5 years, but converting later in the year may potentially let you access these funds almost a full year sooner than if you converted earlier in the year.
  
  That's because the clock on the 5-year rule for withdrawing converted balances penalty-free from a Roth IRA begins in January of the year you convert—no matter when you actually convert. So a conversion made on December 31 is considered the same as a conversion made on January 1 of the same year. In both cases, converted balances are eligible for penalty-free withdrawals 5 years later, beginning January 1.
  
  (For earnings, as opposed to converted balances, to be withdrawn without tax or penalty, the withdrawals must be qualified, meaning you must have had made your first Roth contribution 5 tax years before the withdrawal and you must satisfy at least one of the other IRS qualified distribution criteria: you reach age 59½, become disabled, make a qualified first-time home purchase, or die.)
• Pro: Better information to avoid a change of tax bracket. The closer you are to the end of the year, the more information about your income taxes for the year that you'll have. This may allow you to convert a targeted amount to ensure that the income from the conversion doesn't bump you into a higher income tax bracket. Because the amount you convert is considered taxable income (assuming the assets you are converting do not include any after-tax contributions), you may want to consider converting no more than what you think will bring you to the top of your current federal income tax bracket. It may be helpful to discuss this approach with your tax advisor.
• Con: Less time before the taxes come due. The taxes on the amount you converted will be due not long after your conversion.

Can I convert just part of my traditional IRA balances to a Roth IRA?

Yes, you can choose to convert as much or as little as you want of your eligible traditional IRAs. This flexibility enables you to manage the tax cost of your conversion.

For instance, because the amount you convert is generally considered taxable income, you may want to consider converting no more than what you think will bring you to the top of your current federal income tax bracket. Talk to your tax advisor. You also may want to consider basing your conversion amount on the tax liability you may incur, so you can pay your taxes with cash from a nonretirement account.

Can I convert to a Roth IRA even if I earn too much to contribute?
If you or your spouse have high income levels and are not eligible to contribute directly to a Roth IRA, and you do not already have a traditional IRA, you may want to consider opening a traditional IRA and making a nondeductible contribution, then converting it to a Roth IRA. This strategy is sometimes called a back-door Roth contribution.

Tip: For more detail, see Converting your traditional IRA to a Roth IRA, which includes a Roth conversion tool and a checklist.

Can I convert money from a traditional 401(k) to a Roth IRA?
If you are eligible for a withdrawal from a 401(k) plan, you can convert eligible non-Roth 401(k) money to a Roth IRA in one of 2 ways.

1. Pre-tax contributions only. If you have only pre-tax money in your 401(k), you will need to pay taxes on the entire amount you convert to a Roth IRA.
2. After-tax contributions. If you made after-tax contributions to the 401(k), and if your plan tracks source balances separately, you can roll those after-tax contributions directly into a Roth IRA without paying taxes on the after-tax amount, as long as the associated earnings—which are pre-tax—are also distributed from the plan at the same time. The related earnings can be either rolled into the Roth IRA along with the after-tax contributions, in which case they will generate taxable income; or they can be rolled into a traditional IRA, in which case no taxable income will be generated.

Consider this hypothetical example: Let's say an investor has $50,000 in after-tax contributions and $50,000 in earnings on those contributions, for a total $100,000 after-tax source balance, in a 401(k) account from their former employer (and assume the plan tracks source balances separately and allows partial withdrawals). The investor wants to roll this into a Roth IRA. They can roll the $50,000 in after-tax contributions to a Roth IRA and pay no taxes, and though the earnings would be subject to taxes if they rolled them into the Roth IRA as well, they could instead roll the earnings into a traditional IRA. That way, they would not generate any tax liability in the year of the conversion.

No matter which conversion strategy you choose, always consult with a tax professional first.

Section 2: Roth conversions and taxes

How can I estimate my tax liability on an IRA conversion?

Your tax liability is based on 2 things: the taxable income generated by the conversion and your applicable tax rate. To determine what portion of your conversion is taxable income, you need to know the types of contributions in all of your non-Roth IRAs (other than inherited IRAs). This is because your contributions to a non-Roth IRA could be either deductible (i.e., you took an income tax deduction when you made the contribution) or post-tax (i.e., you did not take an income tax deduction when you made the contribution), or some combination. Note that earnings are always considered deductible, whether they come from deductible or nondeductible contributions.

Deductible contributions. Estimating the taxable income from a conversion is straightforward if you've never made nondeductible contributions to any non-Roth IRA. If that is the case, whatever amount you convert will be taxable income.

Nondeductible contributions. It can become a little tricky if you have nondeductible contributions in any of your non-Roth, non-inherited IRA accounts. According to IRS rules, you cannot cherry-pick and convert just nondeductible contributions (leaving deductible amounts in the account) so you won't incur any taxes. Instead, you need to determine the percentage of nondeductible contributions across all your non-Roth, non-inherited IRAs. Then use that percentage to determine the portion of the conversion that is not taxable. To calculate this percentage, you need to total both the balances and the nondeductible amounts in all non-Roth IRAs and non-inherited IRAs in your name, even if they are held at different IRA providers. Important note: Don't include your spouse's IRAs when doing this. In simpler terms, think of all your non-Roth, non-inherited IRAs as one account.

Let's look at a hypothetical example (see chart below). Raj has $100,000 eligible for conversion in 2 traditional IRAs. Traditional IRA #1 has $85,000 in deductible contributions and earnings; traditional IRA #2 has $10,000 in nondeductible contributions and $5,000 in earnings (treated as deductible), for a total of $15,000. Raj wants to convert $10,000 this year. Of the total eligible IRA balance ($100,000), 90% ($90,000) is in deductible contributions and earnings. So his taxable percentage is 90%. For the $10,000 conversion amount, that's $9,000. It doesn’t matter which IRA the money actually comes from—in either case, the percentage is the same.

Tip: If you and your spouse both have conversion-eligible IRAs, you may want to compare your total percentage of deductible contributions and earnings with that of your spouse. Why? If your spouse has IRAs with mostly nondeductible contributions and you have IRAs with mostly deductible contributions, you might consider converting your spouse's IRAs before yours to reduce the potential tax impact of conversion.

Section 3: Roth conversions and RMDs

Do I still need to take a required minimum distribution (RMD) in the year I convert if I'm over 70½?

Yes—for both workplace plans and for traditional IRAs. In general, the first money withdrawn from your account each year has to satisfy your RMD and is not eligible for a rollover or conversion. Additional withdrawal amounts can be converted to a Roth IRA, which does not require RMDs. Inadvertently converting the RMD amount itself can result in an excess contribution to the Roth IRA and can trigger possible excise taxes. Instead, satisfy your RMD amount with a withdrawal from any one or more of your non-Roth, non-inherited IRAs. Note, you can only aggregate RMD distributions for IRAs. You must take your RMD separately from each employer-sponsored plan that you own.

That said, money you withdrew to satisfy your RMD (after paying taxes on the RMD itself) could be used to pay the taxes on the conversion.

Remember, people age 70½ and older are generally required to take an RMD every year from their retirement accounts (traditional, SEP, rollover, and SIMPLE IRAs, as well as workplace plan accounts). Note that while Roth IRAs are exempt from this, Roth 401(k)s are not. Also, note that inherited retirement accounts have their own rules for RMDs, which differ from those for the original owners.

Say, for example, you have a $100,000 traditional IRA with a $7,000 RMD for the current year. If you were to convert the entire balance to a Roth IRA, you'd need to satisfy the RMD first. If you didn't, the $7,000 RMD amount would be considered a contribution to the Roth IRA, not a conversion. In this example, you'd effectively be making a $93,000 conversion and a $7,000 Roth IRA contribution.

But what if you were not eligible to make a Roth IRA contribution of that size because (1) your income was too high, (2) you didn't have enough earned income, or (3) the RMD amount was above the annual Roth IRA contribution limit? (Note that for 2018, the contribution limits are $5,500, or $6,500 for those age 50 and up. In 2019, the contribution limit is $6,000 or $7,000 for people over age 50.) In any of those situations, you might be subject to excess IRA contribution penalties of 6% annually until the excess IRA contribution is corrected.

Tip: To avoid this situation, take your RMD from your traditional IRAs (other than an inherited IRA, which has its own RMD) before converting. If you have already done a conversion in the current tax year but didn't take the RMD, you should speak with your tax advisor.

How does my state tax Roth IRA conversions?

A Roth IRA conversion is a taxable event. If your state has an income tax, the conversion will likely be treated as taxable income by your state, as well as for federal income tax purposes. Because each state's income tax rules are different, however, it makes sense to check with a tax advisor before you convert.

To convert or not to convert?

Thanks to Roth IRAs' tax-free growth potential and tax-free withdrawals, most investors should consider having them as part of their overall retirement income plan, especially when after-tax contributions are a high proportion of your total IRA balances. But deciding whether to convert isn't necessarily a straightforward decision. That's why we suggest that you carefully assess your situation and check with a tax advisor to help you make an informed decision.

Hardship withdrawals: Things to know

Sometimes a hardship withdrawal from your 401(k) is the only option.

Fidelity Viewpoints

Key takeaways

• If possible, consider other options before resorting to a hardship withdrawal.
• Find out if your plan allows hardship withdrawals and if your situation qualifies.
• After the dust settles, make a plan for getting your savings back on track.

When it rains, it pours—and sometimes the only umbrella available is in your 401(k). Having the option to take a hardship withdrawal from your retirement account can be a financial lifesaver when you have nowhere else to turn for cash.

But before you take a hardship withdrawal from your 401(k), evaluate all your options carefully. If you really have to do it, take steps to help reduce the damage to your retirement savings, and make a plan to get your finances back on track.

Do you qualify for a hardship withdrawal?

There may be a few hurdles to cross before you can take a hardship withdrawal. First, your plan has to allow them—not all do. If your plan does, many companies require that you take a loan from your 401(k) first. A loan from your 401(k) will let you pay the money back to your account with interest.

Read Viewpoints on Fidelity.com: Things to know before taking a 401(k) loan.

A hardship withdrawal from your 401(k) may be available for certain circumstances. Unfortunately, it is an expensive way to tap your own money. Taxes may be due on the money withdrawn and if you’re under age 59½, there may be a 10% penalty as well. Plus you may lose some of the long-term benefits of tax-advantaged compounding—and that could reduce the money you will have available in retirement. Unlike taking a loan from your 401(k), you can't repay a hardship withdrawal. You may even be required to wait 6 months following the withdrawal before you can begin contributing to the account again. The suspension also applies to any other qualified, nonqualified, and stock plans of all related employers.

For those plans that allow them, the IRS considers hardship withdrawals allowable when there is a heavy and immediate financial need—and requires that only the amount necessary to satisfy the need is taken out of the account.

What's not included

Things like vacations, boats, or new televisions are not considered heavy and immediate financial needs.

What is included

Generally, these situations qualify for hardship withdrawals:¹

• Unreimbursed medical bills
• Buying a home
• Paying college expenses—or other college-level education costs
• Funeral expenses
• Payments necessary to prevent eviction from or foreclosure on your home
• Repairing damage to a home located in a federally declared disaster area

Your plan administrator may require some documentation showing that you have no other options and verifying the amount needed.

The penalty can be expensive

If you are under age 59½, the distribution from your account will probably be subject to a 10% penalty, and is generally considered taxable income for state and federal tax purposes—which means it will be taxed at your ordinary income rate. There are some circumstances that qualify for a penalty-free withdrawal, however, including disability and unreimbursed medical bills greater than 7.5% of adjusted gross income.

• Visit IRS.gov to find out more about exceptions to the 10% penalty.

Taxes and opportunity costs

Taxes can take a big bite out of early withdrawals. Someone in the 24% tax bracket in 2018 may potentially owe the IRS 34% of the amount of the withdrawal when the 10% penalty is added on. So, for example, in order to get $10,000 in your pocket, you'd have to take out $13,400 to cover taxes and penalties—if your plan allows you to take additional money to pay for taxes. Not every plan will allow that, so you may need to have another source of funds to cover the tax liability. Check with your plan administrator to understand what is allowed under your plan.

But taxes and penalties are only the immediate costs. The opportunity costs from lost investment returns on that withdrawal can add up over time.

Read Viewpoints on Fidelity.com: Beware of cashing out your 401(k).

Other options

It goes without saying but we have to say it: Taking money from your 401(k) should be a last resort, reserved for a serious emergency. Before you do, consider these alternatives.

Consider a 401(k) loan

In some cases, you have to take a loan from your 401(k) before you can take a hardship withdrawal. In other cases, it's an option. Either way, a 401(k) loan could be a better, though still costly, option than a hardship withdrawal, as you will pay the money back to yourself with interest.

Think about a distribution from a traditional or Roth IRA instead

If you have money in an IRA, you may have a little more flexibility with an IRA than with a 401(k).

Contributions to a Roth IRA can be withdrawn any time, tax and penalty free, though distributions of earnings are subject to a potential 10% penalty.² A limited number of circumstances qualify for a penalty-free distribution from either a Roth IRA or a traditional IRA. Among them are first-time home purchases—or if it's been 2 years since you owned a principal residence, even if it's not your first home. Qualified education expenses and disability may also be eligible for penalty-free withdrawals.

Even though it may be easier to withdraw from an IRA than a 401(k), any withdrawals will lose the benefits of tax-advantaged compounding over time.

How to recover

Most everyone experiences setbacks—but the right response to these setbacks can help you achieve your financial goals. If you do find yourself in a situation where you have to take money out of your 401(k), don't despair or give up. Get yourself back on track by building a solid emergency fund to help ensure that you're covered for unforeseen expenses. We suggest saving at least 3 to 6 months' worth of essential expenses in your rainy-day fund. It's a lot of money to consider saving—but consistently putting away just a small amount can help you get there.

To find money to save, take a look at your spending. There could be a lot of fat to cut out of your budget. No one enjoys a spending diet, but temporarily slashing spending could help.

Read Viewpoints on Fidelity.com: How to save for an emergency.

As soon as you're able, start contributing again as much as you can to your retirement account so that even if it's a small amount. Work toward bumping up that contribution when you can.

The important things are to have a plan and to keep saving for retirement—you'll eventually get back on solid financial footing.

Social Security strategy for women

Women face unique Social Security challenges: These tips can help.

Fidelity Viewpoints

Key takeaways

• Women face unique challenges when it comes to Social Security benefits.
• Getting the most from your benefits requires strategic thinking and taking advantage of available opportunities.
• Timing to take benefits, marital status, and retirement plans all play a key role in shaping your Social Security strategy.
• Making informed decisions about Social Security can help you make the most of your money in retirement.

When you play your cards right with Social Security, you get the most from your benefits. When you don't, you end up with money left on the table.

And because women, on average, outlive men and are more likely, as they get older, to be single and dependent on one income, they need to have a good strategy for Social Security, which can play out differently for women than for men:¹

• Women age 65 or older have an average annual Social Security income of $12,587, compared with $16,590 for men.
• Almost 49% of elderly unmarried women rely on Social Security benefits for 90% or more of their income.
• In contrast, Social Security benefits provide only 35% of the income of unmarried elderly men, and only 30% of the income of elderly couples.

Keep the following in mind to optimize your Social Security strategy:

Timing: It can pay to delay

The biggest factor in making the most of your Social Security benefits is deciding when to take them.

You can start receiving reduced benefits at age 62, rather than waiting until your full retirement age (FRA), which ranges from 65 to 67, depending on your birth date (See your full retirement age).

• If you take Social Security benefits before your FRA, the amount of your monthly benefit payment will be reduced.
• If you delay collecting benefits beyond your FRA, the amount of your monthly benefit will increase monthly until you reach age 70.

To strategize timing around taking Social Security, consider factors such as family longevity, how much money you'll need for retirement, and other income sources.

If you can delay taking benefits until your FRA or age 70, and you live into your 80s or 90s, you could benefit from doing so. If you have a savings shortfall, consider delaying retirement by a few more years or working with an advisor to create an income bridge from savings or other assets.

Bottom line: If you're in good health and have sufficient savings, it may be better in the long run to wait until your FRA or longer to begin taking Social Security.

Investing for the future

According to Fidelity's 2018 Women and Investing Study,² only 29% of women see themselves as investors—but to build financial security in your golden years, it helps to think like an investor and to strategize about Social Security.

"When it comes to planning their retirement income, some women could be doing a lot better," says Ann Dowd, CFP^®, a vice president at Fidelity Investments. Fidelity's study found that 56% of women are not investing outside of retirement, and may be leaving money on the sidelines by keeping it in cash.

Dowd adds, "Women who claim Social Security at the earliest possibly age of 62 may be leaving money on the table. For every year you delay claiming Social Security past your FRA, you increase your annual benefit by 8%— a guaranteed source of income that is also adjusted for inflation over time."

Claiming a spouse's benefit

Your marital status also plays a significant role in your benefits strategy:

Married women may have the option of claiming benefits based on their own work record or 50% of their spouse's benefit. For couples with big differences in earnings, claiming the spousal benefit may be better than claiming your own.

Divorced women may be able to receive benefits on their former spouse's record—even if the spouse has remarried!—but only if: the marriage lasted 10 years or more; the claimant is unmarried and age 62 or older; the former spouse is entitled to Social Security retirement or disability benefits; and the benefit you're entitled to receive based on your own work is less than the benefit you'd get based on your ex-spouse's work.

Widowed women are eligible to receive their late spouse's Social Security payment as a survivor benefit, provided it's higher than their own monthly amount. The surviving spouse can claim the higher monthly benefit for the rest of their life. So, for a couple with at least one member who expects to live into their late 80s or 90s, deferring the higher earner's benefit may make sense. If both members of a couple have serious health issues and therefore anticipate shorter life expectancies, claiming early may make more sense.

To find out more about claiming Social Security based on your spouse's benefit, read Viewpoints on Fidelity.com: Social Security tips for couples

Get Social Security, keep working

You can collect Social Security even if you are still working or earning self-employed income—with a few important caveats:

• If you collect before your FRA, you can earn up to $17,040 in 2018 without any impact on your benefit.
• If, however, you exceed the earnings limit before your FRA, your benefits will be reduced by $1 for every $2 you earn over $17,040. In the year in which you reach FRA, $1 is deducted for every $3 you earn above $45,360 (the limit in 2018).

Once you reach FRA, there is no penalty for working and claiming Social Security at the same time, and your benefits will not be adjusted for earned income. Also, once you reach FRA, the benefit would be adjusted up to account for benefits withheld due to earlier earnings.

However, that's only part of the story. If you continue to work, you don't have to live on your savings, and it gives you the opportunity to keep building retirement savings. Keep working and you can contribute to a 401(k) or other tax-deferred workplace savings plan, or an IRA. Lastly, you can also make catch-up contributions into your 401(k) or IRA, which allows you to set aside larger amounts of money for retirement.

Tip: Your Social Security benefit is based on your top 35 years of qualifying income. If you have been out of the workforce for a number of years—say, to raise a family—or you expect to rely heavily on Social Security in retirement, consider working a few extra years, which can lead to additional savings and greater retirement assets.

Make leaving your job its own decision

Although some 39% of women claim Social Security early at age 62,³ it may not be the best financial decision for them longer term. "Many women make the mistake of coupling their decision to leave the workforce with their Social Security claiming strategy," says Ann Dowd.

"By age 60, you may decide it's time for a change after many years of working and raising your family, but don't think about Social Security as a way to quit your job early," she advises. "Make leaving your job its own decision. The good news is that you may have more resources available to you than you think. You may be able to delay claiming Social Security, especially if your husband or partner is still working."

Dowd suggests women look at the big picture and think about the future. "You still have options in your 60s, so don't leave too much money on the table. Remember, you've still got a lot more great years ahead of you and fulfilling things to do in retirement. But by the time you get into your 80s, you have fewer financial options, so don't jump at the first opportunity to claim Social Security at age 62 just because you really want to quit your job," she adds.

Read Viewpoints on Fidelity.com: 3 key decisions to make before you retire

Develop your strategy

According to Fidelity's 2018 Women and Investing Study,² women of all ages say they're looking for opportunities to make their money work harder, with nearly three-quarters (72%) of women saying they want to take steps within the next 6 months to help make their savings grow.

That spirit can apply to taking Social Security benefits. Take the time to understand exactly how much income Social Security will provide for you at different ages. Use our Social Security calculator to estimate your future benefits based on different scenarios, then create a retirement income strategy that can help maximize your monthly Social Security payments.

Don't forget to take RMDs by year end

To avoid tax penalties, be sure to meet the December 31 deadline.

Fidelity Viewpoints

Key takeaways

• If you're 70½, you may need to take RMDs from certain retirement accounts
• The deadline for taking RMDs is December 31 or April 1, depending on your age
• The withdrawal amount of RMDs also depends on your age
• Failure to take RMDs on time can result in substantial tax penalties

The end of the year is fast approaching. Have you taken your required minimum distribution (RMD) from your retirement account? Lots of people have not. Be warned: This can be a costly mistake, and one that may result in significant IRS penalties.

To avoid these penalties, please note that this year December 31 falls on a weekend, so if you need to sell positions to generate cash for the RMD, you have until markets close on December 29. The RMD must be taken by December 31.

Beginning when you turn 70½, IRS regulations generally require you to withdraw a minimum amount of money each year from your tax-deferred retirement accounts, like traditional IRAs and 401(k) plans. If you don't take enough, you may pay a 50% IRS penalty on the amount not taken.* This is why it's important that you understand how RMDs work, and the timing of distributions.

How the amount is determined

Required minimum distributions are determined by your age, your account balance, and your life expectancy. If you have a spousal beneficiary who is more than 10 years younger than you and is the only beneficiary for the entire distribution year, you can base your RMD on your joint life expectancy.

Tip: For inherited IRAs, the rules are different. (Learn more)

Deadlines for withdrawals

For IRAs, the RMD deadline is December 31 each year. For your first distribution (and only your first), you get a three month extension until April 1 of the following year. The same generally holds true for 401(k) plans and other qualified retirement plans. However, if you wait until after December 31 to take your RMD, you will have to take two RMDs in one year, which could affect your income tax bracket or Medicare eligibility.

If you are over 70½ and still working, you can generally delay your RMDs from your 401(k) until after you retire.* For all subsequent years, distributions must be made annually by December 31. Don't forget to also allow time for any trades to settle if you are selling investments.

Tax reform and retirees

New tax deduction and rate rules may mean lower taxes for many retirees.

Fidelity Viewpoints

Key takeaways

• Retirees may benefit from higher standard deductions and lower tax rates.
• The rules for required minimum distributions, Social Security taxes, and charitable IRA distributions have not changed.
• Some deductions have been eliminated or altered.

If you are retired and thinking about your tax situation, you may wonder what the new tax law will mean for you. Most of the changes from the tax law go into effect in 2018. The new tax brackets, tax rates, rules for itemized deductions could all impact retirees. At the same time, the law left the rules for capital gains, tax loss harvesting, Social Security, and required distributions unchanged.

Viewpoints answers some of the top questions asked by retirees. For a roundup of the tax changes for individuals in general, read Viewpoints on Fidelity.com: New rules for deductions.

Will senior citizens still get a higher standard deduction?

Perhaps the most important tax rule change for many retirees will be the increase in the standard deduction. For older taxpayers who don’t carry a mortgage and have limited deductions, that standard deduction is often more valuable than itemized deductions. That will be the case for even more people, as the tax law roughly doubled the size of the standard deduction.

At the same time, the additional standard deduction for the elderly will still be available. In 2017, the tax rules allowed individual tax filers over age 65 to claim an additional standard deduction of $1,550, and married couples over the age of 65 could increase their standard deduction by $2,500. The new rules would increase these higher standard deductions for people over age 65 to $1,600 per individual and $2,600 per couple.

On the other hand, the new tax code eliminated personal exemptions. Still, many retirees may come out ahead due to the higher standard deduction, rate cuts, and other changes (see case studies below).

What happens to taxes on Social Security?

The new rules would not change the taxation of Social Security benefits. Under current and future laws, Social Security benefits are subject to federal income taxes above certain levels of combined income (see table below). Combined income generally consists of your adjusted gross income (AGI), nontaxable interest, and one-half of your Social Security benefits.

What has changed are the applicable tax brackets—the new law lowered most tax rates and adjusted the income thresholds for the different tax brackets (get details). So the taxes paid on the same Social Security benefit could be lower.

Can IRA withdrawals still be treated as charitable distributions?

The existing rules for IRA distributions to charity have not changed. If you are over age 70½, you may distribute up to $100,000 per year directly to charity from your IRA, and the IRS will count that money as a qualified charitable distribution. The IRS will not include the funds as taxable income, but the distribution can satisfy your required minimum distribution (RMD).

What happens to the deduction for medical expenses?

The new tax rules preserve the deduction for medical expenses, and for the 2017 and 2018 tax years the AGI threshold for that deduction will be lowered from 10% of AGI to 7.5%. That could make this deduction available to more people with significant health issues. In 2019, the threshold will revert to 10% of AGI.

At the same time, the higher standard deduction may make this deduction irrelevant for many people, because the standard deduction may be greater than their total itemized deductions, which would include the itemized deduction for medical expenses.

Do the taxes on investment gains and investment income change?

The short answer is no, the same rules exist for short- and long-term capital gains, qualified and ordinary dividends, and interest income. The rules for tax losses are left unchanged.

However, the tax rates have changed. Short-term capital gains, ordinary dividends, and interest income from most bonds are generally taxed at ordinary income tax rates, so those rates will change along with the new tax brackets (get details).

Hypothetical case studies – the new rules in action
Here are some simplified case studies to see how these changes may play out.

Higher standard deduction
Let’s take a hypothetical couple over age 65 that has already been claiming the standard deduction. Their income included pension payments worth $12,000 a year, and an RMD of $50,000 from a traditional IRA and $24,000 a year from Social Security.

Because their combined income exceeds $44,000, 85% of their $24,000 Social Security benefit is taxable, equal to $20,400.

Their itemized deductions include charitable contributions, state and local taxes, and investment interest expenses totaling $11,000. In 2017, the couple opted for the standard deduction of $12,700, plus the additional standard deduction for the elderly of $2,500, and the personal exemptions totaling $8,100.

In 2017, the couple had a marginal tax rate of 15% and had to pay income taxes on $59,100 of income. In 2017, the federal income tax bill would have been $7,933.

Assuming the same income and deductions, in 2018 the couple would again use the standard deductions and additional deduction for the elderly, but those are now worth $24,000 and $2,600, respectively. The personal exemptions are no longer available.

The increased deductions reduce the income they are taxed on to $55,800. And tax reform lowered the tax rates—they are now in the 12% marginal tax bracket. So their new tax bill is $6,315. That’s a tax cut of about $1,600, or about 20%.

No longer itemizing
Let's look at a hypothetical higher-income couple over age 65 that had itemized their tax returns. This couple earns $50,000 a year from Social Security, withdraws $120,000 a year from a traditional IRA, and still earns $20,000 a year from a position on a board. Their total income was $190,000. Only 85% of Social Security was taxable, or $42,500.

Their mortgage interest, charitable giving, and local tax deductions totaled $18,000. 

In 2017, the couple claimed the personal exemption of $8,100 and itemized deductions worth $18,000, a total of $26,100. That left $156,400 in income, a marginal tax rate of 28%, and a tax bill of $30,676.

In 2018, the new standard deduction would be worth more than the itemized deductions, and the personal exemption is gone. The standard deductions would total $26,600, leaving them with $155,900 in income, but the tax brackets changed and they would now have a marginal income tax bracket of 22%, and a tax bill of $26,177. That’s a tax cut of $4,499, or 15%.

The bottom line

The tax law changed a large number of rules, but many of the provisions most important to retirees were unaffected. Many retirees will see their tax bill go down, but not everyone. The complex changes will affect individuals differently, so be sure to consult a tax advisor.

Working after 65? Avoid 5 Medicare pitfalls

Learn how Medicare works if you are still employed after 65.

Fidelity Viewpoints

Key takeaways

• Your health insurance generally terminates when you leave your job. Apply for Medicare 2 to 3 months before you end employment to avoid a gap in coverage.
• If you enrolled in Social Security before your 65th birthday, you will be enrolled automatically in Medicare Parts A and B. However, if you are still covered by an employer's health plan, you could be paying for 2 plans.
• Speak with your HR department to coordinate the timing and coverage options between your employer plan and Medicare as you approach age 65.

As you turn age 65, your mailbox will likely be full of birthday cards, well wishes, and a deluge of information packets on Medicare, the government health care program for people age 65 and over. But what if you're not ready to retire? Do you keep your employer-sponsored health care coverage or go for Medicare?

Today, more than 23% of baby boomers* are choosing to continue to work, either part-time or full-time, beyond age 65. Although most retirees enroll in Medicare at age 65, if you're still working, you have more options to consider for quality health care coverage—and the information in the Medicare brochure you receive from Uncle Sam may not be suitable for your situation because Medicare does not know whether you are still working.

There's a lot to keep track of: enrollment deadlines, health care coverage options, and possible penalties to avoid. But with some planning and homework, you can avoid the common pitfalls if you continue to work beyond age 65.

Medicare basics

Because Medicare works very differently from employer health insurance, there are lots of things to learn. If you continue to work after reaching age 65, you technically become eligible for Medicare, but you may or may not want to enroll right away.

Here's the dilemma: Your employer must continue to cover all eligible workers, regardless of age, under its group health insurance—yet, Medicare is telling you to sign up now.

It may not be clear that you only need to sign up for Medicare once—at the point when your employer group coverage is ending—so here's the 2-part general rule for when to join Medicare:

1. Enroll during your Initial Enrollment Period (IEP)—3 months before to 3 months after the month you turn age 65; but only if
2. You also lose access to your employer group health insurance coverage.

If you don't enroll during your IEP because you have employer group health insurance coverage, you can enroll at any time you still have employer group coverage or within 8 months after the month your employment or group coverage ends—whichever happens first. You'll need to know what your coverage options will be at age 65 and adjust your Medicare enrollment to meet your needs.

One other situation that can cause confusion occurs if you leave your job with a "retiree" health care plan or coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985). Neither of these health insurance options is considered employer group health insurance coverage, so you would be classified as a "former worker." In this case, you would need to enroll in Medicare during your IEP.

Who pays first?

As with many laws and regulations, the devil is in the details. In the case of health insurance, you need to know who the "primary payer" is—the party responsible for paying your medical bills first and covering the majority of the costs.

• Medicare becomes the primary payer for your health care expenses once you reach age 65 and lose your employer group coverage (assuming you work for an employer with more than 20 employees)
• If you continue to work, your employer's insurance pays first
• And, if you've already left the company and have a retiree plan or COBRA, those plans typically become the secondary payer the month you turn age 65. So, if you don't have Medicare in place already, you become the primary payer.

If you work for an employer with fewer than 20 employees, you need to enroll in Medicare at age 65, during your IEP. Medicare becomes the primary payer and your employer's insurance becomes secondary.

5 pitfalls to avoid when working past age 65

1. Not doing your homework: If you plan to work past age 65, or if your spouse or partner continues to work and covers you, you've got some research to do to make sure you know your options, the costs, and any restrictions.

• Your employer is required to offer you coverage, but is that your best option?
• Is it more expensive to stay in your employer plan or join Medicare?
• Which plan offers you the best coverage for your health needs?
• Can your spouse or partner remain in your employer’s plan if you decide to leave?

Tip: Review your health benefits documents and schedule a call with your company's HR or benefits group to discuss your insurance options. Read the information on Medicare.gov about working after age 65 and the coordination of benefits.

2. Failing to notify Social Security that you want to delay Medicare: If you enrolled in Social Security before your 65th birthday, you will be enrolled automatically in Medicare Parts A and B. However, if you are still covered by an employer's health plan, you could be paying for 2 plans.

• If you signed up for Medicare as part of your Social Security application process (online, in person, or over the phone), you'll need to contact the Social Security Administration by phone or by visiting your local office to explain that you do not want Part B at this time—that's because Social Security manages the administration of Medicare.
• If you automatically receive your Medicare card, you'll need to follow the instructions that came with the card to cancel your Part B coverage. Generally, there is a short time frame of several weeks to return your Medicare card and cancel enrollment.
• If you haven't enrolled in Social Security by age 65, there is no automatic turn on of your Medicare benefit—you just continue as an active employee, and you can enroll in Social Security at a later date.

Read Viewpoints on Fidelity.com: Social Security tips for working retirees.

3. Enrolling in Medicare Part A, but losing the ability to contribute to your health savings account (HSA): Many employees with access to HSAs have funded their accounts hoping that they could use their HSA dollars to pay for qualified medical expenses in their retirement.

But here's the glitch: If you enroll in any part of Medicare, you lose the ability to continue contributions to your HSA. Some people who continue to work after age 65 decide to enroll only in Medicare Part A because they think it's free and that it may provide some secondary insurance coverage in the event of hospitalization; however, this move may have unintended consequences.

"If you have both employer health insurance and Medicare Part A, Medicare becomes the secondary payer," explains Steven Feinschreiber, senior vice president of Fidelity's Financial Solutions Group. "Medicare coverage typically kicks in after the employer's insurance and covers unpaid expenses up to Medicare's cost limit." He continues, "In general, employer insurance pays more to health care providers and hospitals than Medicare, so you may not get any cost savings benefit by having both plans—and you've lost the ability to contribute to your HSA."

Tip: Decide which option is more important to you: the ability to continue to contribute to your HSA or enrolling in Medicare at age 65, because you cannot do both. When you enroll in Medicare after turning age 65, your actual coverage becomes effective up to 6 months earlier. Therefore, you'll want to end contributions to your HSA at least 6 months prior to leaving your job. This will help you avoid a possible tax penalty for making ineligible contributions to your HSA after your Medicare coverage has kicked in.

4. Not coordinating the timing of your Part B with losing your employer group health plan coverage. As you leave your job, your health insurance generally terminates at the end of that month. It's important to apply for Medicare a couple of months before you end employment so that your coverage will be in place on the first month of your retirement. Otherwise, you may have a gap in health insurance coverage leaving you fully responsible for paying any medical expenses you incur during this period.

For example, say you are age 68 and retire on March 15. The last day of your employer health coverage would be March 31. If you enrolled in Medicare in advance of your retirement, Medicare coverage would begin on April 1. If you wait until after you retire to enroll in Medicare, you will have a coverage gap. Your Medicare coverage could begin on May 1 or as late as December 1, and you would be responsible for paying any medical bills that you incur during those months without health care coverage.

Tip: Fill out the appropriate Medicare forms to enroll in Part B as your employer coverage is ending (Forms CMS-40B and CMS-L564). Do so about 3 months before your last day on the job.

5. Missing the "open enrollment period" to buy a Medigap plan after employer health insurance ends. The timing for buying supplemental insurance such as a Medigap policy is different from enrolling in Medicare. If you decide to do so, you'll have 6 months to buy a Medigap plan without underwriting once you have enrolled in Part B and have been assigned your Part B plan number. You may be able buy a Medigap plan after the open enrollment period, but, generally, you then become subject to medical underwriting, and the insurance company can decline to sell you a policy or can charge you more. For more on Medigap options, read Viewpoints on Fidelity.com: Medigap 101.

Learning the ins and outs of Medicare and getting the timing just right is each individual's responsibility. Do your homework, understand your options, ask for help if you need it, and make sure you receive confirmation of your enrollment.

"Talking with your benefits department is one of the most important steps you can take if you are planning to work after age 65," Feinschreiber advises. "You don't want to be in a situation where you have a gap in your primary insurance coverage. Make sure you know how your health insurance will work after age 65, and coordinate the timing between your employer plan and Medicare."

Ready to retire? You still need a budget.

It’s important to start your retirement with a spending plan that works for you.

Fidelity Viewpoints

Key takeaways

• Use the budgeting process to discuss retirement priorities with your partner.
• Try to match your essential expenses to guaranteed sources of income.
• Think about limiting withdrawals from retirement savings accounts to 4%–5% in your first year of retirement, then make adjustments for inflation in subsequent years.
• Consider consolidating accounts at a trusted provider.

Making a budget may not be the first thing you look forward to in retirement, but it's one of the most important things to do to start your retirement on the right path.

Along with an income plan that can deliver a steady "retirement paycheck" and an investing strategy that allows a portion of your nest egg the chance to grow, a realistic budget—based on all the sources of income you have coming every month—is an essential building block of retirement.

Whatever the size of your nest egg, retirement will mean changes in your financial life. Your sources of income will shift versus when you worked, as will the profile of your expenses. And financial priorities often change as you move from saving for retirement to generating income from your hard-earned retirement savings.

"One of the biggest things I find with recently retired or soon-to-retire clients who haven't had a budget in the past is that they're relieved when we actually run the numbers," says Tom Magee, CFP^®, a Fidelity financial consultant in Boston. "When we match up their sources of income with their anticipated expenses in retirement, in most cases the budgeting exercise confirms that their plan can work."

At the same time, Magee says that people who have been diligent about following a budget throughout their working years may need to adjust their approach when making a retirement spending plan. "Many people looking ahead to retirement overestimate their expenses," he notes, "while others may need to adjust to the realities of adapting to life on a fixed income."

If you're ready to begin putting together a retirement budget, here are some tips to help:

Think big picture

For many people, the budgeting process stalls before it really gets started. That's often because they worry about the details of their discretionary spending instead of looking at the big picture. Start by understanding your essential expenses (see the "Essential expenses" section below) and how you can use guaranteed sources of income, like Social Security, pensions, and annuities, to pay for them.

Then create your discretionary budget by focusing on categories of spending—such as travel, health care, entertainment, and any charitable giving plans—rather than trying to account for every dollar you'll spend on coffee, personal care, or clothing. You'll have plenty of time to get more specific after test-driving your budget and seeing how well it fits your actual spending patterns. A good practice is to match discretionary expenses with income from individual retirement accounts (IRAs) and other tax-deferred retirement savings accounts.

Get organized

To plan ahead, you need to think about the life you want to live in retirement, based on what you can afford. You need to know the details of your recent spending patterns, and determine whether your overall spending will go up, go down, or stay the same in retirement.

To start, tabulate your average monthly expenses and know how much money is coming in versus going out. If you use credit cards, go online and look at year-end summaries to see where you spent the most money last year. Make note of any surprise categories of spending. Do the same with online bank statements.

Next, identify your ongoing monthly bills (like cable, cell phone, or landscaping/pool service bills) and determine whether you need to continue all these services. Then look through your past bills to identify work-related expenses (such as dry cleaning or fuel and transportation expenses) that you may no longer have to pay now that you're retired. Lastly, categorize expenses into "essential" and "discretionary" (see below).

Essential expenses

Cover essentials first. Health, comfort, and security are among life's most important priorities, so you'll want to make them your budget priorities too. Make sure your budget covers health care, housing, and insurance—as well as daily living expenses, from putting food on the table to paying utility bills.

Health care: Planning for health care costs can be especially daunting with estimated costs for an average 65-year-old couple retiring in 2017 hitting a total of $275,000 (in today's dollars) over their entire retirement period. Even if you're covered by Medicare and an insurance plan from your former employer, supplemental premiums and out-of-pocket costs continue to rise. For help in budgeting for health care, read Viewpoints on Fidelity.com: How to plan for rising health care costs.

Housing: If your home is paid for, good for you! But don't forget to add utilities, maintenance, and possibly larger home repairs. A good rule of thumb is to budget at least 1% of your home's value for annual maintenance. So, if your home is worth $400,000, then budget approximately $4,000 per year for standard repairs and general upkeep.

You may also want to include money for making accessibility upgrades, such as railings, ramps, or larger doorways, which may become necessary as you age. If you plan to live in a retirement community, be sure you understand the financial arrangements and monthly costs, if any, you'll be responsible for. Depending on the type of community, they could range from housekeeping fees to residents' association dues.

Transportation: No longer having commuting costs is a big bonus of retiring, but your transportation costs won't drop to zero. Most people don't retire to sit around the house, so remember to include the cost of gas or public transportation for trips to activities, as well as vehicle maintenance expenses. If you are considering buying a new or used car, add that expense too.

Food: Although you may not be eating out at lunch with colleagues, overall expenditures on food will likely remain constant. Now that you're retired, it might be a great time to do some fun things like taking cooking lessons or entertaining for friends and family.

Discretionary spending

Once you have accounted for your "must-haves," you can begin budgeting for discretionary items, such as dining out, going to the movies, weekend excursions, and those bucket-list adventures you've been dreaming of.

Travel: How you budget for travel will depend on the types of trips you're contemplating—weekend getaways, long vacations, or visits to family and friends. For short jaunts, you can build a monthly expense into your budget, putting the money you don't use into a pool for spending later. For longer vacations, you'll need to determine whether you have enough in savings to cover the trip without negatively affecting your retirement income plan. If not, you should add a vacation fund to your budget. If you are fortunate enough to own a vacation home, you should account for the cost of traveling back and forth to it. For their convenience, some retirees leave cars in different locales year-round, which, of course, is an added cost.

Entertainment/dining out/gifting: You probably already have a good idea of how much it costs to go to the movies and dine out, but many people forget to include money they use to buy gifts for family and friends for everything from birthday gifts to graduation and baby shower presents. If your budget allows for it, larger gifting priorities—such as giving money to future heirs to minimize inheritance taxes or contributing regularly to charities—should be part of an estate plan or tax-smart philanthropy strategy you craft with your estate attorney and tax adviser.

Stick to your income plan

A well-designed retirement income plan should be backed by an investing strategy that provides opportunities for your assets to generate earnings and helps your income keep pace with inflation. But investment returns will vary, and that, along with unexpected expenses, may require you to build some flexibility into your budget. One way to plan for the ebbs and flows of the financial markets is to express your discretionary spending as a range. That way, you can choose to put aside unspent money in months when your costs are at the bottom end of the range and use it during months when your discretionary spending is higher or your overall income is lower.

Fidelity suggests limiting withdrawals from retirement savings accounts to 4%–5% in your first year of retirement, and then adjusting this number higher for inflation increases in subsequent years. For more on sustainable withdrawals in retirement, read Viewpoints on Fidelity.com: How can I make my savings last? If you give in to temptation and outspend your sustainable rate, remember that it may have a cascading effect, because it can reduce the size of the nest egg that's available to generate potential investment returns over the rest of your retirement.

Communicate with your partner

Money issues can be a cause of significant strife in some marriages, even if the couple has been together for decades. "It's not surprising to find one spouse who lives for the moment while the other is still saving for that rainy day," says Ann Dowd, CFP^®, a vice president at Fidelity Investments.

While disagreements about money can occur at any stage of life, they may be more pronounced in retirement, when couples move from living on income from a job to living on their retirement savings. "Not many people can live day to day on a strict budget," Dowd says. "However, creating an overall budget together can be an effective way for retired couples to identify shared goals and spending priorities."

But keep in mind that budgeting isn't just a numbers game. If you approach it with an open mind, it's a great opportunity to start a conversation with your spouse or partner about your priorities and dreams for retirement—both your individual goals and the things you want to do as a couple.

Remember to account for taxes too

During your working years, your employer was responsible for withholding income taxes and sending them to federal, state, and, perhaps, local government tax authorities. In retirement, if you have significant income from taxable accounts or other sources from which you do not have income tax withheld, you may need to make quarterly tax payments.

Then there are capital gains taxes if you sell securities or other assets at a profit. And if you're still in your home and plan to stay there, be sure to include real estate taxes in your budget. Some states and municipalities also levy an annual tax on major personal property, such as cars and boats.

Keep it simple

Remember why you retired—to have fun and do the things you never had time for when you were working! Finding ways to ease the burden of financial management is always a good idea, but it's especially important in retirement, when you're likely to spend more time traveling and pursuing your passions. One way to simplify may be to consolidate your retirement accounts with a trusted financial services provider, which enables you to organize your income, investing, and spending in one place while potentially reducing fees.

Although making a budget is one of those chores people tend to put off, it can be an essential contributor to feeling confident about your finances in retirement.

Medigap 101: What you need to know

See if Medigap supplemental insurance makes sense for you.

Fidelity Viewpoints

Key takeaways

• Medicare does not cover all health care expenses in retirement.
• Medigap can help eliminate many Medicare out-of-pocket costs, extend skilled nursing home and hospital coverage, and cover health care costs when traveling abroad.
• You can generally keep your doctors under Medigap.

Jeff and Alison Otto of Framingham, Massachusetts, knew picking a Medicare plan would take time and effort. So they talked to friends, family, and their doctor, and read extensively about their options. What really surprised them was the realization that Medicare would not cover all their health care costs in retirement, including those when traveling abroad.

"We travel a lot and want the security of knowing we can get medical treatment away from home," says Jeff, who with Alison is looking forward to visiting her family in England. So like a quarter of retirees, the Ottos decided to buy Medigap insurance to cover health care costs that Medicare does not.

Medicare and Medigap

Since its introduction in 1965, Medicare was designed to cover only a portion of a retiree's health care needs. "Original Medicare" includes 2 parts: Part A, hospitalization coverage, and Part B, physicians and outpatient services. Only selected services are covered, and costs are shared between Medicare and you.

When it's time for you to sign up for Medicare, you have 3 primary options: You can choose to pay what Medicare doesn't cover from your own pocket, buy supplemental insurance, such as Medigap, or buy an all-in-one policy called a Medicare Advantage Plan.

Medigap plans, the focus of this article, are sold by private insurance companies and are identified by capital letters—A, B, C, D, F, G, K, L, M, and N.¹ Each lettered plan, regardless of the insurance company, must offer the same standardized features. (Read Viewpoints on Fidelity.com, 6 key Medicare questions to learn about other Medicare options.)

Why buy Medigap?

Here are 4 common reasons retirees choose to add Medigap to traditional Medicare.

1. Medigap can eliminate most of your Parts A and B out-of-pocket costs. Generally, under Medicare, you are responsible for a portion of the cost after deductibles. Your Medigap insurance may pay for your portion of coinsurance, copays, and other costs you owe.
2. Medigap provides some long-term care coverage. With Medicare, you get a limited number of coverage days for hospital stays, time in a skilled nursing facility (for example, after surgery or for rehabilitation services after a fall), or if hospice care is needed. Medigap provides additional time in these facilities, just in case.
3. Medigap covers health care needs when traveling abroad.² If you don't plan to travel frequently, it might be more cost effective to look into travel insurance, including medical evacuation insurance for emergencies overseas. Pricing will depend on where you are going, your age, and how long you will be traveling. Read Viewpoints on Fidelity.com: Retiree travel tips for staying healthy abroad.
4. Medigap generally lets you keep your doctors. Still, it's important to check with your doctors, specialists, hospitals, and medical facilities to make sure they accept the exact insurance company and Medigap policy you are considering.

When should you enroll in Medigap?

You can enroll in a Medigap plan after you've enrolled in Medicare Part B. Generally, there are 2 time periods when you'll be eligible without any medical underwriting or worry about pre-existing conditions.

• You've turned 65 and enrolled in Part B. In this "initial enrollment period," you have 6 months to select and enroll in a Medigap policy.
• You are older than 65 and losing employer coverage. Once you enroll in Medicare Part B, you'll have 6 months to buy a Medigap policy.

If you miss your initial 6-month enrollment window, insurance companies generally require medical underwriting and you can be denied coverage, or may have to pay a higher premium for a Medigap policy, sometimes substantially higher.

As time passes, you can switch plans based on cost or a different level of coverage, but do so cautiously. Do not stop paying premiums on your existing plan before you find a new plan that will accept you. Switching by choice usually means you'll be subject to medical underwriting. Higher costs or outright denial may be the outcome.

How much Medigap coverage?

When deciding how much gap coverage you'll need, it's important to think about your health situation at age 65 and how healthy you might be at 75, 85, and 95. Steve Feinschreiber, senior vice president at Strategic Advisers, Inc., a Fidelity Investments company, offers 4 rules of thumb to consider as you shop for Medigap insurance:

1. Don't overestimate the status or durability of your good health. "Consider the practical reality of needing more insurance as you age," advises Feinschreiber. "Even elite athletes run into health problems as they move through the decades."
2. Use your family health history as a guide. "Talk to your doctor about aging and take a look at your family history," says Feinschreiber. "It could be a good guide to help decide the kind of coverage you might want to plan for."
3. Choose your insurance separately from your spouse. Since there is no "joint" or "family" coverage under Medicare, it may be most cost effective for you and your spouse to choose different coverage options from separate insurance companies.
4. Weigh costs vs. coverage. Medigap plans can be quite costly. "If you find the costs for gap insurance are hurting the overall health of your retirement income plan, think about where you might be able to make trade-offs," says Feinschreiber. "It's about finding the right balance so you have sufficient coverage and don't run out of money over the course of your retirement."

Countdown to Medicare

Because choosing a Medigap plan can be rather time consuming and complicated, it's a good idea to get started early, perhaps by age 64, or at least 6 months before you retire. To simplify the process, use our checklist.

Fortunately, the transition into Medicare and Medigap was quite seamless for the Ottos. They realize that their needs may change over time, especially as they curtail travel plans as they get older. "Although we've seen costs increase over the last 2 years since we enrolled in Medigap, we have the right level of supplemental coverage for now and think we're getting good value at $800 per month for the both of us including dental coverage," said Alison.

Retirement rules of the road

From your 20s and on, here are some steps to consider on your road to retirement.

Fidelity Viewpoints

Key takeaways

• In your twenties and thirties, it's important to set good financial habits. That means establishing an emergency fund, limiting debt, and saving for the future.
• In your thirties and forties, life may get more complicated, and your finances might as well. Trying to accomplish all of your goals may require a plan.
• In your fifties and sixties, you may begin to think about retirement. That means creating income from savings and managing your finances without a regular paycheck.

Life is a journey with surprising twists and turns—and so is saving for your future (AKA retirement). Marriage, babies, divorce, bills, bonuses, job changes, and more can throw you off course—or give you an unexpected boost forward. But, while there are lots of things you can't predict, there are a few key things to think about at every age that can help increase the odds of success.

Here are some road-tested ideas—by age—to consider along the way. They are not meant to be rigid, one-size-fits-all directives, but guideposts to help you stay on track.

Starting out

In your twenties and thirties you're likely at the beginning of your career, and much of your take-home pay may be going to pay student loans, credit card debt, and monthly living expenses. Saving for "the future" may not be top of mind—but when it comes to retirement planning, it's never too early to start saving.

Consider saving at least a total of 15% of pretax income each year.
It should help ensure enough retirement savings to maintain a person's current lifestyle in retirement. While 15% may seem like a lot, "free money," like employer-matching contributions, to a 401(k), 403(b), or other workplace retirement account, or profit sharing from an employer, counts toward the annual savings rate.

No 401(k)? There are still ways to save for retirement. As long as you have some earnings, there are some tax-advantaged saving options, such as IRAs and self-employed 401(k)s.

If saving 15% immediately is tough, save what you can, and perhaps aim to increase the savings rate each year by 1%. For example, an investor starting at 5%, can aim to increase to 6% by year-end, bump it up to 7% the year after that, etc.

Watch "must-have" expenses, working to keep them at no more than 50% of take-home pay.
Some expenses simply aren't optional, such as housing, food, health care, transportation, child care, and debt payments. But just because some expenses are "essential" doesn't mean they're not flexible. Small changes can add up, such as turning down a thermostat a few degrees in the winter (and up in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work.

Try to save 3 to 6 months of essential expenses in an emergency fund.
An emergency, like an illness or job loss, is bad enough, but not being prepared financially might only make things worse. Think of an emergency fund contribution as a regular bill every month, until there is enough to cover essential expenses for 3 to 6 months. After that, save for those short-term expenses that pop up unexpectedly. Setting aside 5% of monthly pay can also help with these "one-off" surprise expenses. If saving enough in an emergency fund is challenging, consider having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings.

Building for the future

In your thirties and forties, you're probably focused on buying a home, funding your kids' college and your retirement, and just paying the monthly bills. Managing your finances may be a balancing act. That's why it's important to have a plan.

Make the most of tax-advantaged accounts.
When saving for retirement, it's makes sense to do it in tax-advantaged accounts like traditional and Roth IRAs and 401(k)s, and health savings accounts (HSAs).

For those saving in taxable accounts too, consider having less tax-efficient investments (like taxable bonds and bond funds or stocks you trade short term) in tax-advantaged accounts and more tax-efficient assets (like stocks and stock funds held for the long term) in taxable accounts.

A balance between accounts where withdrawals in retirement are taxable [like traditional IRAs and 401(k)s] and those where withdrawals are tax free¹ (like Roth IRAs and HSAs) can also help manage taxes in retirement.

Invest for growth.
If retirement is decades or more away, there is plenty of time to ride out the inevitable ups and downs of the stock market. So make sure to consider stocks, which historically have produced higher long-term returns than bonds and cash, albeit with more volatility.

Plan.
Building a mix of investments for the long term, which reflects your time horizon, financial situation, and risk tolerance, is important. It is a good idea to stay diversified. Remember that you may have 25-plus years in retirement and you’ll need to outpace inflation, so you'll probably need to keep growing your portfolio and have an investment mix tilted toward growth.

If you don’t have the skill, will, or time to manage your investments, consider a target date fund, asset allocation fund, or a managed account, each of which typically adjusts the investment mix over time, and also provides professional management. And remember to revisit and review your investments at least once a year or when your situation changes.

Getting ready for retirement

In your fifties and sixties, you're getting closer to a point when you might like to retire. So, it's a good time to think about a plan for generating income in retirement. Think about the lifestyle you want, and creating a retirement savings and spending plan.

Make the most of Social Security.
The longer you can wait to take Social Security (up to age 70), the higher your monthly benefit will be. Consider this hypothetical example: Colleen is 62, with a full retirement age of 66. (Full retirement age is the age when you first become entitled to full or unreduced Social Security benefits.) If she starts taking benefits at 62, she will receive $1,200 a month. If she waits until 66, she will receive 33% more, or approximately $1,600 a month. If she waits until 70, her benefits will increase another 32%, to almost $2,112 a month.² If she were to live to age 89 (her life expectancy), her lifetime benefits would be about $38,000, or 13%, greater if she waited until age 70 rather than age 66 to collect benefits.³

If you're married, there are more advanced strategies to maximize your combined benefits. And if you are divorced, you may still be able to claim your ex’s benefit, if it's higher than yours. 

Think 45% of retirement income from savings. 
Fidelity analyzed extensive spending data and found that most people needed to replace between 55% and 80% of their preretirement income after they stopped working to maintain their lifestyle.⁴ Of course, you may need more or less depending on your situation. While some costs—like savings, taxes, and insurance—may decline in retirement, you may spend more on health care, travel, and entertainment. Where will the money come from? Social Security may cover some of your spending needs. But, our research shows that at least 45% of a person's pretax paycheck may need to be replaced from savings,⁵ including pensions, although the exact amount will vary depending on income, retirement age, and other factors.

Figure out expenses.
As you near retirement, make a detailed retirement budget to see how much money is needed to cover essential expenses such as food, shelter, and insurance, and see what can be covered by guaranteed income from sources such as Social Security or a pension. An annuity is one way to create a simple and efficient stream of income payments that are guaranteed for as long as you (or you and your spouse) live.⁶

Thriving in retirement

Now is the time to reap the benefits of your hard work and years of saving and planning. It is important to manage withdrawals from savings so you won't run out of money. That means learning a few more rules of the road. Consider the following to make sure your plan stays on track.

Manage withdrawals.
As a rule of thumb, Fidelity research suggests holding portfolio withdrawals to no more than 4% to 5% of your initial retirement assets, adjusted each year for inflation, over the course of your retirement horizon. Of course, your particular withdrawal rate will likely depend on a variety of factors, including your investment mix, your anticipated life span, and market performance.

Update or establish your estate plan.
No matter how much money you have, it’s important to have an estate plan and decide who will inherit your assets. An estate plan goes much further than a will. Not only does it deal with the distribution of assets and legacy wishes but it may help you and your heirs pay substantially less in taxes, fees, and potential legal expenses.

Keep your eyes on the road

While budgeting and saving may not be fun, worrying about money when you're retired sure isn’t either. If you still have many years until retirement, saving more now can have the biggest impact. If you are close to retirement, consider working a bit longer, thereby potentially boosting savings and increasing your Social Security benefit. If you're in retirement, you can also try to boost cash flow by cutting spending, working part time, or tapping home equity. And at any stage, attention to expenses and tax-savvy planning can help.