It should be apparent that any significant change to your financial situation – such as getting a new job with a significantly higher salary, getting hit with significant long-term expenses, or receiving a large inheritance – can impact your retirement investment planning and strategy.
But changes to your personal life, particularly your family status and composition, can have a significant impact on your self-directed IRA investment planning as well. Let’s take a look at a few of the most common situations.
Marriage. Getting married can change virtually every aspect of your life, and your retirement strategy is no exception. Doing your long-term retirement planning as a couple, you may decide upon a vastly different investment strategy than you had when you were single. For example, if your income is significantly higher than that of your spouse, or can make larger contributions to your self-directed IRA and other retirement accounts, then you’ll need to come up with an appropriate joint investing strategy to maximize your collective nest egg.
Divorce. On the other side of the coin, a divorce can also be a personal change that requires you to re-evaluate your retirement planning.Not only will a divorce likely cause you to name new beneficiaries for your account, depending on the nature of your divorce, you may need to go through the process of dividing up the assets within your account, and doing so in the most tax-advantaged manner.
A court-approved divorce settlement can divide one spouse’s IRA between the two individuals, but the tax consequences can be significant, depending on how the division is made.Under federal law, this type of transfer can be performed on a tax-free basis provided that (1) the division is formally included in the property settlement agreement or divorce decree, and (2) the funds are transferred directly from one spouse’s IRA directly to the other spouse’s account. Not meeting these two requirements could subject the original account holder to an immediate year tax liability.
Having Children. The birth of your first child is certain to be one of the most memorable days of your life. Among everything else that will change, you’ll need to plan for their financial security, and this might impact your investment allocation within your self-directed IRA, and you may even wish to name your children as beneficiaries of your account.
And when your children grow up and move away from home, either to go to college or to enter the workforce, you may be able to use your self-directed IRA to provide them with an extra measure of support. You can make penalty-free withdrawals from your account before reaching retirement age if you’re paying their qualified educational expenses, or contributing up to $10,000 to help them buy their first home.
As your family grows and changes over time, you’ll put yourself in the best position to reach your retirement goals if you understand how family changes can impact your investment and planning strategy.