Schwab Intelligent Portfolios September 25, 2017

    If you're interested in investing with Schwab Intelligent Portfolios®, you may be wondering what type of account you should open. With all the possibilities out there, the decision can seem daunting—but it doesn't have to be. Start by asking yourself a few questions:

    1. Are you saving for retirement?

    If your goal is to invest for growth over a long time horizon, and you don't expect to need the money before age 59½, consider an individual retirement account (IRA). Schwab Intelligent Portfolios offers three types of IRAs: traditional, Roth and rollover.  Here's how they differ:

    • Traditional: With a traditional IRA, you won't pay taxes on investment earnings until you make withdrawals, and you may get immediate tax benefits if your income is below a certain level.1 Someone who anticipates being in a lower tax bracket after retirement might want to consider a traditional IRA.
    • Roth: With a Roth IRA, contributions are made in after-tax dollars and qualified distributions can be withdrawn tax-free after age 59½. For someone who believes she is in a lower tax bracket now than she will be later on, doesn't mind deferring the tax benefit and qualifies to contribute,2 a Roth IRA can be a good choice to consider.
    At a glance: Roth IRA vs. traditional IRA
    Roth IRA Traditional IRA
    Taxes
    • Contributions are not tax-deductible.
    • Earnings can grow tax-free.
    • Contributions may be tax-deductible.
    • Earnings can grow tax-deferred.
    Withdrawals
    • Contributions are always tax- and penalty-free.
    • After age 59½ and if the account has been open 5 years, earnings are tax- and penalty-free.
    • Distributions are not required.
    • After age 59½, withdrawals are penalty-free, but taxed as current income.
    • You must begin taking distributions at age 70½.
    Income limitations
    • You aren't eligible for a Roth IRA if your earned income is above a certain level.2
    • Anyone with earned income can contribute to a traditional IRA.
    • Some contributions may be tax-deductible.1
    Age guidelines
    • None
    • You can contribute before reaching age 70½ if you have earned income.

    • Rollover: With a rollover IRA, you can transfer money from a workplace retirement plan sponsored by a former employer into an IRA without paying withdrawal penalties at the time of transfer. You can roll over your money into a Roth IRA or a traditional IRA. There are a number of important considerations when evaluating whether a rollover is appropriate for you. You might consider a rollover IRA if you want to consolidate your retirement savings into one plan or are looking for investment choices that aren't available in either your old or new employer's plans. However, you have alternatives: You may be able to leave your money in your former employer's plan; you can roll it into your new employer's plan; or you can withdraw the money entirely. Be aware that if you withdraw the money, it will be taxable and subject to a mandatory 20% federal withholding rate. You may also face early withdrawal penalties if you're younger than 59½.

    2. Are you self-employed or a sole proprietor?

    If you are self-employed or own a small business as a sole proprietor, a compelling retirement option for yourself and your spouse might be a Simplified Employee Pension plan (SEP-IRA). With this account you can make retirement contributions for yourself or your spouse (based on eligibility, see below). Your contributions are tax-deductible and the earnings are not taxed until they are withdrawn. One advantage is that SEP-IRAs are easy to set up and maintain. To be eligible for a SEP-IRA account that invests in Schwab Intelligent Portfolios, you must meet one of the requirements:3

    • You must be a sole proprietor (a person who, individually or with a spouse, owns 100% of an unincorporated business), who has no employees other than a spouse, who is included in the SEP-IRA.
    • You must be a partner in a partnership, and the SEP-IRA plan includes only partners or their spouses.
    • You must be the sole shareholder of a corporation (a person who, individually or with a spouse, owns 100% of the corporation), who has no employees other than a spouse, who is included in the SEP-IRA.
    • You must be the spouse of a person described in the above scenarios.

    3. Do you own a small business with fewer than 100 employees?

    If you are self-employed or own a business with 100 or fewer employees, you are eligible to establish a SIMPLE IRA plan, as long as it is the only retirement plan you fund. Companies maintaining another employer-sponsored retirement plan in the same year are not eligible. You must generally include all employees age 21 and over if they received at least $5,000 in compensation during any two prior years and if you reasonably expect that they will receive at least $5,000 in the current year.

    Employer contributions are tax-deductible. Earnings grow tax-deferred, and you pay no taxes on assets until you withdraw them in retirement.

    First, establish your SIMPLE IRA plan with Schwab. As employees open their accounts, they can choose to enroll in Schwab Intelligent Portfolios.

    4. Are you setting aside money for heirs?

    If you're creating an account that you want to pass on to someone after you die, consider a revocable living trust. This is a private legal arrangement that places your assets in trust for your benefit during your lifetime, and specifies where you'd like them to go after your death. Generally, the money bypasses probate court, saving time and cost (however, it won't shield your heirs from any applicable estate taxes). You can name yourself as the single trustee or include your heir as a second trustee, which would allow him or her to manage the account if necessary. It can be helpful to reach out to an estate planning attorney or a tax professional to discuss the finer details of your estate plan. 

    5. Are you creating a brokerage account?

    Just want to invest? A taxable account comes with no particular tax advantages or estate-planning details to consider. However, when you open a brokerage account with Schwab Intelligent Portfolios, you will be able to choose one of five types:

    • Individual: You are the sole owner, and upon your death the account will become part of your estate.
    • Joint Tenant with Rights of Survivorship: This is account is co-owned with another person (or people). If you die, your interest in the account automatically transfers to the surviving owners.
    • Tenants in Common: Under this arrangement, two or more people share ownership of the account. However, if an owner dies, his share isn't automatically transferred to the surviving owners, but to the heirs named in his will.
    • Community Property: A community property account is owned by two married people and contains assets acquired during the marriage. Each spouse has equal ownership in the assets, and in the event of death or divorce the account would be split between the two owners. Community property accounts are only allowed in certain states, including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
    • Custodial: A custodial account is managed by an adult (not necessarily the child's parent) for the benefit of a minor child. As soon as the child reaches age 18 (or, in certain states, 21), she can take full control of it.

    How Schwab Intelligent Portfolios Can Help

    Schwab Intelligent Portfolios offers up to 10 different types of accounts. One of them may be appropriate for you. If you're still unsure about which account type to choose, contact a Schwab investment professional at 855-694-5208 or reach out through live chat.

    1. While anyone with earned income can contribute to a traditional IRA, contributions are tax-deductible only if your modified adjusted gross income (MAGI) is below certain levels. For the 2017 tax year, those levels are: $72,000 for single tax return filers; $119,000 for filers who are married filing jointly and are covered by a workplace retirement plan such as a 401(k); and $196,000 for filers who are married filing jointly and are not covered by a workplace retirement plan.

    2. For the 2017 tax year, you must have a MAGI of less than $133,000 (single filer) or less than $196,000 (married filing jointly) in order to contribute to a Roth IRA.

    3. The Employee Retirement Income Security Act (ERISA) sets fiduciary standards for many types of retirement accounts. Only certain SEP IRAs that are exempt from ERISA rules are available to invest in Schwab Intelligent Portfolios. Only self-employed or sole proprietors (and their spouses) are eligible to open this type of account.

    Schwab Wealth Investment Advisory, Inc. does not provide legal, tax or accounting advice. Where specific advice is necessary or appropriate, SWIA recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

    A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options, which may include, but not be limited to, keeping your assets in your former employer’s plan; rolling over assets to a new employer’s plan; or taking a cash distribution (taxes and possible withdrawal penalties may apply). Prior to making a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment-related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances. Visit schwab.com/rolloveroptions to review important information about the options that may be available to you.

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