If you’re in your 20s, 30s or 40s, you should consider a Roth IRA. If you’re self-employed, you may only have an IRA as a retirement savings option available to you. And a Roth IRA can be a great option.
An IRA is an individual retirement account that is available to most people even if you already have a 401(k). The main advantage of a 401(k) is the company match feature, but the other benefits apply to IRAs as well:
Pre-tax contributions that save on federal and state income taxes, and
Tax-deferred growth over your entire working life.
A Roth IRA is different from a traditional IRA because contributions are made after taxes have been paid. But since the contributions are made “after-tax,” you don’t have to pay taxes on that money when you withdraw the funds in retirement. Not paying taxes on IRA withdrawals is a huge benefit. Imagine not having to pay taxes on your income. You can have that with a Roth IRA.
Typically, people in their 20s have a lower income than when they’re in their 40s. This means that the younger person would be in a lower tax bracket, let’s say 20% of their gross income. If this twentysomething contributes $800 to a Roth IRA, they must first pay $200 in taxes on the $1,000 in income it took to make this $800 contribution. They would therefore start $200 behind another twentysomething who made a $1,000 contribution to a traditional IRA. How can that be good?
Well, the advantage starts to accrue after the contribution is made and over the rest of the person’s working life (potentially 40 years). Forty years later, with average investment returns of 7.5% per year, that $800 would be worth $14,400.
In a traditional IRA, all of that $14,400 would be taxable once it’s withdrawn. With a Roth IRA, none of that $14,400 would be taxable. At a tax rate which at that point could be 25% or 30%, you would potentially pay $4,000 in taxes on that money in retirement, vs. the $200 in taxes you would have paid your twenties.
If your investment returns are higher, as they would be with a system like ours, the advantage is even greater. The $800 would grow to $95,500 with our system, not $14,400! In that case, the tax savings (due to the higher tax bracket later in life) could be over $25,000. The tax advantages are much less significant for people in their 40s or 50s because the Roth IRA contributions have less time to grow and because people in their 40s and 50s are typically in a higher tax bracket.
Anyone under the age of 45 should investigate a Roth IRA and see if it makes sense for you. It’s also possible to contribute to both a 401(k) and a Roth IRA. You can contribute as much as you need to in order to max out the company match in a 401(k), and also contribute to a Roth IRA as long as you stay within the annual IRS limits on contributions.
There are even situations and strategies that can work for Roth IRA conversions for people over 50. These Roth conversion are fairly compled and you should consult a financial advisor to see if it makes sense for you.
Everyone’s tax situation is different, but you should see if a Roth IRA is right for you or you children. Your Social Security income is taxable when you retire. Your 401(k) and traditional IRA withdrawals are taxable when you retire. But withdrawals from a Roth IRA are not subject to taxes. Not having to pay taxes on retirement income makes it much easier and much simpler to manage your finances at this stage of your life.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
In his recent blog post, Ben Carlson of Reinholtz Wealth Management, said that our current stock market situation may turn out to be similar to the Roaring 20s – the 1920s that is. The graph below shows the Dow Jones Industrial average for the period between 1920 and 1929 just before the stock market crash of 1929.
In 1920, we had just emerged from a World War and the Spanish Flu pandemic. The decade began with a Depression in 1920 and 1921 and then the stock market rose by 500%.
Here is what Carlson has to say about the 2020s.
“Net worth is at all-time highs.
The stock market is at all-time highs.
Housing prices are at all-time highs.
Economic activity is at all-time highs.
The unemployment rate has been below 4% for more than two years.
You can even earn 5% on your cash!
People are spending money like crazy.
Retail sales have seen a massive jump per-pandemic levels:
Inflation partially explains this but even on a real basis these numbers are so much higher than the pre-pandemic trend.
Even after accounting for inflation, people are spending way more money on food these days:
Yes we love to complain about prices at the grocery store but that hasn’t slowed people down from spending.
In fact, people are eating out more than ever these days:
That period of Covid restrictions around eating out obviously sparked something in people that made everybody want to go out to eat more than ever before.
It’s not just eating out. People are traveling like crazy now too.
Plus, we’re in the midst of an AI boom.
In a keynote address last week, NVIDIA’s Jensen Huang listed all of the companies that now rely on the chipmaker:
NVIDIA’s market cap has gained nearly $1.7 trillion since the start of 2022.
Call it a bubble if you want but the AI revolution is coming regardless of current tech stock valuations. The future will include robots and AI-based personal assistants and tutors for your children and who knows what else.
Consumer sentiment doesn’t exactly line up with a roaring 20s mentality because people hate inflation and higher interest rates.1 But you have to watch what people do, not what they say.
People are spending money on food, travel, clothes and technology.
They’re investing in their 401k, IRA or brokerage account. They’re gambling in their Draft Kings or Fan Duel account. They’re day trading options in their Robinhood account.
People are acting like it’s the Roaring 20s, whether they agree with that sentiment or not.
It’s also worth pointing out that the orgy that was the Roaring 20s was followed by the Great Depression.
Booms are inevitably followed by busts. So it goes.
The current post-pandemic period also unleashed an entrepreneurial appetite for risk in this country the likes of which we’ve never seen before. Business formations are at an all time high.
Things could always be better.
But it’s crazy to be where we are considering where we were just four short years ago during the outbreak of Covid.
As far as I’m concerned, the Roaring 2020s are here.
Enjoy it while it lasts.”
None of us knows what the short-term future holds. Many people are worried about a big stock market correction after the huge growth in stock prices since October of 2022.
If this the beginning of a bubble, you want to stay invested because the gains are always highest at the end of a bull market run.
Our customers that follow our Market Signals recommendations can safely stay aggressively invested because the system will automatically get them out of stocks when things head south.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Updated: Mar 26
You simply cannot afford to lose money with your 401K and IRA accounts.
You need strong investment returns to create a retirement nest egg that can support a very comfortable retirement, but you should not take unnecessary risks to get there.
We often review retirement accounts that include investments in cryptocurrencies and other alternative investments. Some people place big bets on speculative stocks in their retirement accounts. Crypto and other investments like this do not belong in your retirement portfolio.
You might push back and point out the recent gains in cryptocurrencies. But remember that the key to any investment is not where it has been but rather where it is going.
Owning stock index funds also carries some risk in the short term. The stock market is very volatile. But in the long run, I would suggest that there is very little risk associated with large cap stock index funds. Over the last 30, or 50 or even 100 years, the S&P 500 had delivered annual investment returns of about 10%. That kind of consistent performance gives stock market investors confidence in their returns over the next 20, 30 and 40 years.
And if you use a system like ours, Market Signals, you can protect your retirement funds that are invested in stock market index funds against the short term losses that regularly occur in the stock market. The primary objective of our system is to protect your life savings against big losses in bear markets.
Advocates of bitcoin will tell you that it will double in price over the next year. But it could also drop by 50% over the next year. Nobody really knows.
Stock prices in the long run follow the earnings of the companies that they represent. There is nothing to peg the price of bitcoin against.
If you own cryptocurrencies in your 401K, you could see huge gains in the future. But you could also post huge losses. And if the value of those currencies goes way down, your retirement accounts could suffer tremendously. You will have no way to make up for those losses. And you might not have enough time to make up for the shortfall.
If you feel the need to invest in cryptocurrencies or commodities or other alternative investments, use play money for that. Use money that you can afford to lose. If you have a large balance in your retirement accounts and you feel the need to speculate, use less than 5% of your money for these kinds of investments.
Do not gamble with your retirement funds.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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