Published August 13, 2021
The stock market continues to trade in a relatively quiet manner waiting for the next piece of information that will provide a jolt to push stocks one direction or the other. While we wait, we take this opportunity to review a fundamental financial planning concept – the beauty of the Roth IRA. The commentary below comes from our friends at Delta. Roth IRAs are a perfect account type for our investment models as they are shielded from taxes and allow our outsized gains to stack up even faster. Herewith some comments on the Roth:
“When my teenage children earn money over the summer and ask where they should invest it, I say let’s get it in the market and let the eighth wonder of the world (the Law of Compound Interest) start working its magic, its miracle.
In addition to individual accounts, I had them open Roth IRAs. “But why two accounts Dad? What is a Roth IRA?” Mad Money’s Jim Cramer says the Roth IRA may be “the single greatest thing our government has done.” I explained how the Roth grows tax free (like other retirement accounts) and the withdrawals are tax free. “But what’s the catch?” “You have to wait 40-plus years to withdraw it.” 59 ½ seems a long way off to a 16-year-old.
Roth IRA key takeaways:
- Roth distributions which include earnings, capital gains & dividends on your contributions are not taxable. (No one knows what future tax rates will be, so having a portion of your savings in this bucket may end up looking very smart).
- Roths don’t have RMDs (required minimum distributions) so you can let the account grow as long as you want.
- Roth IRA contribution limits ($6,000 annually and $7,000 if you’re age 50 or older) are reduced or eliminated at higher incomes.
Put the Plan in Place
There are two scenarios in the chart above. First, the dotted red curve has the teenager add $6,000 for 11 years for a total of $66K. After 43 years, the account would be $1M (assuming the market grows at 7% – roughly the stock market average over the past 200 years). The second scenario has contributions for 43 years for a total of $258K. In this case, the solid blue curve would grow to $1.7M (again assuming 7% annual growth).
One way to accumulate wealth is to start investing at a young age and live a long time. Not all of us have that luxury anymore (talking about youth), but our children and grandchildren do and we should do everything we can to encourage working, saving and investing.”
Another piece of this puzzle is to employ our TimingCube models to drive profits in markets going both up AND down. If you need help opening a Roth account to be managed by our models, contact our MTA friends at firstname.lastname@example.org. They are full-service investment advisors, expert in our models, with decades of experience ready to help and serve you.
Ah, the dog days of summer. A very quiet, almost listless week on Wall Street kicked off with a slight -0.1% tick downward. Oil prices slid -2% on concerns Chinese government actions would hamper the global economic recovery. But then Tuesday the Senate passed the long-awaited infrastructure bill boosting industrial and materials stocks. Oil recovered its Monday slip as did stocks. A below-forecast core inflation report helped stocks Wednesday to a +0.2% lift in the market indexes. Another fractional gain Thursday and again Friday. Solid earnings from Disney helped keep the mood upbeat. Interest rates gave back almost all of their week-long rise while oil prices recouped virtually all of their Monday loss.
A quiet week saw indexes barely move day-to-day. But the direction remained higher leaving the S&P 500 up +0.78% as the index continues to hit new record high levels. The Nasdaq 100 (QQQ) was flat with a +0.21% move. Smallcap stocks were lower by -1.03% after three weeks of gains.
Warm wishes and until next week.