Broker Check

Monday Money Report

| October 30, 2023

The S&P 500 entered correction territory last week, meaning the index had a drop of 10% or more from the previous high point. Before you panic, take a look at the number of shares you own. If you’re still working and contributing to your investments, look at how many shares you purchased with the last contribution to your account, compared to how many you bought previously. While you are accumulating wealth, down markets are a good thing; you’re buying more shares.

The question for today is, where are you buying those shares? We talk a lot about asset allocation, meaning you have different types of investments. Another thing to consider is asset location, or where you own your investments. For your retirement accounts, this is a traditional account or a Roth. Here are three differences between Roth and traditional accounts:

  1. You receive a tax deduction when you contribute to your traditional retirement account. Both account types grow tax-deferred, meaning you aren’t taxed each year on dividends, interest, or capital gains. But only contributions to traditional accounts reduce your taxes now.

    Roth contributions are after-tax, meaning you receive no upfront tax benefits.
  1. Roth accounts do not have Required Minimum Distributions. Depending on the year you were born, you must begin taking distributions from your traditional retirement accounts somewhere between 72 and 75. The IRS has a table that lists the percentage of your account you have to withdraw each year based on your age.

    As your RMDs grow each year, this can push you into higher tax brackets, and trigger IRMAA, the Medicare surcharge that’s based on your income.

    Because you paid the taxes on your Roth contributions upfront, you are not required to take money out of the Roth. And when you do, that comes out tax-free.

  2. Roth accounts can be powerful wealth transfer vehicles. The latest legislation, called Secure 2.0, requires that most non-spouse beneficiaries withdraw all funds from an inherited retirement account within ten years. Traditional accounts also have a Required Minimum Distribution each year.

    Because a Roth account is not subject to RMDs, that money can grow for ten years after the death of a surviving spouse before it has to be removed from the Roth. And it comes out of the Roth tax-free.

Deciding which account type to fund is worth a discussion with your financial advisor and tax professional. You may want to fund a traditional account now and convert some of that to a Roth early in retirement. Or, if you’re young, the compounded tax-free growth may make a Roth contribution valuable now. Either way, don’t make the decision by default.

Your action item this week is to contact the credit bureaus to freeze your credit. This prevents someone from opening a fraudulent account in your name.

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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.