Stocks were up and down last week, but still positive for the week. Friday’s gains were led by bank stocks, and the news that Gilead Sciences Inc’s drug remdesivir cuts Covid-19 mortality by 62%. This eased fears about rising case rates. Oil also increased, to just over $40 a barrel. Oil prices affect US producers due to our reliance on shale and other less-easily accessible oil fields.
People are starting to worry about a bubble, but if you look at the NASDAQ-100, an index that tracks large technology companies, the gains are no where near the surge we saw leading up to the tech bubble. There is also plenty of liquidity in the capital markets, so equities, or stocks, still have room to grow.
This week brings us the 2019 tax filing deadline. As part of the CARES Act, Congress extended the deadline not only to file taxes, but also to pay any tax due for last year to July 15th. That also gives you the opportunity to fund a retirement account for last year until the 15th.
I always recommend having a strong emergency fund. Depending on your situation, this should be 3 to 6 months of living expenses in a cash-equivalent, such as a savings account or money market. And that’s even more important given all the uncertainty in the world right now.
But, if you have your emergency savings on hand and still have funds available, funding your IRA, Roth IRA or, if you are self-employed, your SEP IRA, is a good step towards your retirement. How do you make the decision of which one to fund?
The IRS will make part of that decision for you. If you make less than $124,000 as a single person, or $196,000 if you are married and filing jointly, you can fund a Roth IRA. Remember, this is after-tax money going into an account that grows tax deferred and, under most circumstances, comes back out tax-free.
If you made more than $139,000 as a single person, or $206,000 as a married couple, and you have a retirement plan at work, you can still contribute to a Roth IRA using the “Backdoor Roth” approach. Or as I like to call it, three times the paperwork for the same outcome. You contribute to an IRA but, because of your income, it is not deductible. Then you convert those funds to a Roth. Moving after-tax dollars from an IRA to a Roth is generally not a taxable event. There are some other considerations around this, such as if you have taxable money in an IRA already. But it is something to discuss with your advisor and tax planner, as is just making a non-deductible IRA contribution.
If you’re self-employed and don’t have any employees, you can contribute to a SEP IRA. Contributions to a SEP are tax deductible, and you can contribute up to 25% of your income, to a maximum of $57,000.
Every type of retirement account has its own nuances, but they are all tax-advantaged. I firmly believe it is every American’s civic duty to avoid taxation. Tax evasion sends you to jail, and we don’t want to go there. But using the system to minimize our taxes is just smart financial planning.
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