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Maximizing the Power of the Roth
How advisors can supercharge retirement savings with Roth strategies
Happy Sunday everyone, and welcome to Benzinga’s financial advisor newsletter.
As a result of Trump-era tax cuts, some Americans turned to the Roth IRA to save for retirement and take advantage of a favorable tax situation. However, those tax cuts are set to expire after 2025.
So, today’s Industry Chatter piece provides key tactics to help your clients maximize the power of the Roth before these tax benefits go away. Let’s dive in!
Lastly, if you would like to be featured in our upcoming advisor spotlight editions, click here to send us an email.
INDUSTRY CHATTER
Seasoned advisors know that utilizing tax-advantaged accounts is a vital part of the gig.
When it comes to tax-advantaged accounts, one of the best places to look is Roth accounts.
A Roth allows clients to grow their money in an after-tax pot, which means the funds can be withdrawn later with significant tax savings.
Supersize the Roth
Advisors working with a high-income client can investigate to see if their client has access to a mega backdoor Roth conversion through his or her retirement plan.
These conversions involve employees contributing funds into their 401(k)s as after-tax contributions, and then those funds are converted to a Roth IRA.
A person with a traditional Roth 401(k) can contribute as much as $23,000 of his or her salary into the account for 2024. However, a mega backdoor Roth can push that amount up to $69,000 this year.
To add to the benefits, an individual over 50 years old can go even further, with a cap of $76,500 for 2024.
Some Rules & Regulations
There are several requirements for a client to be eligible for a mega backdoor Roth.
The client’s 401(k) provider must allow for a Roth in general, and it must allow for in-service rollovers to a Roth IRA with after-tax dollars.
The easiest way to find out if this is possible is to have the client reach out to the 401(k) provider to ask if the option is available.
According to Fidelity, only about 10% of retirement plans at the financial institution permit the mega backdoor Roth, but the number has been climbing.
Taking It to the Next Level
If a client can save aggressively, there’s yet another step to contribute even more to Roth accounts.
An advisor can recommend a contribution outside of the 401(k) to a Roth IRA using the backdoor route, adding an additional $7,000 or $8,000 toward tax-advantaged accounts in 2024.
Altogether, a person under 50 could save $76,000 in tax-advantaged accounts this year, and an individual over 50 could stash away $84,500.
There are several considerations to ponder before taking the mega backdoor Roth route including lifestyle, income, and goals. However, if a high-income client has an immense savings capacity, their advisor could present this option.
For the right person, the mega backdoor Roth can save a considerable amount of taxes while maxing out retirement contributions.
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MARKET RECAP
Tech stocks in the Nasdaq 100, as tracked by the Invesco QQQ Trust, soared to record highs during the week, marking their fifth consecutive week of gains — the longest streak since January — driven by Nvidia Corp.‘s exceptional earnings report.
Shares of the artificial intelligence giant surged over 9% following its first-quarter financial results, which revealed a 262% year-over-year increase in sales, exceeding expectations and sparking a broad-based rally in semiconductor stocks.
Solar stocks, as monitored through the Invesco Solar ETF, enjoyed their best week since December 2023, potentially in response to President Joe Biden's increased tariffs on Chinese imports, including a significant hike on solar cells.
Risk sentiment waned in non-tech sectors, as hawkish Fed meeting minutes and S&P Global's business surveys indicated renewed inflationary concerns, raising fears of prolonged higher interest rates. The Dow Jones fell on Thursday, suffering its worst session in over a year.
The hype around meme stocks deflated this week, with GameStop Corp. plummeting and marking the worst performance among Russell 1000 stocks.
AI's Trillion-Dollar Market
Wedbush analyst Dan Ives forecasts trillion-dollar valuations in tech, driven by the AI revolution, following Nvidia’s stellar quarterly results. Nvidia’s data center business grew 427%, fueling its stock rally. Ives likens the AI boom to the 1995 internet revolution, predicting a significant impact on the tech industry with substantial investor participation and transformative growth.
Inflation Stress Rises
Retail traders are increasingly stressed by inflation and skeptical of Federal Reserve rate cuts, according to a Charles Schwab sentiment survey. Bullish sentiment on U.S. stocks fell to 46% in the second quarter, while 79% view cryptocurrencies as risky investments.
Ethereum ETFs Approved
The Security Exchange Commission approved the first step on the path to spot Ethereum exchange-traded funds, paving the way for increased mainstream and institutional investment in the second most valuable cryptocurrency. The approval reflects growing regulatory acceptance of cryptocurrencies, potentially leading to capital inflows from mainstream investors.
Crypto In Politics
Cathie Wood‘s prediction that cryptocurrency will be a significant issue in the 2024 White House race is proving accurate. As young voters increasingly favor candidates supporting crypto, politicians are adjusting their stances.
Meme Stocks Decline
Interest in meme stocks like GameStop and AMC Entertainment Holdings Inc. has waned following Roaring Kitty’s exit from social media. Investors on Reddit's WallStreetBets forum are now focusing on other stocks, including Nvidia, Tesla Inc. and Nikola Corp.
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THE WEEK AHEAD
Economic Data
Monday: Memorial Day holiday
Tuesday: S&P Case-Shiller home price index, Minneapolis Fed President Neel Kashkari speaks, Consumer confidence
Wednesday: New York Fed President John Williams speaks, Fed Beige Book
Thursday: Advanced U.S. trade balance in goods, Advanced retail inventories, Pending home sales
Friday: Personal income, Personal spending, PCE index, Core PCE index, Chicago Business Barometer (PMI)
Earnings
Monday: ASML, UBS Group, Advent Technologies, San-A Co
Tuesday: Yara International, Sonova Holdings, Vestas Wind Systems
Wednesday: Volkswagen, Bank of America, Roche Holding, Henkel AG & Co
Thursday: Auto Trader, Arcadis NV, Apollo Global Management
Friday: AstraZeneca, Roche Holding, Amgen, Barclays PLC
Click here for the full calendar of economic data and earnings reports.
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