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Learn how to start investing and about different types of retirement investing accounts.

Unlocking the Potential of the Mega Backdoor Roth 401(k): A Comprehensive Overview

01.17.2023 by admin // Leave a Comment

A mega backdoor Roth 401(k) is a good tool for high-income individuals to save more money for retirement and reduce future taxes. It is called a “backdoor” Roth 401(k) because it allows individuals to contribute above the 401(k) limit – which is $22,500 in 2023. Through a mega backdoor Roth 401(k) you can contribute up to $66,000 in 2023 if you’re under 50 years of age. There are some important considerations to keep in mind when using this strategy. This includes whether or not the plan includes automatic conversions. Learn if this strategy of using a mega backdoor Roth 401(k) is right for you.

What is a Mega backdoor Roth 401(k)

A mega backdoor Roth 401(k) is a way to contribute additional funds to a 401(k). It involves making after-tax contributions to your 401(k) through your employer. It is a useful tool for high earners who want to take advantage of tax-free growth and the withdrawal benefits of a Roth retirement account and have already maxed out the pre-tax maximum of their 401(k). Because the tax is paid prior to the contribution, any earnings are tax free. These tax savings can really add up the earlier you leverage this tax strategy in your career.

How Much Can You Contribute to a Mega Backdoor Roth 401(k)

Every year, the IRS sets the employee pre-tax and Roth 401(k) contribution limits. The maximum combined amount you and your employer can put into a 401(k) in 2023 is $66,000 for under age 50. For over age 50, the maximum is $73,500 in 2023.

Does Your Mega Backdoor Roth 401(k) Plan Offer Automatic Conversions

When signing up for the mega backdoor Roth 401(k) through your employer, it is important to understand if the plan supports automatic conversions. This means that once new contributions are made to your after-tax account they are immediately converted to your Roth account. Though the contributions have already been taxed, any earnings from the contributions haven’t been taxed. An automatic conversion can reduce your tax liability on each conversion. This is because it eliminates the time the incoming money would be accruing taxable earnings. If your company does not offer this, you may have to do it manually and it could result in higher taxes. Converting any earnings to a Roth will trigger a tax bill in the year of the conversion. So, if you have to do a manual conversion you’ll want to do it the same day the contribution is made.

When Can You Start Withdrawing From a Roth 401(k)

As of 2023, the earliest you can withdraw from your 401(k) is 59 ½ years old without incurring a penalty. There are some exceptions to this rule. You may be able to take penalty-free withdrawals of your contributions at any time, as long as you held the account for at least 5 years. You can also withdraw 401(k) earnings if you meet these exceptions:

You become disabled
The funds are used for certain qualified higher education expenses
The funds are used to buy a first home (up to $10,000 lifetime limit)
The funds are used to pay for unreimbursed medical expenses that are more than 7.5% of your adjusted gross income
You use the funds to pay for health insurance premiums while you are receiving unemployment benefits

Laws do change, so it is always best to consult your accountant before you make any withdrawals of your Roth 401(k). These also are available for Roth 401(k) accounts and may not apply to other types of retirement accounts. If you do withdraw early, even following these exceptions, you will lose out on tax free future earnings.

Should You Contribute the Full Amount to a Mega Backdoor Roth 401(k)

Ultimately, how much you contribute to a Mega Backdoor Roth 401(k) depends on your situation. You may want to stay more liquid in your taxable accounts given the current economic uncertainty. Your 401(k) plan may not offer as many investment options as your Roth IRA. The tax savings now with a pre-tax 401(k) may also be more impactful than the tax savings realized 30 years from now. Or, you may have better investments available outside your 401(k) which outweigh any future tax savings. As you start earning more money though, your financial plans should be reassessed. It is a great time to consider to if the Mega Backdoor Roth 401(k) should be part of your retirement savings strategy.

How to Buy Treasury Bills at Charles Schwab

01.10.2023 by admin // Leave a Comment

After over a decade of low interest rates, Treasury bills are finally starting to look attractive. Treasury bills are some of the safest investments in the world, and as of January 2023, are paying over 4% interest.

So, how do you buy Treasury bills? You can buy Treasury bills at Treasury Direct and brokerages, including Charles Schwab. I already have an account at Charles Schwab, which is why I started looked into how to buy Treasury Bills with them, though other brokerages may be just as easy. Here is how I bought a 3 month Treasury Bill at Charles Schwab.

What is a Treasury bill

A Treasury bill, also known as a T-bill, is a short-term debt obligation issued by the U.S. government. Treasury bills have different maturity time frames including 3 month, 6 months, 9 months, a year and longer fixed timeframes. T-bills are sold at a discount to their face value. This means you will pay less than face value, and receive the interest + initial principle (face value) when the T-bill is redeemed at maturity. Treasury bills are considered some of the safest investments because they are backed by the U.S. government.

Why To Buy A Treasury Bill

Before we go into how to buy a Treasury bill, why should you buy a Treasury bill in the first place? Right now, there is a lot of uncertainty in the economy and stock indices have been in a downtrend. There are limits to how much you can invest in Series iBonds, and also a mandatory 1 year holding period w/ a 5 year mandatory holding period to avoid a 3 month interest penalty. With inflation expected to go down, the value of buying Series iBonds isn’t as simple. Though the interest rates in January 2023 are 6.89%, in 6 months it will likely be lower and potentially comparable to the interest Treasury bills offers. With the recent increase in Treasury Bill interest rates, there are options to make 4%+ interest. And, you don’t have to hold for long with the options to buy 8-week and 12-week Treasury Bills.

Additionally, while Treasury bills are taxed federally, they are except from state and local taxes.

How to Buy a Treasury Bill at Charles Schwab

To buy a Treasury bill at Charles Schwab you will need a brokerage account. If you do not have a brokerage account, go to Charles Schwab and click “Open an Account.” You’ll need provide personal and financial information as well as transfer funds after the account is open, and it usually takes a few days before the cash is available to trade or buy Treasury bills.

Once you have a brokerage account:

Log in and open the “Trading” tab
Click on the “Bonds” heading
On the “Bonds” page, scroll down to “U.S. Treasuries” and click the term you want to buy
Select the specific Treasury bill you wish to purchase and enter the desired quantity
Review and confirm the details of your order, including the price and any fees
Double check the price, as that will be the amount moved from your cash to the Treasury bill
Submit your order and wait for it to be processed. If the market is open, it will be processed that day. If the market is closed, it will be processed the next business day.
Once your order is complete, go to the “Accounts” tab, select “Positions” and scroll to “Fixed Income”. You will now see your Treasury bill there in your account.

How to Cash Out Your Treasury Bill On The Maturity Date

When a Treasury bill in a Charles Schwab brokerage account matures, the proceeds will automatically be credited to your in cash. No actions are needed to sell the Treasury bill or receive the proceeds.

The cash in your account will be the face value of the Treasury bill along with any accrued interest. If you hold the Treasury bill in a taxable brokerage account you will pay federal taxes on the earnings but are exempt from state and local tax. If you hold it in a retirement account like an IRA or Roth IRA, the tax rules will follow the tax rules for those accounts.

What Does Charles Schwab Charge to Buy A Treasury Bill

Pricing isn’t static, so be sure to check out https://www.schwab.com/fixed-income/pricing for the latest fees. As of January 4th, 2023 it is free to purchase online, and $25 if purchased broker assisted.

Why To Buy a Treasury bill at Charles Schwab vs Treasury Direct

When I started researching how to buy Treasury bills, I learned you could also buy directly with Treasury Direct. However, when I bought Series I-bonds on Treasury Direct I found the UI to be complex and a pain to log into my account. Since it is easy to log into Charles Schwab, and they also have an easy to use mobile app, I decided to buy through Charles Schwab.

Investing in Your 20s: A Beginner’s Guide to Building Wealth Early

02.01.2021 by admin // Leave a Comment

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Investing in your 20s is crucial for building wealth and securing your financial future. However, it can be overwhelming to know where to start. Don’t get caught up in all the hype of the latest make money quick stock or crypto. As we’ve seen in the last year, those can go down as quickly as they went up. You have decades left to reap the benefits of investing in stocks and it’s important you make the right investing decisions for yourself. This beginner’s guide will walk you through the basics of investing, choosing the right investment options for your needs and saving for retirement. By starting early, you’ll have the advantage of time on your side to grow your investments and reach your financial goals.

Invest Enough In Your 401k To Get The Full Employee Match

A 401(k) plan is a retirement savings plan sponsored by employers. It allows employees to contribute to their retirement savings pre-tax in the United States. The 401(k) contribution limit for 2023 is $22,500, an increase of $2,000 from 2021. Don’t know if you have a 401(k) plan or match? Ask your boss or look at the internal benefits webpage at your company. If you are eligible, your company will have information on how to sign up. The contribution amount you elect will be taken directly from your paycheck.

At minimum, you should always contribute enough to your 401(k) to get the full match. As you start making more money, understand how much you’ll save on taxes and begin increasing your contributions until you hit the max. Also consider your money needs in the next 5-10 years. When you’re starting out in your 20s you’re paying down debt, saving for a car and saving for a house. It’s easier to put more money in retirement accounts when you’re no longer saving for a down payment.

Even though a 401(k) can be a set it and forget it account it’s best to check the performance of your 401(k) investments periodically. A 401(k) is a great investment vehicle; however, many companies limit what you can invest in. Even if you have a 401(k) you should also open a Roth IRA account for retirement savings and investments.

Open A Roth IRA To Lock In Gains Tax Free

A Roth IRA is a retirement account that offers you a tax benefit when you retire in the United States. Roth IRA contributions are not tax deductible. You also do not pay taxes when you withdraw money at age 59 ½ +. This is different from traditional IRAs and 401(k) plans.

Make sure you’re familiar with the benefits of a Roth IRA and the Roth IRA rules first. Important rules include you can only invest up to $6,500 in 2023 pending income eligibility and you can only withdraw certain money penalty free before 59 1/2. While you don’t pay taxes on gains, you also can’t write off losses on your taxes.

At the beginning of your career, your salary is lower, your taxes are lower and you have less money. It’s harder to contribute at all to your Roth IRA, let alone the maximum. At the same time, you have the opportunity for money you contribute to grow tax free for 40+ years. In a Roth IRA you also have the flexibility to invest in any stocks, ETFs and mutual funds you want.

How do you set up a Roth IRA? It’s very easy and can be done in minutes. Charles Schwab, Vanguard and Fidelity all offer Roth IRA accounts among others.

Invest Money Through ESPP and Vested RSUs

Do you work for a publicly traded company? Your company may offer an Employee Stock Purchase Plan, or ESPP. This benefit enables you to buy company stock at a discount. ESPP is a way for you to make extra money without any extra effort. The only steps? Enrolling in ESPP and deciding when you want to sell the shares. Whether you keep the shares or sell the shares is based on your own investment and tax strategy.

Another possible benefit to take advantage of is equity compensation. Restricted Stock Units (RSUs) are a popular way of giving company equity to employees at tech startups and large public companies. RSUs are a great way to grow your wealth. If they aren’t part of your comp plan today, inquire if this is something your company offers. A company may offer RSUs to employees, but may not offer them to all employees. Sometimes employees have to perform at a certain level, or need to be at a certain level, or they are offered as part of an employment package. Whether you keep the shares or sell the shares is based on your own investment and tax strategy.

Buy Individual Stocks in the Stock Market If You Like Risk

You want to buy individual stocks to get rich quick, but how do you know which one to buy? When starting anything, I always ask myself about what I’m willing to pay to learn. Learning anything cost money. Even if you teach yourself, you always need to buy the basics. For example buying / renting gold clubs or technology to watch how to videos on YouTube. How much are you willing to spend learning something new?

The thing about stocks is that there is a chance it could go to $0. That chance depends on which stock you pick. For example, Gamestop is a very volatile stock. If you buy a share and it comes crashing down you could lose most of your money when you decide to sell. This is why it’s good to know how much you’re willing to spend to learn something new.

If you’re willing to spend $100 to learn something new, buy $100 worth of a stock or several stocks. Say the stock goes up in value, great! If it goes to $1, you were willing to spend $100 to learn something new. Now, you’re left with $1 and knowledge about how to set up an investing account, how to buy a stock, how stock prices fluctuate, where to learn more about your investments, how to sell a stock, how to write off stock losses on your taxes and more.

When you buy your first stock consider buying a share of a company that excites you. That way, you’ll want to learn more about the company. You’ll want to listen to quarterly earnings, learn about market valuations and more. If you’re not excited about your first investment you’re less likely to spend extra time learning about investing in the stock market. Generally, stocks fall into two categories: growth stocks and value stocks.

Growth Stocks

Growth stocks are stocks that are considered to have the potential to outperform the overall market based on their future potential. These stocks usually don’t pay dividends and tend to be more volatile. Examples of growth stocks include Tesla, Roku, Square and Amazon.

Value Stocks

Value stocks are stocks that are currently trading below what they are really worth and the thought is they have the opportunity to provide a better return. Some value stocks also offer dividends so you don’t have to wait to sell a stock to get some cash. Value stocks are usually larger, more established companies. Examples of value stocks include companies like Verizon and 3M.

Both growth and value stocks have the possibility to go up in value and go down in value. There is no guarantee the stock will go up. And, if you think a stock is overvalued there is also no guarantee that stock will go down.

See Also: Smart Money Moves In Your 20s

Buy ETFs If You Don’t Want To Actively Manage Your Stock Portfolio

ETFs stand for electronically traded funds, also know as index funds. When you buy an index fund you are buying a basket of individual stocks. If you buy a S&P 500 ETF, you’re investing in all 500 companies that are in the S&P 500. The more diversified your portfolio, the less volatile your portfolio is. The goal of index funds is to match the performance of a specific benchmark.

There are fees for ETFs; however, they tend to be lower than mutual funds. Before you buy an ETF make sure you know what fees the ETF charges per year. The average fee for index funds is 0.15% according to Morningstar data from April 2019.

Keep Some Money In Low Risk Investments

As you’re getting established, it’s always a good idea to keep some money in low risk investments. This includes keeping your emergency fund in a high yield savings account, moving cash around to take advantage of bank bonuses, and buying short term Treasury Bills.

Investing Money In Your 20s Summary

No matter how you decide to invest money in your 20s it’s important you choose a strategy that works for you. Before you start investing, make sure you know the options that may give you free money to start investing. This includes things like a 401k employee match and RSUs. Other important considerations? When you’ll need the money, your risk tolerance and how much time you want to spend.

Investing money in your 20s is hard when you don’t have as much money and it’s new. Like everything, you’ll learn from your mistakes and get better over time. Even if you buy a bad stock, or sell a good stock early it’s better to learn these lessons when you have less money at stake.

Different strategies work for different people. Investing when you may need the money for a big purchase in the next 5 years is different than investing money when you don’t need money for 20 years. Different people also have different risk tolerances. If you’re going to lose sleep worrying about losing money in the stock market a lower risk, set it and forget it strategy may be more aligned to your goals.