Paul Winkler: All right, back here on “The Investor Coaching Show.” I am Paul Winkler. Paulwinkler.com is the website.
Upcoming Changes to 401(k)s
So there are some changes to 401(k)s coming to a neighborhood near you. We were just talking about getting involved in 401(k)s.
I like them because you’re basically taking income and saying, “I don’t need it today. Give it to me at some point in the future when I don’t have income.”
So you’re deferring your income to the future.
And one of the things that we often talk about is, “Hey, I can’t afford this.” I was on Channel 5 this week, and that was one of the topics. I said, “How do you get to the point where you’re actually putting more money away in your 401(k)?”
Well, maybe each raise that you get, if you get raises — hopefully you do — you take that raise, and you put at least part or some or all of it in your 401(k), and then before long, you might have up to 15% of your pay going into the 401(k). That’s kind of what you shoot for, typically.
It depends on your age. If you’re younger, it might be slightly less; you can get away with that. But if you’re older, you might want to do more.
So for the people that are older, this is a big deal with the changes that are coming because they have a maximum contribution in 2024 of $23,000. Now, for some people, that’s just way out of reach, but that’s going to be going to $23,500.
There are some people in the listening audience that go, “Yep, I’m going to do that. I want to do that and get an increase of $500.”
Because what they found is that 14% of people out there in 401(k)s do contribute the maximum. I was surprised at that number: 14%. It’s higher than what I thought it would be.
Catch-Up Contribution
So let’s say you’ve reached the age of 50, and they look at it and go, “Hey, in your younger years, you may be struggling just to make ends meet, and maybe you’re just getting a family started, getting your home started. You’re just getting things going, and maybe you didn’t put money away as much as you could. Maybe you were putting in a small amount. Maybe you were only putting up to match your employer.”
Typically, if you’ve got one, I’m really a big fan. If we can get up to the match that the employer’s putting in there for you for free, try to do that.
But let’s say you’re one of these people. You just didn’t do that earlier on in life. Well, when you hit age 50, you have a catch-up contribution, and that is where you can put another $7,500, is what that is for 2024. That number’s not changing, but now you’ve got $23,500 plus seven, so you got about $31,000 that you’re able to put away, pre-tax.
Or if you’re doing a Roth feature, if somebody has a Roth feature, well, for a lot of people that are in higher income tax brackets who can afford to put away that much, you have to really be careful about paying taxes and then putting it into Roth. Just simply because you may be deferring to a point in the future where your taxes are lower because you’re not working anymore.
So I really have people think hard about that. I’ve heard some financial firms just tell everybody to do it, and I gave a really egregious example a couple of weeks ago, where this guy had a $700,000 or $800,000 IRA.
The firm told him, “Right away. Do this right away. You take all of it and convert it.” And I walked through the tax ramifications, and it was absolutely awful. So you have to be super, super careful.
Following Rules of Thumb
A lot of times, what happens is people, they go by rules of thumb. I’ve heard that a lot of times financial people try to make things overly simple. They have rules of thumb about things and they just tell people, “Do this.” I hear people say: “Just do an index fund.”
Well, you look at indexes, and some asset class indexes work. Some asset class indexes do not work very well at all.
I had a client actually talking about his son. Dad, who’s my client, said, “So my son’s talking about just putting everything in these index funds in various asset categories.”
And I said, “You may want to point this out to your son because this asset category, the difference in return over the past 25 years is about 3% per year lower in the index fund. And in this asset class over here, it was 1 to 2% lower per year for the last 25 years. After a while, that really, really adds up. That’s a huge difference between those, so you got to be really careful.”
The idea behind an index fund is just to track a certain area of the market, but what they do with them is they’re very lazy because of the way they’re marketed. They’re just using the name of an index, and they’re cap-weighted.
They’re over-weighting the big companies, so that can be a problem. So watch out.
Rules of thumb in general are something I tell people to be very, very careful about. Some people say, “Always pay off your mortgage,” and sometimes it may be a good idea to pay off a mortgage early, and sometimes it doesn’t make sense.
“Always get a 15-year mortgage.” I hear that, and I say, “Well, I’ve seen circumstances where a 30-year would’ve made actually more sense.” So I like being very, very particular about somebody’s circumstances as to what they ought to do.
SECURES Act 2.0
But back to this. It says, “Thanks to the SECURES Act 2.0, those approaching the end of their career can now actually supercharge their savings.”
This is something I’ve talked about a little bit, that you have people that have these extra catch-up contributions for people aged 60 to 63.
So you can have an older worker who can make an additional 401(k) contribution of $11,250 in 2025, and that totals out to $34,750. So you have somebody that has a little bit of extra that they want to put aside, and you’re between the ages of 60 and 63. That catch-up contribution is actually increased for that particular group.
And I don’t know why they did that. It was kind of a weird thing, just for ages 60 to 63, and that’s it, but anyway, that’s what it is.
And the other thing is that the income limits are changing for the Savers Credits. Now, some of you may not recognize that there are these things called Savers Credits. So what that is, for a lot of people, they’re not putting enough money away for retirement, and they’re not putting enough money at all in retirement.
What happens, in 2024, the Savers Credit works like this: You can actually get a credit of 50% of your contribution if you’re married, filing jointly, and your income — your AGI — is not more than $46,000. And for other filers, it’s going to be an AGI of $23,000. So literally, when you put money away, you can actually have the government contributing.
So this lady contributes $2,000, let’s say, into her IRA, and after deducting the IRA contribution, her adjusted gross income is $39,000. She may claim a 50% credit of $1,000 for the $2,000 IRA contribution. So that’s how this can work, so this is something to talk to your tax people about.
Tax Credits
If I’m putting money into an IRA, can I get a credit based on my income? There’s a credit of up to 50% for an AGI that’s not more than 46,000.
There’s another threshold. You get 20%; it’s a lot lower. It’s a lot lower. It’s something.
It’s better than a poke in the eye with a sharp stick, but it’s lower. It’s $46,000 to $50,000 for married, filing jointly. If your income is between those two numbers, you might have a credit of 20% of the contribution, and then it’s 10% of the contribution from $50,000 to $76,500.
Now, those numbers are roughly half. It’s not exactly half, but it’s pretty close for all other filers. So if you’re single, it’s up to $23,000 for 50%; $23,000 to $25,000 for 20%; and $25,000 to $38,250 for 10% of the contribution getting a credit.
Now, a tax credit is a bigger deal than a tax deduction because it’s dollar-for-dollar off of the taxes.
Now, if you’re one of those terrible rich people, and you have an income of over $76,000, forget it. You can’t do it. Or $38,000 for single people.
So anyway, it’s something to get people to save, and I think it’s just a statement by the government, saying, “Hey, we are not going to take care of you from cradle to grave. You got to take care of yourself, and we’re going to give you some carrots in order to get you to save some for the future and encourage you to do a little bit more of that.” So just keep that in mind.
In MarketWatch, there was something I was going to comment on. They were talking about selling treasury bonds, or should we hope for a rebound? And again, I hit this because if you look at long-term bonds, a lot of times, people make the mistake in their investment portfolios of holding long-term bonds in the safe part of their portfolio, and I tell people it’s anything but safe.
Now, you may not look at this, but I’m going to tell you, this is what we look at: I’m looking at the duration of your bonds in your portfolio. So let’s say that you’re getting near retirement, and you have this investment portfolio that’s allocated between stocks and bonds. Typically, as you get older, I’m going to be backing off of stocks a little bit.
Now, not too much, because now I’ve got too much inflation risk in my portfolio if I don’t have some equity exposure or stock exposure, so you got to be super careful about not overdoing this. I see people, they get all in fixed-income investments, and then they get in retirement, and now they’ve got a problem where they’re not keeping pace with inflation.
Broad Diversification
Matter of fact, I may give an example of that. I was doing some work on a spreadsheet earlier, and I was like, “Whoa, this number is eye-opening.” What if you put all your money in a prime money market in the year 2000 and took an income, and what would it be, versus if you had followed?
I use that date because when I opened the company, it was the year 2000, and it’s also good because it is the worst time to start investing or pulling money from an investment, which is into a market downturn like what happened in 2000 through 2002. And a lot of people said, “That’ll never end.” They think, That’s not going to happen.
I’m like, “Oh, beware. Stock prices for large U.S. stocks are selling for actually above what they were selling for in 2000.”
So when I talk about taking an income, I’m talking about following what I teach on this show, and that is much more broad diversification.
But when I’m talking about the bonds, recognize that when you try to shoot for higher interest rates in your bonds in your portfolio, there are only a couple of ways to get higher interest rates. One of them is lending money to companies with one foot on a banana peel and the other in bankruptcy court.
So you’re talking about what we call high-yield or junk bonds. You can get higher interest rates, but when the economy goes south, those are the people who can’t pay their debt.
The other way to do it is to increase the maturity length, or an easier way to measure that is using what’s called duration. And when you have high duration bonds, let’s say 10 duration bonds, when interest rates go up 1%, your bonds go down 10%.
Well, when interest rates go up, that can cause stocks to go down. When stocks go down and your bonds go down, that’s trouble.
Waiting to Sell Bonds
So what they’re talking about on MarketWatch right here is talking about investment professionals. They’re advising investors to wait until the end of the year to sell, and I’m like, “Well, wait a minute. Number one, you’re telling them to wait until the end.”
The problem here is, for me, why did the investment professionals get them into these bonds in the first place? They were the wrong types of bonds.
What happens is that I want to look at those maturities and the durations, and I want to keep them shorter. Now, there may be some bonds that you have that are too long in duration, and they’ve lost money.
I wouldn’t be selling it for tax reasons; I’d be selling it to make sure that the bond mix is correct. And they use the Vanguard Long-Term Treasury ETF here, and you have these bonds, 20 durations, and they’re talking about the problem with these things.
They went down 10% in just the past two months; 10% decline, just two months. This is the safe portion of your portfolio, and I look at that and go, “What could happen? You could have another interest rate increase. Who knows?”
If the economy starts getting better, if things start looking better, just because the Fed reduced interest rates not too long ago doesn’t mean that they aren’t going to have to reverse course, and interest rates start going on the short end.
But here’s the thing: The Fed does not control long-term interest rates, and that’s what you are subject to with these bonds.
If you see, all of a sudden, that the economy starts to get a little bit better, and all of a sudden, now you’re looking at maybe the future’s looking a little bit brighter. It doesn’t take much for those long bonds that are very, very low right now to jump up in value.
So I would be very, very conscious of your situation. I’m not giving advice here because I don’t know your situation, but be very conscious of doing it as this article is talking about doing it for the sake of tax management.
And they’re saying, “Wait until you get rid of it.” I don’t know. I might take the loss right now and take it against the capital gains someplace else, maybe some other investment that I own that is inappropriate.
I might have another investment in my portfolio. I might need to be rebalancing, and I might look at this one thing that went up a lot, and it’s over-represented in my portfolio.
I have very, very big growth companies right now selling for a very, very high premium over their earnings or over their book value. It might be a really good time not to wait two months to go and sell.
Don’t wait until the end of the year, necessarily, to do this. You may look at a situation where it could be tax-advantageous to not do that.
So I’d be very, very careful when I see this type of advice out there. I don’t remember who sent me this article, but that’s just my two cents regarding that.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
