Tumultuous would be a good word to describe investing in 2022, the S&P 500 declined over 18% and the Dow Jones dropped over 8%. Technology stocks had been leading the way the past several years, however the tech-heavy Nasdaq finished down over 33% in 2022, ouch!Let’s talk about bonds – Bonds are supposed to hold up well in down markets, right? That’s not always the case. Short-term bond funds suffered, the Vanguard Short term Bond fund (symbol BSV) had a total return of negative 5.49%, and long-term bond funds like Vanguard Long Term Corporate Bond fund (symbol VCLT) finished down over 25%. If you owned any kind of diversified portfolio in 2022 you likely experienced significant volatility and loss, there weren’t many asset classes that did well last year. While 2022 was dismal, its important to keep it in perspective, bear markets happen, but there is something better that history tells us…history has shown that bear markets eventually give way to new highs. If you are of the belief that the market will see new highs in the future, how are you preparing for that? One way to prepare for future growth is to ensure that the expected future growth is tax-free. I will highlight two areas that are worth considering.

Roth IRA – The IRS raised the limit investors can contribute to their Roth IRA in 2023. The new rules allow a maximum contribution of $6,500 for investors below 50 years of age, and $7,500 for investors ages 50 and over. The Roth IRA is the best investment account available for long term growth because it grows free of both federal and state taxes. There is no other account type where you can make an infinite amount of money and not be taxed, you should be looking to maximize your Roth contributions every year. There is a big difference to having 1 million dollars saved at retirement in a Traditional IRA that will be subject to tax, compared to having saved 1 million in a Roth IRA that will not be subject to taxation. A Roth IRA can be a great way to catch up if you are a bit behind on retirement savings. For example, If a 50 year old person had zero savings, but started saving $7,500 per year in a Roth until age 67, assuming a 9% compounded growth rate, that person would have over $277,000 of tax-free retirement savings at a standard retirement age. Of course, there are some rules to this tax-free growth – mainly the account has to be open for at least 5 years and you have to be 59.5 years or older for your withdraws to be free of tax. Because your individual situation is unique and Roth contributions have some rules / limitations I recommend visiting with your Financial Advisor and/or tax pro before contributing to a Roth IRA.

College Savings – There has been some BIG developments in college savings. In the past, unused college savings funds in 529 accounts faced not only taxation but also a penalty upon distribution if the proceeds were not used for qualified educational expenses. Now, because of a new law passed in late 2022, 529 college savings accounts are much more attractive. Starting in 2024 investors will be able to do tax-free rollovers from a 529 college savings account into a Roth IRA for their child. To give perspective on this opportunity – If your child graduates at 22 years old and you roll $35,000 from the 529 to a Roth, assuming a 9% annual compound growth rate, your child would have about 1.6 million at retirement age of 67. There are some limits, rules, and other considerations when rolling over from a 529 account so be sure to consult with your Financial Advisor and/or tax pro before using this strategy.

I hope you have found this information helpful; I’d love to discuss any questions you have and welcome your call. Please call me (Bret) directly at 623-256-7167, or you can also visit our website at www.greenpeaksplanning.com.

This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.