The past week’s reads:
- Could Company 401(k)s Go the Way of IBM? Watch the video or read the transcript. IBM, an early adopter of the 401(k), recently restructured its retirement plan, offering workers a defined benefit plan (cash balance) and a defined contribution plan (401(k)). IBM will no longer match employee contributions to the 401(k) plan. Morningstar’s John Rekenthaler assesses IBM’s motivations and the implications for its workers. He sees it mostly as a positive.
- How Much is That $70,000 Truck Costing You? I regularly listen to Animal Spirits, the podcast with Ritholtz Wealth Management’s Michael Batnick and Ben Carlson. Ben Carlson often cautions against the financial perils posed by high-end pick-up trucks and bus-sized sports utility vehicles. In this post, he does the math.
- Backdoor Roth IRAs: What to Know Before Stepping Through. Another Morningstar video/transcript. Christine Benz details a strategy that allows workers who earn too much to contribute directly to a Roth IRA to capitalize on this account’s powerful tax advantages. Note: You must have earned income to take advantage of this strategy.
This piece made me think of an unrelated strategy for parents. If your children have high-school, college, or even low-paying full-time jobs, help them open and fund a Roth IRA. They’ll forgo the tax deduction from contributions to a regular IRA, but at a low income, these benefits are modest. The benefits of investing in an account that shields their savings from future taxation, when their tax rate will most likely be higher, can be huge.
An example: At 20, your daughter works in a campus lab, does a little Doordash, and interns at a consulting firm. She earns enough to contribute the 2024 maximum, $7,000, to a Roth IRA. Assume that the contribution earns an annual return of 6%. A $7,000 contribution at age 20, partially or completely subsidized by parents, will be worth $96,352 at age 65. Your daughter will pay no taxes on withdrawals from this account.
And if parents can subsidize these annual contributions as their children find their economic footing–ages 20 to 30, for example–the next generation will be in a good position to achieve financial security in retirement. Annual $7,000 contributions from 20 to 30, followed by 35 years of no contributions, would compound to $853,844 at age 65.