Welcome to the next installment in our series of Hiley Hunt’s Evidence-Based Investment Insights: Get Along, Little Market

In our last piece, “Managing the Market’s Risky Business,” we described how diversification plays a key role in minimizing unnecessary risks and helping you better manage those that remain. To round out the conversation, we’ll cover another benefit to be gained from a well-diversified stable of investments: It helps create a smoother ride toward your goals.

Diversifying for a Smoother Ride

Like a bucking bronco, near-term market returns are characterized more by periods of wild volatility than by a steady-as-she-goes trot. Diversification helps you tame that beast. Because, as any rider knows, it doesn’t matter how high you can jump if you fall out of the saddle.

When we crunch the evidence-based numbers, we discover that diversification helps minimize the bucking you must endure along the way to long-term expected returns. Imagine several rough-and-tumble, upwardly mobile lines that represent several kinds of holdings. Individually, each represents a wild ride. Bundled together, the upward mobility remains, but the jaggedness along the way can be smoothed (albeit never completely eliminated).

Fidelity’s “guide to diversification” describes how diversification and individualized portfolio construction can help you tame the market’s best and worst investment outcomes according to your goals. For a more detailed, data-driven illustration of the same, check out “How to diversify your investments,” by financial author Larry Swedroe.

Covering the Market

A key reason diversification works is related to how different market components respond to price-changing events. When one type of investment may zig due to particular news, another may zag. Instead of trying to move in and out of favored components, the goal is to remain diversified across a variety of them. This increases the odds that, when some of your holdings are underperforming, others will outperform, or at least hold their own.

The result of diversification isn’t perfectly predictable. But it offers a blanket of coverage for capturing random market returns where and when they occur. This goes a long way toward replacing nerve-wracking guesswork with a more coherent investment strategy.

The classic Crazy Quilt Chart illustrates this concept. After viewing a color-coded layout of which market factors have been the annual winners and losers in past years, it’s clear there is no discernable pattern, just a crazy array. If you can predict how each column of best and worst performers will stack up in years to come, your psychic powers are greater than ours.

Your Take-Home

Diversification offers you wide, more manageable exposure to the market’s long-term expected returns, as well as a smoother expected ride along the way. Perhaps most important, it eliminates the need to try to forecast future market movements, thus reducing those disruptive self-doubts that throw so many investors off course.

So far, we’ve introduced some of the challenges investors face in efficient markets and how to overcome them with a well-diversified portfolio. Next, we’ll pop open the hood and take a closer look at how to tune up your own investment portfolio’s performance.

 

Welcome to the next installment in our series of Hiley Hunt’s Evidence-Based Investment Insights: Managing the Market’s Risky Business

In our last piece, “The Full-Meal Deal of Diversification,” we described how effective diversification means more than just holding a large number of accounts or securities. It also calls for efficient, low-cost exposure to a variety of assets from around the globe. Now, let’s expand on the benefits of diversification, beginning with its ability to help you better manage investment risks.

There’s Risk, and Then There’s Risk

Before we even have words to describe it, most of us learn about risk as toddlers, when we tumble into the coffee table or reach for that hissing cat’s tail. We learn where risks are found, how to avoid them when possible, and which ones may be worth taking anyway.

To understand, avoid, and manage investment risks, it helps to know there are two main types: avoidable concentrated risks and unavoidable investment risks.

Avoidable Concentrated Risks

Concentrated risks are the ones that wreak havoc on particular stocks, bonds, or sectors. Even in a bull market, one company can experience an industrial accident, causing its stock to plummet. A municipality can default on a bond even when the wider economy is thriving. A natural disaster can strike an industry or region while the rest of the world thrives.

In the science of investing, concentrated risks are considered far more avoidable. Bad luck still happens. But we are granted a super power for minimizing its impact on our investments: You can diversify your holdings widely and globally, as just described. When you are well diversified, if some of your holdings are affected by a concentrated risk, you are much better positioned to offset the damage done with plenty of other holdings.

Unavoidable Investment Risks

Unavoidable investment risks are the systemic kind that apply to large swaths of the market. If concentrated risks are like bolts of lightning, investment risks are like downpours, in which everyone gets wet.

Put another way, systemic investment risks are the ones you face by investing in capital markets to begin with. If you stuff your cash in a safety deposit box, it will still be there the next time you visit it. (It is likely to buy you less due to inflation, but that’s a different risk, for discussion on a different day.) Invest in the market and, presto, you’re exposed to investment risk.

Risks and Expected Rewards

Hearkening back to our past conversations on group intelligence, the market as a whole knows the differences between avoidable and unavoidable risks, and sets prices accordingly. This wisdom informs us on how to manage our own investments.

Managing concentrated risks: If you try to beat the market by chasing particular stocks or sectors, you are exposing yourself to concentrated risks you could instead minimize through diversification. As such, you cannot expect to be consistently rewarded for taking on concentrated risks.

Managing investment risks: Every investor faces investment risks that cannot be “diversified away.” When these overall risks are on the rise, those who stay invested with steely resolve can expect to more fully capture future expected returns as markets recover and likely grow. However, sitting tight during risky times when others are selling out is easier said than done. That’s why you want to take on as much, but no more investment risk than you need to, in pursuit of expected returns. Diversification becomes a “dial” for setting the right volume of investment-related risk/reward exposure for your individual goals.

Your Take-Home

Diversification plays a key role in managing your investment experience. It’s vital for minimizing concentrated risks. It also helps you fine tune your desired exposure to investment risks and expected rewards, to reflect your own financial goals.

This sets us up for addressing another powerful benefit of diversification: smoothing out the ride along the way.

 

Welcome to the next installment in our series of Hiley Hunt’s Evidence-Based Investment Insights: The Full-Meal Deal of Diversification

In our last piece, “Financial Gurus and Other Unicorns,” we concluded our exploration of the impractical odds you face if you or your hired help try to outsmart the market’s price-setting efficiencies. Now, we turn our attention to the many ways you can harness these efficiencies to work for, rather than against you.

It starts with diversification as among your greatest financial friends. After all, what other single action can both dampen your exposure to a number of investment risks and strengthen your ability to achieve your personal financial goals? While the combination may seem almost magical, the benefits of diversification have been well-documented and widely explained by 70+ years of academic inquiry. Its powers have been enduring and robust.

Global Diversification: Quantity AND Quality

What is diversification? In a general sense, it’s about spreading your risks around. In investing, that means it’s more than just ensuring you have many holdings. It’s also about having many different kinds of holdings. That is, you want to ensure that your multiple baskets contain not only many eggs, but also a bounty of fruits, vegetables, grains, meats, and cheese.

While this may make intuitive sense, many investors come to us believing they are well-diversified when they are not. They may own a large number of stocks or stock funds across numerous accounts. But upon closer analysis, we find most of their holdings are concentrated in large-company U.S. stocks, or similarly narrow market exposure.

In the pages ahead, we’ll explore what we mean by different kinds of investments. For now, think of a concentrated portfolio as the undiversified equivalent of many basketsful of plain, white eggs. Over-exposure to what should be just one financial ingredient among many is not only unappetizing, it can be detrimental to your financial health. Poor diversification:

  1. Increases your vulnerability to avoidable risks
  2. Increases the odds for a bumpier, less reliable investment experience
  3. Makes you more susceptible to second-guessing your investment decisions

A World of Opportunities

Combined, these three strikes tend to generate unnecessary costs, increased investment mistakes, and, perhaps most important of all, higher anxiety. You’re back to trying to beat formidable market forces instead of turning them into investment alliances.

There is a wide world of investment opportunities available from low-cost funds offering efficient exposure to global capital markets. Why not make best use of them?

Your Take-Home

To best capture the benefits of diversification, turn to fund managers who focus their energies—and yours—on efficiently capturing diversified dimensions of global returns.

In our last piece, we described why brokers or fund managers who are instead fixated on trying to outperform the market are likely wasting your time and money. You may still be able to achieve diversification, but your experience will be weakened by pointless efforts, extraneous costs, and irritating distractions. Who needs that, when diversification can help you have your cake and eat it too?

Next, let’s explore why diversification is sometimes called one of investors’ few free lunches.

 

Welcome to the next installment in our series of Hiley Hunt’s Evidence-Based Investment Insights: Financial Gurus and Other Fantastic Creatures.

In our last piece, “Ignoring the Siren Song of Daily Market Pricing,” we explored how price-setting occurs in capital markets, and why investors should avoid reacting to breaking news. The cost and competitive hurdles are just too tall. Now, let’s explain why you’re also ill-advised to seek a pinch-hitting expert to compete for you.

In his “Berkshire Hathaway 2017 Shareholders Letter,” Warren Buffett described his take on the price paid to active “experts”:

“Performance comes, performance goes. Fees never falter.”

Instead, Buffett suggests:

“Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with every bit of Wall Street jargon. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.”

Group Intelligence Wins Again

As we covered in “You, the Market, and the Prices You Pay,” independently thinking groups (like capital markets) are usually better at arriving at accurate answers than even the smartest individuals in the group. That’s in part because their wisdom is already bundled into prices, which adjust with fierce speed and relative accuracy to any breaking news.

Thus, even experts who specialize in analyzing business, economic, geopolitical, or any other market-related information face the same challenges you do if they try to forecast future prices. They must still try to successfully predict the unpredictable. Just like anyone else, they cannot foresee the news itself, let alone the reactions to unexpected news that is not yet known. Particularly after the costs involved in trying, outmaneuvering prices set by group intelligence usually remains a prohibitively tall hurdle.

The Proof Is in the Pudding

But maybe you know of an extraordinary stock broker, fund manager, or media guru who strikes you as being among the elite few who are up to the challenge. Maybe they have a stellar track record, impeccable credentials, a secret sauce, or brand-name recognition. Can you rely on their latest forecasts?

Let’s set aside market theory for a moment and consider what has actually been working. Bottom line, if investors could depend on expert stock-picking or market-timing forecasters, we should expect to see credible evidence of it, with more “winners” than random chance would explain.

Not only is such data lacking, the body of evidence to the contrary is overwhelming. Each season’s crop of star performers often fails to survive, let alone persistently beat comparable market returns moving forward.

Plus, the best way to profit from a guru’s stellar track record requires you to jump on their band wagon while they’re still on a hot roll, so you too can profit from their future success. In the absence of a time-travel machine, this is once again a daunting challenge.

To cite one of many sources, Morningstar publishes a semiannual “Active vs Passive Investment Management Barometer Report,” comparing actively managed funds to their passively managed peers. In its Midyear 2023 report, there was some relatively good news for active investors. For the 12 months from June 2022–June 2023, Morningstar found, “Fifty-seven percent of active strategies survived and beat their average passive counterpart … well above their 43% success rate in calendar-year 2022.”

Of course, if 57% of active strategies survived and beat the market for the 12 months ending June 2023, this means a relatively hefty 43% of them did not.

Thus, even the brief pop was not a resounding success. Nor do we expect it to be long-lived. As Morningstar also reported:

“Actively managed funds’ recent surge did little to change their long-term track record against their passive peers. Just one out of every four active strategies survived and beat their average passive counterpart over the 10 years through June 2023.”

Dimensional Fund Advisors found similar results in its independent analysis. Looking at the 10-year performance for U.S.-domiciled stock funds through year-end 2022, they found only 27% of an initial 2,954 funds survived and outperformed their benchmarks.

Across the decades and around the world, a multitude of academic studies have scrutinized active manager performance and consistently found it lacking.

  • Among the earliest such studies is Michael Jensen’s 1967 Journal of Finance paper, “The Performance of Mutual Funds in the Period 1945–1964.” He concluded, there was “very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance.”
  • More recently, Eugene Fama and Kenneth French published a 2010 Journal of Finance study, “Luck versus Skill in the Cross Section of Mutual Fund Returns,” demonstrating that “the high costs of active management show up intact as lower returns to investors.”
  • In 2016, a pair of professors from the University of North Florida published “A Review of Studies in Mutual Fund Performance, Timing and Persistence,” scrutinizing more than 60 of the “more widely cited works” on fund performance. They concluded: “The basic results have not changed; it appears that: (1) mutual funds underperform the ‘market;’ (2) fund managers in aggregate are incapable of timing the market; and (3) mutual fund investors are ill-advised to invest based on prior fund performance.”
  • Yet another study, “Mutual fund performance at long horizons,” appeared in the January 2023 Journal of Financial Economics. Its authors concluded that fund managers still struggled to outperform the market (as proxied by the S&P 500). They estimated “an aggregate wealth loss to mutual fund investors of $1.02 trillion,” based on long-horizon mutual fund underperformance. In separate commentary, the authors wrote, “This wealth loss reflects the combined effect of mutual fund fees and investors’ timing decisions.”

Your Take-Home

So far in our Evidence-Based Investment Insights series, we’ve been assessing common investment challenges. Fortunately, there’s a way to invest that lets you nimbly sidestep rather than face these stumbling blocks: You can simply let the market do what it does best on your behalf. Next up, we’ll introduce the strategies involved, starting with what some have described as investment’s only free lunch: diversification.

Welcome to the next installment in our series of Hiley Hunt Wealth Management Evidence-Based Investment Insights: Ignoring the Siren Song of Daily Market Pricing.

In our last piece, “You, the Market, and the Prices You Pay,” we explored how group intelligence governs relatively efficient markets (as well as jelly beans) in an imperfect world. Next, let’s look at how prices are set moving forward. This, too, helps us understand why traditional active investors face a steep hurdle by trying to compete against rather than participate in efficient markets.

News, Inglorious News

What causes market prices to change? It begins with the never-ending stream of news informing us of the good, bad, and ugly events that are always taking place. For example, when there are reports that a fungus is attacking Florida trees, orange juice futures may soar, as the market predicts that there is now going to be less supply than demand.

But what does this mean to you, your investment portfolio, and every investor’s quest to buy low and sell high? Should you buy, sell, or hold tight to your juiciest investments?

Before the news tempts you to chase or flee active trends, it’s critical to be aware of the evidence that tells us the most important thing of all: You cannot expect to consistently improve your outcomes by reacting to breaking news.

Great Expectations

How the market adjusts its pricing is why there’s not much you can do about breaking news. There are two principles to bear in mind here.

First, it’s not the news itself that moves the price; it’s how it impacts our expectations. When a security’s price changes, it’s not whether something good or bad has happened. It’s whether the news is better or worse than expected. If it’s reported that an orange tree disease is continuing to spread, pricing changes may be minimal if everyone was already bracing for ongoing doom and gloom. On the other hand, if an ingenious new fungicide is announced, prices may change dramatically in reaction to the lucky break.

Thus, it’s not just news, but unexpected news that alters future pricing. By definition, the unexpected is impossible to predict. So is how, and how dramatically (or not) market players respond to it. For example, what’s good news to one industry may be bad news to another. Once again, group intelligence gets in the way of those who are hoping to outwit others by consistently forecasting future prices.

The Barn Door Principle

Another reason to consider breaking news irrelevant to your investing is what we’ll call “The Barn Door Principle.”

By the time you hear any breaking news, the market already has incorporated it into existing prices, well ahead of your ability to act on it. The proverbial horses have already galloped past your open trading door.

This is especially so in today’s world of electronic trading and social media broadcasting. Prices are set and re-set nearly instantaneously as fresh news arrives.

In other words, unless you happen be among the very first to respond to breaking news (competing, mind you, against automated traders who often respond in fractions of milliseconds), you’re setting yourself up to counterproductively buy higher or sell lower than those who already have set new prices based on the news.

Your Take-Home

Avoid trying to play an expensive game of market whack-a-mole, based on ever-evolving information and cut-throat competition over which you have no control. Instead, position your life savings to benefit from greater market efficiencies.

 

Welcome to the next installment in our series of Hiley Hunt Wealth Management’s Evidence-Based Investment Insights: You, the Market, and the Prices You Pay.

When it comes to investing (or anything in life worth doing well) it helps to know what you’re facing. In this case, that’s “the market.” How do you achieve every investor’s dream of buying low and selling high amidst a crowd of highly resourceful and competitive players? The answer is to play with rather than against market forces, by understanding how market pricing occurs.

The Market: A Working Definition

Technically, “the market” is a plural, not a singular place. There are markets for trading stocks, bonds, commodities, real estate, and more, in the U.S. and worldwide. For now, you can think of these markets in aggregate as a single place, where participants from all around the globe compete against one another to buy low and sell high.

Granted, this “single place” is enormous. It represents a huge number of participants who are individually AND collectively helping to set fair prices every day. That’s where things get interesting.

Group Intelligence: We Know More Than You and I

Before the academic evidence showed us otherwise, it was commonly assumed that the best way to make money in seemingly ungoverned markets was through a “lone wolf” approach known as traditional active investing.

To succeed, a traditional active investor seeks to become an expert at forecasting market pricing, so they can successfully pick stocks (pick/avoid future winning/losing stocks), and/or time the market (enter/exit ahead of rising/falling markets). In so doing, their goal is to earn higher returns than markets are expected to deliver “passively,” to anyone who is participating in them.

Unfortunately, this outdated active approach to beating the market is inherently flawed. A simple jar of jelly beans shows us why. Academia has revealed that the market is not so ungoverned after all. Yes, it’s chaotic when viewed up close. But it’s also subject to a number of important larger forces.

One of these is group intelligence. The term refers to the notion that, at least on questions of fact, groups are better at consistently arriving at accurate answers than even the smartest individuals in that same group … with a caveat: Each participant must be free to think independently, as is the case in free markets. (Otherwise, peer pressure can taint the results.)

Writing the Book on Group Intelligence

In his landmark book “The Wisdom of Crowds,” James Surowiecki presented and popularized an enormous body of academic insights on group intelligence.

Take those jelly beans, for example. In one college experiment, 56 students guessed how many jelly beans were in a jar that held 850 beans. The group’s aggregated average guess came relatively close at 871. Only one student in the class guessed closer than that. Similarly structured experiments have been repeated under various conditions. Time and again, the group consensus was among the most reliable counts.

Now apply group wisdom to the market’s multitude of daily trades. Each trade may be spot on or wildly off from a “fair” price, but the aggregate average incorporates all known information contributed by the intelligent, the ignorant, the lucky, and the lackluster. These current prices set by the market are expected to yield the closest estimate for guiding the market’s next trades. It’s not perfect mind you. But it’s the most reliable estimate in an imperfect world.

Your Take-Home

Understanding group intelligence and how it governs efficient market pricing is a first step in more consistently buying low and selling high in competitive markets. Instead of believing the discredited notion that you can actively outguess the market’s collective wisdom, you are better off concluding that the market is incredibly efficient at its price-setting job. Your job then becomes efficiently capturing the returns that are being delivered.

But that’s a subject for future Evidence Based Investment Insights. Next up, we’ll explore what causes prices to change. Chances are, it’s not what you think.

If there’s a message to take from 2023 markets, it is this: Timeless wisdom best informs timely decisions.

Here’s how Morgan Housel describes the same in his new book, “Same as Ever.”

“The typical attempt to clear up an uncertain future is to gaze further and squint harder—to forecast with more precision, more data, and more intelligence. Far more effective is to do the opposite: Look backward, and be broad. Rather than attempting to figure out little ways the future might change, study the big things the past has never avoided.”

Following are a few timeless tenets that offer timely investment insights for the year ahead.

 There’s Never a Good Time to Time the Market

Perhaps most obviously, last year demonstrated how randomly—and rapidly—markets can move. As The Wall Street Journal reported at year-end:

“Almost no one thought 2023 would be a blockbuster year for stocks. They could hardly have been more wrong.”

Another financial journal observed:

“What was supposed to go up went down, or listed sideways, and what was supposed to go down went up — and up and up. The S&P 500 climbed more than 20% and the Nasdaq 100 soared over 50%, the biggest annual gain since the go-go days of the dot-com boom. … ‘I’ve never seen the consensus as wrong as it was in 2023,’ said Andrew Pease, the chief investment strategist at Russell Investments.”

 Many financial pundits offered elaborate explanations for the year’s fortunes, and why (in hindsight) their projections were so far off. While their reasons may be accurate, the implication is, were it not for this, that, or the other thing, their forecasts would have been correct.

 The problem is, there’s almost always “this, that, or the other thing” going on in this big, busy world. Thus, it really should come as no surprise that routine surprises regularly randomize the market’s next moves.

 We’ve known this for years—since at least 1973, when Burton Malkiel published the first edition of “A Random Walk Down Wall Street.” Even after 50 years, Malkiel’s message represents one of the most timeless truths explaining why we don’t try to time market trends.

 Beware of Catchy Catchphrases

In 2023, just seven stocks within the S&P 500 Index explained almost two-thirds of the index’s total annual gains. Their striking performance scored them the catchy title, “Magnificent Seven.”

What should we expect for this star lineup in the coming year? Search today’s popular press, and you’ll find timely tips galore on whether to bulk up on more magnificence, or sell while the selling is good. Forecasts hinge on the usual suspects: Whether inflation rises or falls, a recession lands or recedes, technologies advance or retreat, and so on.

Taking a more timeless view, we would suggest being wary of celebrated stocks bearing trendy titles. Chasing after stellar returns with their own nicknames may work for a while. But eventually, one of those “surprises” tends to come along, turning once-hot stocks into cold plays.

Which brings us to our next timeless tenet.

Diversification Is Perennially Prudent

Viewing 2023 up close, there may be a temptation to chase after the market’s recent winning streak, bulking up on more of that which has been so pleasantly surprising of late.

Zooming out, our perspective remains unchanged: We recommend maintaining a globally diversified portfolio, tailored for your needs. Treat an allocation to the Magnificent Seven (and the next trend, and the one after that) as one of many “pistons” powering the market’s perennial growth. But pair it with effective diversification, to temper the inevitable upsets that await us in the year(s) ahead.

In this spirit, we wish you a well-diversified investment portfolio in 2024, along with abundant concentrations of health, happiness, and harmonious well-being for you and yours.

 

As the end of the year approaches, many of us turn our minds to charitable giving. While cash donations are always appreciated, consider a more impactful option: donating highly appreciated securities. This strategy offers significant benefits for both you and the worthy causes you support.

Here’s why donating appreciated securities is a smart move for your 2023 charitable giving:

Maximize Your Donation:

  • Capital gains tax: When you donate appreciated securities held for more than a year to a qualified 501(c)3 organization, you avoid paying capital gains tax on the increase in value. This means more of your donation goes directly to supporting the causes you care about.
  • Claim a charitable deduction: You can also claim a tax deduction for the full fair market value of the securities you donate. This deduction can potentially offset your taxable income, further reducing your tax burden and increasing the overall value of your gift.

In 2023, the standard deduction for individuals is $13,850 ($27,700 for married couples filing jointly). If you itemize deductions, you man claim the full fair market value of your appreciated securities up to 60% of your adjusted gross income (AGI). For any excess, you man carry it over for up to five years.

For example, imagine you own shares of a stock that have appreciated in value from $10,000 to $50,000. If you donate these shares to charity, you avoid paying capital gains taxes on the $40,000 gain. Additionally, you can claim a $50,000 deduction on your tax return.

Flexibility and Efficiency:

  • Donate directly to charities: Many charities now accept donations of stock electronically, making the process simple and convenient.
  • Utilize a donor-advised fund: Consider donating your securities to a donor-advised fund (DAF). This allows you to receive the tax benefits immediately while taking time to decide which charities to support in the future. DAFs offer flexibility and control over your charitable giving.

Additional Benefits:

  • Reduce your portfolio risk: Donating appreciated securities can help diversify your portfolio and reduce your overall tax burden.
  • Leave a legacy: By donating highly appreciated securities, you can make a significant and lasting impact on the causes you care about, even after your lifetime.

Who should consider this strategy?

Donating appreciated securities is a smart option for anyone who:

  • Owns stocks, bonds, or other securities that have appreciated in value.
  • Is looking to reduce their tax burden.
  • Wants to maximize the impact of their charitable giving.

Remember: It’s crucial to consult with your tax and financial advisor before making any significant investment or charitable decisions. They can help you determine if donating appreciated securities is the right strategy for your individual financial situation and goals.

By taking advantage of this tax-smart approach, you can double your impact and make a lasting difference for the causes you care about. So, consider giving the gift of appreciated securities this year. It’s a win-win for you, the charities you support, and the world around you.

 

As the end of the year approaches, many people are thinking about their taxes and finances. One important thing to consider is whether or not to contribute to a Roth IRA. Contributing to a Roth IRA can offer a number of benefits, including tax-free withdrawals in retirement. If you are able to, contributing the maximum amount to your Roth IRA before the deadline this year can be a wise financial decision.

What is a Roth IRA?

A Roth IRA is a type of retirement savings account that allows you to grow your money tax-free. You contribute after-tax dollars to your Roth IRA, and your contributions grow tax-free. You can also withdraw your Roth IRA contributions tax-free at any time. However, if you withdraw earnings from your Roth IRA before you reach age 59½, you may have to pay a 10% penalty.

What are the benefits of contributing to a Roth IRA?

There are a number of benefits to contributing to a Roth IRA. These benefits include:

  • Tax-free withdrawals in retirement: This is one of the biggest benefits of a Roth IRA. Unlike traditional IRAs, where you have to pay taxes on your withdrawals in retirement, Roth IRA withdrawals are completely tax-free. This can save you a significant amount of money in taxes over the course of your retirement.
  • Tax-free growth: Your Roth IRA contributions grow tax-free. This means that you can keep more of your money over the long term.
  • No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs do not have RMDs. This means that you are not required to start taking withdrawals from your Roth IRA at age 72. This can give you more control over your finances in retirement.
  • Estate planning benefits: Roth IRAs can be a valuable estate planning tool. Because Roth IRA withdrawals are tax-free, they can be a way to pass assets to your heirs without them having to pay taxes.

What is the maximum amount I can contribute to my Roth IRA in 2023?

The maximum amount you can contribute to your Roth IRA in 2023 is $6,500. If you are age 50 or older, you can contribute an additional $1,000 for a total of $7,500.

What are the income limits for Roth IRA contributions?

There are income limits for Roth IRA contributions. If your modified adjusted gross income (MAGI) is above a certain level, you may not be able to contribute the full amount to your Roth IRA. The income limits for 2023 are as follows:

  • Single filers: $129,000
  • Married filing jointly: $204,000

If your MAGI is above the applicable income limit, you can still contribute to your Roth IRA, but your contributions will be phased out.

Should I contribute the maximum amount to my Roth IRA before the deadline this year?

If you are able to, contributing the maximum amount to your Roth IRA before the deadline this year can be a wise financial decision. This is because it will allow you to start taking advantage of the tax-free growth of your Roth IRA contributions sooner. The sooner you start contributing, the more time your money has to grow.

Of course, whether or not you should contribute the maximum amount to your Roth IRA depends on your individual circumstances. You should take into account your income, your expenses, and your other financial goals before making a decision.

If you are not sure whether or not you should contribute the maximum amount to your Roth IRA, you should talk to a financial advisor.

Investing in a Roth IRA is a great way to save for retirement.

Even if you can only contribute a small amount each year, you will still be able to benefit from the tax-free growth of your Roth IRA contributions. The sooner you start contributing, the more time your money has to grow.

 

Please note that the information in this blog post is for informational purposes only and should not be construed as financial advice. You should always consult with a financial advisor before making any financial decisions.