On The Agenda

1. Why you need to know about the Roth IRA 5-year rule

2. You can put credit card points in your Roth IRA ^LUMINARY

3. Are you rich?

4. How to choose a credit card ^LUMINARY

5. Goldman Sachs puts the first rate cut in Q2 2024

6. How does Jerome Powell look at wage growth? ^LUMINARY

Understanding the (THREE??) 5-Year Rules for your Roth IRA

From Nate Hoskin, Founder & Lead Advisor

If you have a Roth IRA you need to understand the 5-year rule. In fact, there are 3 different 5-year rules so I’m going to break down all of them as quickly as I can.

The 5-year rule applies to 3 different circumstances and each one has a different result.

1. Earnings Withdrawals

Remember, you can take out anything you contribute to a Roth completely tax and penalty-free regardless of how old you are.

The 5-year rule only applies to the gains in a Roth IRA. Let’s say you put $6,000 into your Roth and it grows to $6,500. In order to take that $500 of gains out you have to be 59.5 and the account must be open for 5 years.

If you are under age 59.5, the gains get taxed when the come out regardless of how long the account has been open.

If you are age 59.5+ AND the account has been funded for 5 years, you can take out the gains tax-free.

If you are age 59.5+ and the account has NOT been funded for 5 years, you pay taxes and a penalty of 10%.

2. Roth Conversions (Backdoor Roth)

If you roll money from a traditional IRA or 401k over to a Roth, you have to wait 5 years before you can touch any of that money. Even though you technically paid taxes on the whole rollover, if you take that money out within 5 years you get a 10% penalty.

This was put in place because people were rolling money over to Roth IRAs in retirement to avoid Required Minimum Distributions and then taking the money out immediately, while also avoiding the penalty.

3. Death

And finally, if you inherit a Roth IRA from someone who died, if their account had not been active for 5 years before they died the earnings are going to be subject to tax but the contributions are not.

Whenever you inherit an IRA you have to take that money out according to a Required Minimum Distribution (RMD) schedule, so you will be forced to pay those taxes.

Use your cashback to pay for retirement ^{LUMINARY SECTION}

Here’s a workaround to contribute to a Roth IRA completely tax-free.

You can actually put your credit card points into your Roth IRA. So if you have a card that gives you 4% cashback, you can take that cash and add it to your Roth IRA. Here’s the kicker though…

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Are You Rich?

From Jon Scott, Lead Author 

I don’t often call an article a must-read, but this article from Bloomberg is:

This article is so interesting because it reveals a fundamental strain pervading American’s financial psychology, touched upon by several articles of late. Specifically, this Bloomberg article reveals that approximately 21% of respondents with net assets of $500,000-1,000,000 define themselves as poor or just comfortable. Incredibly, an even larger percentage of those with net assets of $1-5 million define themselves as poor or simply comfortable. Let me make that more clear, there are people with assets in excess of $1 million who call themselves poor.

Why does this matter?

I really can’t put it in better words than the author, “if those who have actually made it don’t feel like they have, where does that leave the rest of us?” What do we individuals and families with much less than these “regular rich” have to aspire to, and work for, if the same feeling of inadequate funds exist even if we come to acquire assets in excess of $1 million? What’s the point of working harder if we’ll feel nearly just as poor/comfortable? Global Social Mobility in the US ranks below Portugal, Estonia, Lithuania, and even the stereotypical class conscious United Kingdom. Clearly, we have some urgent issues that need to be redressed for the good of the country.

Simultaneously, US consumers are dealing with rising prices. Mark Zandi, Chief Economist at Moody’s Analytics, testified to Congress that inflation alone accounted for an extra $709 of spending per month compared to two years ago. The economy is growing a healthy clip, but it’s clear these benefits are not felt by Americans who are not ultra-rich.

How to choose a credit card  ^{LUMINARY SECTION}

Being able to allocate cashback funds to your Roth IRA tax-free sounds amazing, but there’s more to it than that. You have to choose the right card for that purpose. Perhaps, allocating money to your Roth IRA isn’t a priority at all, and instead you’re looking to maximize the number and/or quality of your vacations.

There are generally two categories of cards:

• Cashback

• Reward (points) cards

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Goldman Sachs puts the first rate cut in Q2 2024

From Bennett Fees, Economic Research Associate

In a recent report, economists at Goldman Sach’s forecast the Fed to start cutting interest rates during the second quarter of 2024. This is a product of their prediction that yearly core PCE inflation will have fallen below 3% and wage growth below 4% (for more on wage growth, see my luminary section below). These predictions are summarised in the following chart.

So what’s new about this?

In the Fed’s Summary Of Economic Projections, they have related forecasts, albeit on an annual level.

Here, we see that the median expectation puts Core PCE below 3% in 2024, and the Federal Funds rate well above 4% in 2024. Although there are projected cuts in 2024, there is no date penciled in for when those cuts might start - making the GS projections perfectly reasonable. Importantly, both Powell and GS think interest rates will stay elevated well above their near-zero levels for the next few years.

So what’s the takeaway?

Many readers will remember that at the beginning of the calendar year, the main focus was on whether there would be a recession or not. This has changed. Now, the arguments have shifted away from warnings of a recession, to that of a softer and softer landing on the backbone of strong employment. These projections from Goldman Sachs show the effects of this evolution in thinking.

Still, there are reasons to think we aren’t in the clear just yet. My luminary section below takes a good look at one of these areas.

How does Jerome Powell Look at wage growth ^{LUMINARY SECTION}

During his May 3rd press conference, Jerome Powell highlighted four key measures of wage growth: the employment compensation index, average hourly earnings, the Atlanta Wage Tracker, and compensation per hour stating it’s “basically, those four and many others”.

So how does he read these numbers?

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