Personal Investing -- Still Working, Not Retired -- Looking At The Schwab Cartoon, Part 2

Locator: 47084INV.

I'm starting a new series on investing that I can share with my extended family members, most of whom have Schwab accounts but little understanding about investing.

This information is based on lessons learned during thirty-plus years of investing and saving for retirement. This information supplements, does not replace personal reading, research, and professional advice.

Anything I write here is meant only for my extended family members and no other readers. It is a starting point for discussion among the family members. Nothing is written in stone. These posts will be updated as conditions change. They will eventually be collected and linked under the "Personal Investing" tab at the top of the blog. 

This is meant for extended family members who:

• are not retired:
• report less than $250,00.01 annually in earned income to the IRS
• have limited investing experience

This information holds true for the extended family member who has a financial advisor (paid or otherwise).

Likewise, kids or no kids, it does not matter.

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For Extended Family Members Who Are Still Working,
Not Retired

Goal: pay no taxes whatsoever on investments. My attitude: if you are still working and investing, you should be paying absolutely no taxes (capital gains / dividends) on your investments. If you are paying taxes on your investments and making no plans to stop that you are doing things all wrong.

If you max out your retirement accounts and 529s, it's time to start investing in real property but that's a topic for another day.

The Schwab cartoon:

 
Focus on sections A and C. 

Confirm with knowledgeable sources, the numbers change annually, but roughly:
    __ IRA contributions this year (2024): $7,000 per individual = $14,000 per couple
        __ Roth IRAs and not traditional IRAs, we can discuss reasons later
    __ 401(k) contribution: $23,000
    __ 529 contributions; two children; no max; set a goal for each year; as a starting point, I'll recommend $5,000 per child = $10,000
    __ total so far: $47,000 for sections A and C

Bottom line: don't even talk to me about putting "new" money into anything but sections A and C unless you have maxed out sections A and C.

Section B:

• put no new money in section B
  
• "buy and sell" within section B
• any new positions, do not check off the box "automatic reinvestment" 
• there's an argument for automatic reinvestment but generally not a good idea
• this made sense years ago when DRIPs were in fashion to avoid commissions
• there are no commissions any more in Schwab accounts

Section A: this is a biggie

• set up a new self-directed IRA / self-directed spousal IRA in section A
• if you "want" the excitement of trading, do it within a self-directed IRA
• any cash raised through a sale in section B, move that cash into new or existing IRAs in section A
• you can trade willy-nilly in your self-directed IRA and not face tax consequences; trading within section B will result in tax consequences
• you've already incurred a taxable event when you sell something in section B, so why not move it into your self-directly IRA and quit paying taxes on capital gains and dividends
  

Traditional IRA or Roth IRA:

• the only "good" thing that a traditional IRA provides that a Roth IRA does not: a very, very minor tax break
• the tax break makes you feel good
• in fact, the tax break the traditional IRA provides is nothing -- absolutely nothing -- compared to the tax advantages of the Roth IRA
• if you really, really want that tax break that a traditional IRA provides, invest only in a Roth IRA but calculate the taxes you would save by investing in a traditional IRA: I will pay you that amount of savings in cash when you file your taxes
• note: in 2033, RMDs required starting at age 75.  
• Roth IRAs: RMDs never required.