Posted: 7-10-24 | Innovia Wealth
Planning: The Tax Benefits of Roth IRAs for Minors
Did you know your son’s or daughter’s summer job provides an opportunity to fund a Roth IRA for them?
Individuals with earned income, subject to some limitations, are eligible to make a Roth IRA contribution in an amount equal to the lesser of their earned income or $7,000 for 2024 ($8,000 for those 50 or older). Contributions may be made directly by your children or grandchildren if they have earned income from a job. Alternatively, you may use some of your annual gift exclusion and contribute to your children’s or grandchildren’s Roth IRA on their behalf.
The potential benefits of this strategy are profound:
- Roth IRA contributions are made with after-tax dollars, balances inside a Roth IRA grow tax free, and future qualifying withdrawals from a Roth IRA are also tax free.
- Parents or guardians can open and manage the account on behalf of a minor child, helping them understand financial responsibility and the power of compound interest from an early age.
- Starting early can maximize the potential tax-free growth of investments over time, providing a valuable head start on long-term financial planning and retirement savings.
- Gifting funds for a Roth IRA demonstrates financial foresight and generosity, teaching the recipient about the importance of saving and investing for the future. It’s a thoughtful way to leverage your annual exclusion gift to support financial security and independence for your family.
Please contact your Innovia advisor if you think a Roth IRA contribution and/or annual exclusion gift could be a good option for you and your family.
June—New highs, lower inflation, what’s not to like?
Artificial Intelligence (AI) continues to be THE investment story of the last fifteen months. The stock prices of large technology companies hit new highs, with NVIDIA and Apple leading the way. We believe AI will significantly impact the economy over time, but it’s hard to know exactly how it will work out in the short to mid-term. When just a few companies lead the pack by so much, it can mean enthusiasm is getting ahead of reality. This does not mean you should sell your winners now, but it does mean exercising caution rather than betting narrowly where the excitement is greatest.
Bond returns were also positive this month as inflation data showed a resumed downtrend. It appears the Federal Reserve expects to lower interest rates (see chart below), which gives investors hope the economy is in good shape and that interest rates on loans may come down.
Federal Reserve member (each blue dot) forecasts for interest rate cuts
July—Economy, earnings and elections
Economic growth has been strong in the US and appears to be rebounding around the rest of the world. This generally good news is checked by higher credit card delinquencies and signs of weakness in consumer spending (see retail sales below), especially at the lower end of the income range. Investors seem to be more worried about inflation and as long as that keeps coming down, markets are likely to do well.
Second quarter corporate earnings reports, coming out later this month, will soon be a major focus. This will give investors a view into consumer spending, corporate profits, and future growth. Expectations for growth are high.
Important elections in Europe and the US will also make the news; however, we don’t expect their impact on the economy and company profits to be as significant (meaning potential pullbacks are unlikely to last).
% Change in Retail Sales
US Census Bureau
Private Markets Pulse: Illiquidity is a feature, not a bug.
Illiquidity in private equity markets is often viewed negatively by investors. It is something you must “give up” to reap the potential benefits of investing in private markets. However, an argument can be made that illiquidity has a positive impact on aligning investor behavior and generating long-term returns.
The inability to quickly sell private equity investments forces investors to adopt a long-term perspective. This aligns with the nature of private equity investments, which typically take time to restructure, grow, and eventually exit the investment profitably. The lack of liquidity mitigates the temptation to react to short-term market fluctuations, allowing for a more stable and strategic approach to value creation. This enforced patience can lead to higher returns as companies mature and strategic initiatives bear fruit. Private equity’s structure encourages thorough due diligence and active management, focusing on operational improvements and strategic growth rather than short-term market performance.
Being forced to sell investments at inopportune times can be highly detrimental to returns. Market conditions can be unfavorable due to economic downturns, sector-specific issues, or temporary setbacks within the invested company. During such times, asset prices are often depressed, leading to potential losses or suboptimal returns if an investor must liquidate their position. Illiquidity protects investors from making panic-driven decisions, ensuring that they can wait for a more favorable market environment or for the underlying business to achieve its growth potential. This concept is no different than when we recommend holding stocks through a downturn in the public markets.
As a result, illiquidity can serve as a discipline mechanism, fostering a committed and engaged investment approach that can help lead to superior returns.