I was talking to a high-profile Wall Street strategist the other day who told me she and her husband were house-hunting in the Hamptons.
They saw a place they liked, but the asking price was too high.
“It was as if the downturn in the stock market hadn’t happened,” the strategist related. “I told the broker: ‘I’m paying what this house was worth back in February 2020, because that’s what it’s worth now.’”
A provocative take, and one worth considering.
The strategist is suggesting that a surge in the price of everything from stocks to crypto to real estate was a one-off that came and is now gone. So, too, are the stimulus payments sent to millions of Americans that helped fuel some of this enthusiasm.
Therefore, the argument goes, prices should — and will — revert back to pre-COVID norms.
Let’s follow the strategist’s lead, then, and use February 2020 as a benchmark. Or in the case of stocks, February 19, 2020, when the S&P 500 closed at a pre-pandemic high of 3,386.
As the magnitude of the COVID-19 pandemic became clear, investors sold stocks, and by March 23, 2020, the S&P fell to 2,237, a drop of more than 33% in just over a month.
Since then the market has been on a ride wild enough for Mr. Toad.
Starting from the March 2020 low, the S&P 500 more than doubled to its most recent record close of 4,796 on January 3, 2022. Fueled by $5 trillion in stimulus funding — $1.8 trillion of which went directly to individuals and families — as well as accommodative policy from the Federal Reserve and near-zero interest rates, markets entered a speculative phase that witnessed the rise of meme stocks, SPACs, crypto and NFTs.
“We believe what’s gone on in the market in the first six months of this year, and what will go on for maybe another year to year and a half, is bear market punishment for the ridiculous financial euphoria,” says Bill Smead, founder and chairman of Smead Capital Management.
So far this year, the S&P 500 is down over 18% and investors just endured their worst starting six months to a year since 1970. Of course, the S&P is some 500 points above the February 2020 high. Which means, if our strategist is right, the index still has another 13% to drop.
Following the same framework, crypto investors are feeling the pain, but may still have more to come.
On February 11, 2020, the price of bitcoin (BTC-USD) was $10,326. Today bitcoin trades just below $22,000, standing at $21,872 on Friday afternoon.
The cryptocurrency’s record high is over $67,500, reached in November 2021.
The SPAC market, too, appears to be returning to earth. According to SPACInsider, the number of SPAC IPOs in 2019 was 59, then 248 in 2020, and up to 613 last year. In 2022, just 70 SPAC IPOs have come to market.
“We had this massive SPAC boom,” says SPACInsider founder Kristi Marvin. “It was a confluence of perfect factors that will be hard to replicate – with the Fed injecting that much money into the system and so forth. We’re obviously in a very down market.”
As for venture capital, a number of measures show the business slowing. But one metric that offers an indication of where the industry stands relative to early 2020 is the number of acquisitions of VC-backed companies. In the second quarter of 2022, there were some $15.4 billion of announced or closed deals, according to PitchBook. In the first quarter of 2020, the total was $10.7 billion.
As for valuations of early stage VC companies, the process may take longer to unwind. The average early stage valuation stood at $58 million the first quarter of 2020; today, the average valuation comes in at $168 million for these same businesses. And private markets often don’t require investors to take writedowns like their public market counterparts.
“The stimulus really was impactful,” says Dave Pierce, managing director GPS Capital Markets. “Prices really didn’t jump incrementally at first, but as people have been able to put money into the economy, it has made everything way more expensive.”
And, of course, there are metrics which show that facets of the economy have in fact reverted to B.C. (Before COVID) in a good way.
Nearly 2.5 million people passed through U.S. airport security checkpoints on the Friday of July 4th weekend, the most since, you guessed it, February 2020. The pandemic low in TSA checkpoint throughput was reached on April 13, 2020, when just 87,534 people went through security checkpoints.
And after yesterday’s jobs report showed the creation of 372,000 jobs in June, with the unemployment rate holding steady at 3.6%, the White House crowed that “our private sector has recovered all of the jobs lost during the pandemic, and added jobs on top of that.” And that 3.6% unemployment rate is just a smidge above where it was (3.5%), back in Feb 2020; in April 2020, this topped out at 14.8%.
Even if the process of returning to February 2020 does happen across financial markets, we can’t erase the past 28 months.
Most Americans in a recent survey say their lives are different now and they accept that. COVID is still with us and so are its effects — supply chain snafus, tight labor conditions, and inflation are among them.
And now, perhaps because of all that, some say the economy is slowing. One thing we know for sure is that the stock market has been in meltdown mode. And if the market is a leading indicator, maybe we are going back to — as Barbra Streisand says — the way we were.
The Fed began to eye all this warily last year and in January signaled it was going to take away the punch bowl and raise rates, which is when stocks began to swoon.
But aren’t more people working and flying both positives, which means stock prices shouldn’t or won’t fall more? Good question.
When looking at the day-by-day vicissitudes of the economy, it’s not easy to come to definitive conclusions.
Returning where we started though — luxury vacation homes — it could be our Hampton’s-home-hunting strategist might not hit a bid, at least if stories about houses in Naples, Florida and Nantucket are any measure.
There still appears to be all kinds of money sloshing around looking for a home.
And it seems that sometimes, a $20 million beach house is worth…whatever you pay for it.
This article was featured in a Saturday edition of the Morning Brief on July 9, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Follow Andy Serwer, editor-in-chief of Yahoo Finance, on Twitter: @serwer
American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.
How Do Mega Backdoor Roths Work?
A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.
Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.
Roth Account Basics
Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.
First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.
Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:
Single filers: MAGI of $125,000 or less
Married filing jointly: MAGI of $198,000 or less
Head of household: MAGI of $125,000 or less
You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.
Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.
What Is a Backdoor Roth?
A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.
But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.
How a Mega Backdoor Roth Works
A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:
You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.
If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.
Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.
You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.
Benefits of a Mega Backdoor Roth
There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.
You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.
Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.
Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.
So who is a mega backdoor Roth right for? You may consider this move if you:
Have an eligible 401(k) plan at work
Have maxed out traditional 401(k) contributions
Are not eligible to contribute to a Roth IRA because of your income
Have additional money that you want to invest for retirement
Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover
Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.
Mega Backdoor Roth Alternatives
If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.
Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.
Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.
A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.
Tips for Retirement Planning
If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.
Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.
Photo credit: ©iStock.com/designer491
Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.
Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.
China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.
(ticker: BABA) and
(0700.H.K.) were among the companies fined as a result.
Voyager Digital is restructuring and preparing for sale
Cryptocurrency broker Voyager Digital said it is preparing a plan to restructure and resume cash withdrawals from the platform According...
Mike McGlone: Ethereum and Bitcoin oversold
A senior commodities strategist at Bloomberg Intelligence believes that according to technical analysis of the market, leading cryptocurrencies are selling...
Chainlink protocol developers refused to support next Ethereum fork
Ethereum is preparing to switch to PoS, and the community expects forks of the second cryptocurrency to appear on the...
PredictIt news: CFTC shuts down PredictIt prediction market in US
Important PredictIt news: The U.S. Commodity Futures Trading Commission (CFTC) has issued an order to shut down one of the...
Is bitcoin mining profitable today? Bitcoin mining difficulty drops for third month in a row
Is bitcoin mining profitable? The difficulty of mining bitcoin began to drop precipitously as the largest-capitalization cryptocurrency’s price fell below...
WazirX news: Indian authorities froze assets of WazirX
WazirX news: India’s economic intelligence agency froze assets of Binance-bought WazirX after allegations of money laundering Indian authorities have seized...
US recession and stock market. Thomas Barkin, Fed: Recession is virtually impossible
The U.S. recession and the stock market are closely linked. The key U.S. stock market indices – Dow Jones, NASDAQ...
Euro rate chart: the euro is not going into a trap
No matter how much FOMC officials try to convince investors of the Fed’s commitment to aggressive tightening of monetary policy,...
European stock market news: Europe started to lag behind the rise in U.S. stock prices
Current European stock market news: U.S. stock futures rose slightly Friday, helped by tech stocks as investors prepare for the...
Dollar rate today live: What is happening to the dollar today?
As you know, the dollar exchange rate has been lagging lately. We all wish wars would end as quickly as...
U.S. stock market capitalization 2022: Morgan Stanley advises against buying U.S. stocks
U.S. stock market capitalization by 2022 leaves much to be desired. The key U.S. stock market indexes – DOW Jones,...
EUR/USD: European Union’s main currency problems
EUR/USD: The pair stayed in the flat, as investors refrained from making big bets before the U.S. labor market data...
Asian stock market charts: Major Asian indicators are up 0.88%
What’s happening on the Asian stock market charts right now? The major Asian indicators are mostly up 0.88%. Some indicators,...
Nonfarm Payrolls and Recession: July’s NonFarm Payrolls Surprise – What Next?
As you know, nonfarm payrolls and the recession are always closely related. The U.S. Federal Reserve sees its main goal...
Stock market today: Stock Europe closes the week with a fall
Stock market today: In trading on Friday, key stock indicators in Western Europe are showing a decline amid weak financial...
Top brokers USA
Due to the strictness of the supervisory agencies to the investment market in the United States, traders who choose a...
Nasdaq 100 index rises for third straight week
The Nasdaq chart today, which reflects the value of stocks of U.S. technology companies, rose 20% from its June low....
4 Dividend Stocks Offering Double-Digit Yields: An Easy Way To Earn Passive Income
Carbon emissions and climate change are well known, so many global companies are concerned about this factor. Today it is...
Situation in Taiwan leads to detours and delays in global transport
China’s military exercises near Taiwan have pushed the situation in the region to the limit. Therefore, some ships carrying liquefied...
Demand for gasoline in the U.S. has fallen below pandemic levels
According to the U.S. Energy Information Administration, average monthly gasoline consumption has fallen below the 2020 level. The demand surge...
Saudi Arabia raises oil prices in Asian countries to record levels
Aramco is raising Arab Light oil prices by 50 cents in September. It is a record increase in oil prices...
Current electricity prices UK: Marginal annual energy costs in the UK jump above £4,000
Current electricity prices in the UK are rising fast. According to Investec Bank Plc, the price ceiling paid by households...
Oil prices daily adjusted upward
The price of October futures for Brent at London’s ICE Futures Exchange stood at $95.74 per barrel, up $1.62 (1.72%)...
Current gold price stabilizes after rally
Current gold prices on Thursday morning grew slightly; with the second day remaining above $1,800 per troy ounce; markets are...
Futures wheat prices: wheat rose sharply on the Chicago Exchange
Futures wheat prices as well as soybeans in Chicago rose sharply on Thursday. Wheat quotations recovered from 6-month lows on...
Latest crypto news: What happened on the crypto market as of August 4 morning
Daily crypto news: Starbucks will develop loyalty program with web3 tools, Solana developers found alleged culprit of ecosystem exploit, ZBExchange...
Bank Sygnum adds support for staking Cardano (ADA)
Swiss digital bank Sygnum announced that staking Cardano ADA is now available to its users. Sygnum Bank customers can now...
Next Ethereum update will attract more investment from institutions
Next Ethereum update will be a deciding factor in increasing institutional investment in cryptocurrency A Bloomberg Intelligence report suggests that...
Breaking news about Coinbase: Court finds ex-Coinbase employee accused of insider trading not guilty
Breaking news about Coinbase: A federal court in Manhattan has found not guilty a former employee of Ishan Wahi, whom...
Inflation in European Union: Producer prices in the euro area rose by 1.1% in June and by 1.3% in the EU
Inflation in the European Union: Euro-area producer prices (PPI) rose 1.1% in June 2022 compared to the previous month, when...
- Coronavirus9 months ago
Biden administration still seeking agreement from Mexico on return of asylum seekers
- Cryptocurrency9 months ago
NFT World Records: CryptoDragons Sold Out 500 Eggs in Its Primary Pre-Sale in Тhe Тwinkling of аn Еye!
- Economy9 months ago
Analysis-Europe’s big payday remains elusive even as inflation surges
- Cryptocurrency8 months ago
In the Wilder World, Staking and Liquidity Mining Have Arrived
- Cryptocurrency9 months ago
Crypto.com is the #1 app in the Google Play Store in the US
- Cryptocurrency9 months ago
The Next Web 3.0 Social Media Will Be Built on Solana
- Stock Markets4 months ago
WeLion Cooperates with Nio to Produce Semi-Solid Battery
- Forex9 months ago
Dollar Consolidates After Strong Gains; Tapering Could Be Speeded Up