Mellen Money Management LLC
Principal, Financial Planner
After spending much of his 10-year career as an advisor for a large regional bank, Scott Snider decided it was time to break away from corporate America and start a fee-only financial planning firm named in memory of his Grandparents. Mellen Money Management embodies their generosity and serve-first values. Today Scott's firm works with clients in the Jacksonville, FL and Columbus, OH markets and offers virtual meetings for those that live on the other side of the country. In fact, several of Scott's clients live around the globe.
Mellen Money Management provides investment management and comprehensive financial planning, with an emphasis on understanding the impact of key life transitions on your money. In addition, Scott specializes in helping young professionals and families navigate the confusing maze of college tuition, financial aid, and student loans. It's Scott's mission to ensure you are not letting the astronomical cost of college manage you. More importantly, Scott believes this problem can't be solved in a vacuum and should be balanced with the many other financial goals that compete for your money. Please explore the Mellen Money Management website, check out the blog, or contact Scott to learn more.
BS, Finance, Miami University
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Who is Mellen Money Management
Approximately 10% is the average return for the S&P 500 since its inception back in 1928. Adjusted for inflation the "real return" is more like 7%. Also worth noting that nearly half of the gains from the S&P 500 resulted from dividends.
Think of the Roth IRA itself as a wrapper around your money that provides tax-deferred growth and then when you go to retire you can take all of the growth and contributions out tax-free. The avoidance of tax is not available had you just invested the money with after-tax dollars and did not own a Roth IRA. In fact, capital gains, dividends, and ordinary income taxes apply in that case. Also note, a Roth, unlike a Traditional IRA, receives after-tax dollars as the contribution. Traditional IRAs on the hand usually receive pre-tax contributions that grow tax-deferred, however, at retirement, the money withdrawn is fully taxable at ordinary income tax rates. The other scenario you might see is a non-deductible IRAs. These allow the money to grow tax deferred, but the original investment uses after-tax dollars. Only the growth is taxable at the time of distribution. Note, the growth gets pulled before the original basis (amount invested).
A Roth is especially appealing to younger investors because the growth is often 4-8 times what they originally invested by the time they retire. The actual growth rate will largely depend on how you invest the underlying funds within the Roth account. You can select from any number of investment vehicles, such as cash, CDs, bonds, stocks, ETFs, mutual funds, real estate, MLPs, private equity, or even a small business. Historically with a properly diversified portfolio, an investor should expect anywhere between 7%-10% average annual returns. Time horizon, risk tolerance, and the overall mix are all important factors to consider when trying to project how your money might grow.
Besides owning physical crude oil, there are 3 ways for an investor to gain exposure to the price movements of oil:
- Investing in oil futures contracts
- Investing in commodity Exchange Traded Funds (ETFs) that track oil futures
- Invest in an oil sector fund or buy the stock of companies whose primary business is related to oil
1) Investing in oil futures contracts is an efficient way to directly invest in oil as a commodity. This type of strategy is best suited for accredited investors because it carries a higher degree of risk and is generally more capital intensive than the other two investment alternatives. Basically, investors who buy/sell oil futures are agreeing to buy/sell oil at a future price. Meaning the difference in price between the day the futures contract is bought versus the price on the day the contract expires is the profit or loss realized to the investor. For example, say an investor buys a futures contract, that person profits when the price of oil goes up. Whereas, the opposite is true if the price goes down. For investors who sell futures contracts, they profit when the price of oil goes down and lose money when the price goes up.
2) Oil commodity ETFs such as USO and DBO can be an effective way for everyday investors to get indirect exposure to the daily price movements of oil futures like the West Texas Intermediate crude. ETFs offer the investor liquidity because they are readily traded like a stock on the major exchanges. However, it is important to note that these type of ETFs are better-suited for day traders because of the long-term deviation from the price of the commodity itself. This difference in value occurs because there is a cost to the fund whenever futures contracts expire and need to be renewed. In other words, these transaction costs can add up to a significant amount in the long-term and is why a "buy-and-hold" type of investor should beware.
3) The most common way for investors to get access to the price movements of oil is buying sector ETFs like iShares Global Energy (IXC), or buying individuals stocks in the crude oil business like Exxon (XOM). To a certain degree, investors are able to experience a high-level of correlation between the price movements of crude oil and the profitability of companies within the oil sector. Some companies are more efficiently run than others, which will have a direct impact on those companies' ability to generate profits. It should also be noted that buying a sector fund gives the investor better overall diversification versus owning an individual company. On the other hand, buying a single company allows an investor to exclude any number of companies that appear unattractive within the oil sector.
Assuming you are employed as a physician by a separate company where the 401(k) plan is offered and the SEP IRA is tied to your 1099 income, then you can contribute to both retirement plans, along with your IRA. What's great about this is that your contributions are treated independently and allows you to tax shelter significantly more income as a result. In other words, you may contribute up to an aggregate total of $77,500 if under age 50, and $84,500 if 50 or older.
Breaking it down... You can put $18,000 of annual salary towards your 401k ($24,000 if age 50+), with a total limit of $54,000 ($60,000 for age 50+) when including employer contributions. Due to your SEP contributions being considered employer contributions from a separate employer, any amount deferred is not counted against the $18,000 salary deferral limit. Therefore, you are able to contribute an additional 25% of your 1099 income, up to $54,000. Note, if your 1099 income is $100,000 your contribution would be capped at $25,000 -- $100,000 x 25%. So in order to hit the SEP limit of $54,000, you need to make $216,000 from your independent contract work. Furthermore, you may contribute up to $5,500 ($6,500 for age 50+) towards a traditional IRA. Possibly even a Roth IRA if you are at or below the IRS income phaseout limits.
Be mindful that if you have any employees working for your LLC S Corp, then everyone must receive equal percentage contributions to the company SEP IRA plan. Also, since you are electing to incorporate, you are permitted to contribute 25% to a SEP IRA. However, sole proprietors, LLCs, and unincorporated partnerships must contribute 20% of their net adjusted self-employment income. The last detail to keep in mind is that your traditional IRA contribution probably does not qualify for any type of tax deduction because if you are asking this kind of question you probably make too much money. Click the following link to see the IRS' income limits as it applies to deductions with traditional IRAs. With that in mind, something to think about is the "backdoor Roth IRA," but I would consult with your CPA to see if such a strategy is advantageous or not. My initial instincts say it is it probably not, given your desire to simultaneously contribute to a SEP IRA.
While generally not illegal, I would advise against it. As I tell my clients, it's your money so you can do with it whatever you want. My job is to give good counsel. Not be a dictator. Just be aware of the consequences if you go down that path. Investing your student loan proceeds means you have to beat the interest rate being charged on your loan to see any meaningful benefit. With loan rates anywhere from 3% to 15%, the spectrum is pretty wide. Therefore, anyone considering such a risk should know that the historical average return of the S&P 500 going back to 1928 is 10%. Which means I would never be comfortable investing funds from any loans that charge 5% or more because the risk-reward tradeoff just isn't there. With lower interest rate type of loans (3%-4%), it is advisable to focus on paying down the debt and then invest other monies being saved for such a purpose.
A good example of why you should avoid investing your student loans is if you end up being the unlucky person who invested their money at the start of the Great Recession. Say you invested $25,000 of student loan proceeds at the previous market peak during November of 2007 and bought the Vanguard Total Stock Market Index... Not only would you have experienced a 50% drop ($12,500), but it took 4 years and 5 months to recoup your original investment back to $25,000. Unless you are the next stock trading protegee, I strongly discourage against borrowing to invest as a general rule.