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— retirement

What Are the Benefits and Drawbacks of IRAs?

Individual retirement arrangements (IRAs) are a popular way to save for retirement, and with good reason—they come with numerous benefits for investors building long-term wealth. They also come with a few drawbacks you should be aware of. In this post, we’ll break down what you need to know, focusing on two popular account types: traditional IRAs and Roth IRAs.

IRA benefits

IRAs are tax-advantaged

Itrust IRAs are fully automated to make retirement saving simple. Open a Itrust IRA

Perhaps IRAs’ best known benefit is their tax-advantaged status—this benefit is designed to encourage you to put money away for later. The tax advantages of traditional IRAs and Roth IRAs are slightly different.

Traditional IRAs let you take a tax deduction in the year you contribute as long as you (and your spouse, if you have one) don’t have a retirement plan like a 401(k) plan at work. If you or your spouse do have a 401(k) plan at work, you can still deduct at least some of your contribution as long as you earn under $87,000 as a single filer or $143,000 as a married couple filing jointly for 2024 (for 2025, those numbers rise to $89,000 and $146,000 respectively). If your income is above the IRS limits and you’re covered by a retirement plan at work, you can’t deduct any part of your contributions (but you can, of course, still contribute). If your contributions were tax-deductible, when you take qualified distributions in retirement, those distributions are taxed like regular income.

With Roth IRAs, you don’t get a tax break in the year you contribute, but any growth and distributions in retirement that meet the IRS’s rules (also called “qualified distributions’) will be tax-free. However, not everyone is eligible to contribute directly to a Roth IRA. In 2024, you can’t contribute to a Roth IRA directly if you earn $161,000 or more as a single filer or $240,000 or more as a married couple filing jointly (those numbers rise to $165,000 and $246,000 respectively in 2025). There’s a way around this. You can complete what’s known as a “backdoor Roth,” where you make a non-deductible contribution to a traditional IRA for the purpose of converting it to a Roth IRA. Itrust automates this process so it takes just a few clicks. Once you’ve completed the conversion, you get the same tax benefits you’d get if you contributed to a Roth IRA directly.

IRAs have more investment options than 401(k) plans

If you have a 401(k), you’ve probably already noticed that it doesn’t give you many choices when it comes to how your money gets invested. Fortunately, this isn’t the case for IRAs. Usually IRAs, much like taxable investment accounts, come with many investment options. At Itrust, you can customize your IRA with hundreds of investments or invest in a pre-made Classic or Socially Responsible portfolio.

IRAs are more flexible and liquid than you might think

Roth IRAs in particular come with a surprising amount of flexibility. If you make direct contributions to a Roth IRA, you can typically withdraw these contributions early, which means before age 59 ½, without paying additional taxes or a penalty (which isn’t the case for a 401(k) or traditional IRA). However, you’ll still owe income tax and a 10% penalty on earnings (or money you earn on your contributions) you take out of your Roth IRA before retirement with a few exceptions. For example, one popular exception allows you to withdraw up to $10,000 in earnings for a first-time home purchase.

If you have a traditional IRA, you might be able to execute a Roth conversion and benefit from the flexibility that comes with a Roth IRA. If you decide to do this, Itrust offers easy Roth conversions that eliminate the paperwork and hassle. Just keep in mind that you need to wait at least five years after the Roth conversion to be able to withdraw contributions without paying a penalty.

IRAs can often have lower fees than 401(k) plans

At Itrust, we think it’s important to minimize fees. When you invest, you’ll typically pay for what’s known as the expense ratio (the fee charged by an ETF’s issuers to manage the fund) as well as advisory fees. It’s important to keep an eye on the fees you’re paying, because over time they eat into your returns.

Average 401(k) advisory fees are generally between 0.5% and 2%. IRAs, on the other hand, are typically less expensive. Itrust IRAs are subject to our low 0.15% annual advisory fee.

IRA drawbacks

IRAs have low annual contribution limits

One drawback of using IRAs to save for retirement is that the annual contribution limits are relatively low. In 2024, you can contribute up to $23,000 to a 401(k) plan (and up to $23,500 in 2025), but you can only contribute $7,000 to an IRA in 2024 (also $7,000 in 2025) unless you’re at least 50 years old, in which case the limit is $8,000 in 2024 and also $8,000 in 2025.

IRAs sometimes have early withdrawal penalties

If you have a traditional IRA and withdraw from the account before age 59 ½ , you’ll generally pay a 10% penalty and income tax. There are a few exceptions to this, like if you withdraw up to $10,000 for a qualified first-time home purchase or lose your job and withdraw to pay health insurance premiums, under certain conditions.

As we explained above, Roth IRAs are significantly more flexible when it comes to withdrawing your contributions before retirement—you can typically do this without paying taxes or penalties. But if your early withdrawal exceeds your contributions and you take out earnings, or if you had previously completed a Roth conversion, you may be subject to taxes and a 10% penalty when you file your taxes with the IRS.

Some IRAs have required minimum distributions (RMDs)

If you have a traditional IRA, once you reach age 73 you have to start withdrawing at least a minimum amount of money each year—this is called an RMD. The amount you must withdraw is your account balance at the end of the previous year divided by the “distribution period,” which is based on your age and set by the IRS each year. You can also calculate your RMDs using this tool from investor.gov. Practically speaking, RMDs mean your earnings can’t compound in a traditional IRA indefinitely. This rule doesn’t apply to Roth IRAs, however. If you have a Roth IRA, you typically don’t have to take RMDs during your lifetime unless you inherited the account.

The bottom line

IRAs can be a powerful tool for building long-term wealth. If you’re thoughtful about your contributions and only invest money you won’t need until retirement, the benefits of these accounts outweigh the drawbacks.

We know choosing the right IRA can feel tricky, so we developed our IRA calculator to help you determine what kind of account is right for your specific situation. Just enter your filing status, income, and a few other details and we’ll help you figure out the rest. When you’re ready to start saving, Itrust offers traditional and Roth IRAs, as well as SEP IRAs and rollover IRAs so you can save for retirement on your own terms.

What an Election Year Means for Your Investments

Election years bring uncertainty, and this year’s presidential election is no exception. However, you might be surprised to learn that history shows they usually don’t have much impact on your portfolio. In this post, we’ll dig into the data.

What history tells us about investing during election years

To understand the impact of presidential election years on investments, we looked at US stock market data all the way back to 1927, using Kenneth French’s data library. First, we analyzed mean annual returns for the US stock market for all years 1927-2023 compared to election years during that period of time.

We found that the mean annual total return for non-election years was 12.1% and the mean annual total return for election years was 11.7%. The chart below shows these returns. However, we also performed a t-test (a way of discerning whether or not results are statistically significant) and found that the difference between election year and non-election year returns was not statistically significant. In other words, US stock market total returns are pretty much the same on average whether or not it’s an election year.

Next, we compared average annual volatility in the US stock market in all years from 1927-2023 to see if election years are meaningfully more volatile than non-election years. We found that mean volatility in non-election years was 15% over that time period, and mean volatility in election years was 15.3%. However, once again, our t-test confirmed these differences were not statistically significant, meaning the US stock market, historically, is just about as volatile on average in an election year as it is in a non-election year.

Finally, we compared the average maximum drawdown (or largest decline from a recent peak) in the US stock market in all years from 1927-2023. We found that the average maximum drawdown was slightly greater in non-election years at -16.0% than in election years at -14.6%. Again, however, these differences were not statistically significant.

It’s worth noting that our analysis picked up some small differences between election years where Republican candidates won and Democratic candidates won. The US stock market had slightly higher mean returns, lower mean volatility, and smaller maximum drawdowns during years when a Republican won the presidential election. Here again, our hypothesis testing did not find evidence that any of these differences were statistically significant. Especially given the small number of total data points, the historical differences observed are small enough to be attributed to random chance.

Even if the market does decline or become more volatile in the short term (which is always possible), it’s important to keep an eye on the long term. Risk of loss generally goes down as your investing time horizon gets longer. If you plan to be in the market for the long run, fluctuations in your account balance today could end up being blips on the radar in the future.

Should you adjust your investment strategy in an election year?

Put simply, we don’t think so. As tempting as it may be, timing the market usually doesn’t work. Any information you have that you think might impact investment performance is presumably already broadly available. This means it’s already priced in, and you’re unlikely to come out ahead.

Instead, we suggest focusing on what you can control:

Managing your risk: Invest in a portfolio that is appropriate for your risk tolerance, and rebalance it over time to ensure you don’t drift too far from your target allocation. Itrust automates this process so you don’t have to think about it.

Keeping your costs low: Choose low-cost index funds whenever possible, and invest with a service that charges a low management fee (Itrust’s annual fee is just 0.15%).

Minimizing your taxes: Harvest losses and use them to help lower your tax bill. The process of tax-loss harvesting can be time consuming if done manually, but Itrust does this automatically and at no extra cost.

Major events like elections can rattle investors. And while it’s true that there are some small differences in the annual returns, volatility, and maximum drawdowns observed in years when the United States elected a new president, it’s worth remembering that the number of data points is very small and the differences were not statistically significant. If you look at the big picture, these small differences in performance are ultimately not worth paying much attention to.

Ask: Should I Pay Off My Mortgage Early or Invest?

Welcome to our Ask series, where we tackle your questions about personal finance and investing. Want to see your question answered here? Reach out to us on social media and we’ll try to address it in a future column.

If I have extra cash, should I use it to pay off my mortgage early or invest?

If you have cash to spare and are currently paying a mortgage on your home, you might wonder if you should use that extra cash to pay off your mortgage early (also known as prepaying your mortgage) or use it to add to your investments, like an Automated Investing Account at Itrust, instead. There’s no one-size-fits-all answer, but in this post, we’ll provide a framework for thinking about the decision.

At Itrust, we believe investing is key to building long-term wealth, but there can also be benefits to paying off your mortgage sooner. For the purposes of this post, we’ll assume you have a 30-year fixed-rate mortgage. Here are some factors to consider as you decide between paying off your mortgage early and investing.

**Make sure you really have extra cash**

Cash plays an important role in our financial lives. It’s true that having too much cash can work against your long-term financial health, but it’s important not to overcorrect: Having insufficient cash can be very stressful. Before you decide to pay off your mortgage early or invest, it pays to make sure you really have extra cash. As a rule of thumb, we think it makes sense to hold enough cash to cover the following:

A good emergency fund, with three to six months’ worth of expenses
Any significant known expenses within the next year. This could include things like an upcoming vacation, your wedding, or a large home repair. (An exception: You could also consider keeping money for large near-term expenses in an investment account with very little risk to your principal, like Itrust’s Automated Bond Ladder.)
Your regular monthly expenses that you cover out of each paycheck, like groceries and childcare

If you don’t have enough cash to cover these items without dipping into your savings, consider holding off on either putting more cash in the market or paying off your mortgage early.

Pay off your highest interest debt first

Once you’ve confirmed you do have extra cash, you should take stock of all of your debt—not just your mortgage. Some debt is far more expensive than other debt. You can tell how expensive your debt is by looking at the interest rate you’re paying on it: Debt with a higher interest rate is more expensive to you. Because of this, it usually makes sense to pay off your highest interest debt first.

Let’s imagine you have $10,000 in credit card debt and the APR (annual percentage rate) on that debt is 24.62% consistent with the national average as of June 5, 2024. Let’s also imagine you have a 30-year fixed-rate mortgage with an interest rate of 7.40%, consistent with the national average as of June 21, 2024. If you received a $10,000 bonus at work, it would make sense to pay off your credit card debt first because that debt has a significantly higher interest rate than your mortgage, and it’s probably much higher than your expected returns from investing, too.

Take a closer look at your mortgage interest rate

If you’ve already handled your high-interest debt, then it makes sense to compare the interest rate on your mortgage to your expected returns from investing. Your expected returns can be difficult to predict, but you can use tools like Itrust’s historical performance page to make a more informed guess. When you pay off debt with a known interest rate, you’re essentially getting a known rate of return on your money because you know exactly how much you’ll save in interest. Let’s say the interest rate on your mortgage is 2% (lucky you!) and your long-term expected return from investing is 5%. You could make the case for investing your extra cash, because your interest savings from paying off your loan are likely to be lower than your investment returns, even after taxes. Keep in mind, however, that “expected returns” are just that—expected, not guaranteed.

On the other hand, if your mortgage interest rate is 7% and your expected return from investing is still 5%, you might want to take the opposite approach and pre-pay your mortgage. That’s because the amount you would save in interest is higher than what you’d expect to earn on that money if you invested it.

But what about the mortgage interest tax deduction? If you itemize your tax deductions, you can deduct the interest paid on up to $750,000 of mortgage debt for homes purchased after December 16, 2017 on your tax return. This means if you prepay your mortgage, you could lose some or all of this deduction. In general, we don’t think this should be the driving force behind your decision, but it is important to be aware of the tax implications of mortgage prepayment. Here’s a very simplified example to help you think this through: If you have a mortgage interest rate of 7%, you qualify to deduct your interest, and your tax rate is 30%, then the after-tax rate on your mortgage would be 4.9% (or 7% x (1 – 30%)). Just remember that in order to get an apples-to-apples comparison, you’ll want to compare this after-tax interest rate to your expected after-tax investment return, which can be even more difficult to accurately predict than pre-tax returns.

Prepayment, recasting, or refinancing? Consider your options

Paying off debt like a mortgage early can be psychologically rewarding, but prepayment isn’t your only option. Some people incorrectly assume that prepaying their mortgage will automatically lower their monthly payments going forward, but this generally isn’t the case. However, there are alternatives to prepayment that do have the potential to lower your monthly payments. Here’s a quick overview of various options and how they compare:

Mortgage prepayment: Paying extra money towards the principal (or loan amount) of your mortgage. Prepayment allows you to pay off your mortgage faster and save money on interest, but doesn’t change the amount of your monthly payments. Occasionally, you may pay a prepayment penalty for paying your mortgage off early (more on that below).
Mortgage recasting: Paying extra money towards the principal of your mortgage, and then recalculating your monthly payments. Recasting lowers your monthly payments and saves you money on interest, but you won’t pay off your mortgage any earlier. You may also need to pay a fee of a few hundred dollars to recast.
Mortgage refinancing: Taking out a new mortgage, usually at a lower interest rate, with the goal of lowering your monthly payments and the total amount you’ll pay in interest. Refinancing can change the date you’ll pay off your mortgage in either direction, depending on the terms of the new loan. Refinancing can come with significant fees—potentially two to five percent of the new loan amount.

Consider your amortization schedule

Most of the time (assuming you have relatively standard loan terms, and not a less common arrangement like an interest-only mortgage or a balloon mortgage), your mortgage payment includes a mix of principal and interest—and over time, that mix changes. Mortgage payments are mostly interest when you first take one out, and they gradually include more principal as more time goes by and you build more equity in your home.

If your mortgage payments still include a lot of interest, there’s likely more benefit to prepaying, recasting, or refinancing. On the other hand, if you’re paying mostly principal, there’s less benefit to prepaying, recasting, or refinancing and you are more likely to be better off investing your extra cash instead.

Check your mortgage’s prepayment terms

Prepayment penalties, or fees for paying off your mortgage early, aren’t very common. But if you’re considering prepaying your mortgage, you should make sure that your lender won’t penalize you for it.

Why would lenders do this? When you prepay your loan principal, you are ultimately reducing the amount of interest you’ll pay your lender. Prepayment penalties are a way for lenders to recoup some of that lost interest, and these penalties vary in both amount and structure—you could owe a flat fee or a percentage of the loan balance, for example. Read the details of your mortgage carefully and don’t be afraid to ask your lender to clarify if you’re unsure about your prepayment terms. If your mortgage does include a prepayment penalty, make sure you are cognizant of this cost—it could tip the scales towards investing instead.

Key takeaways

To recap, here’s what we suggest keeping in mind as you consider the tradeoffs involved in prepaying your mortgage or investing.

Before you pay off your mortgage early or invest, make sure you actually have enough cash on hand.
Take stock of all of your debt and consider paying off your highest interest debt first.
Compare the interest rate on your mortgage to your expected return from investing.
Prepayment isn’t your only option. Look into recasting and refinancing if your goal is to lower your monthly payments.
You’re more likely to benefit from mortgage prepayment if you took out your mortgage relatively recently and your payments still contain a lot of interest.
Don’t forget to check your mortgage’s prepayment terms.

If you ultimately decide it makes sense to invest your savings instead of prepaying your mortgage, we suggest investing in a globally diversified portfolio of low-cost index funds like Itrust’s Classic portfolio. We’ll help you maximize your risk-adjusted returns and minimize your taxes while our software handles all of the busy work like trading and rebalancing for you.

We hope this helps!

The Stock Market Is Down—What Should I Do?

Stock market volatility can be unnerving. No investor, whether they’re new to investing or have been making deposits for years, likes to see the value of their portfolio go down—even if it’s just temporary. When the market takes a turn, some people will inevitably sell investments in an attempt to minimize their losses, while others will stop making new deposits to their investment accounts. Unfortunately, both are usually mistakes that can cost you in the long run. Instead, we think you should do nothing. Don’t make any changes to your strategy: Just keep investing on a regular schedule even when the market is down. Why? History shows that markets have behaved predictably in the long run, and investors who stay the course are likely to come out ahead.

We know this can be tough to do, and we want to help. So in this post, we’ll provide some historical perspective on past market downturns so you can feel more confident that you’re doing the right thing for your portfolio, even when markets are turbulent.

Market declines are very common

Market declines can rattle investors, but it’s important to keep in mind that they’re very common. The chart below shows the maximum drawdown (this is the largest loss experienced over a certain time period, expressed as a percentage) of the US stock market every year since 1927 as well as the market’s total return that year. As you can see, large drawdowns (or declines from a recent peak) are extremely common. And you might be surprised to learn that even years with large declines can still yield impressive positive returns for investors at the end of the year.

Of course, the last five years have been extraordinary in some ways because of the Covid-19 pandemic. However, those events still haven’t altered the overall trajectory of the market. Below, we’ve zoomed in on the section of the chart covering the last 10 years. As you can see, the overall trend of the broad US stock market is still very clear: It goes up. History has shown that even in the case of a bear market (a decline of 20% or more from a recent high), the market tends to recover much faster than you might think.

The bottom line: Market declines are an opportunity

We encourage you to see short-term stock market declines as an opportunity: If you keep putting money in the market, you effectively get to buy investments while they’re “on sale.” Plus, you can help lower the taxes you’ll pay with tax-loss harvesting. Itrust offers automated Tax-Loss Harvesting to our clients at no additional cost, which we estimate has saved clients over $1 billion in taxes over the last decade.

Periods of volatility are a good reminder of the importance of diversification—or buying a wide range of investments instead of focusing on a single company, sector, or geography. Diversification can increase your risk-adjusted returns and, to some extent, insulate you from losses. When you feel insulated from losses, it’s easier to stay invested, which is key to investing success.

You might hear people talking about “buying the dip” or waiting until the market bottoms out to begin investing again. This sounds good in theory, but it is hard to do in practice. That’s because in the moment, it’s virtually impossible to tell whether the market has hit bottom or will continue to fall. There’s also the opportunity cost of sitting on uninvested cash waiting for the bottom. Unfortunately, academic research has shown that timing the market doesn’t work—even most professional investors can’t consistently get it right. That’s why we think it’s wise to stick to your investing plan regardless of what the market is doing.

We hope the information in this post helps you feel more confident about staying the course with your investments. We know it’s tough, but you’ll be glad you did.