Bautis Financial Advisor Commentary: July 8, 2021

This is the seventh installment in an ongoing series where Marc Bautis, Wealth Manager and Founder of Bautis Financial, comments on hot topics in the financial industry. Today, Marc is joined by Kayla Waller, Bautis Financial’s Paraplanner.

Is Renting a Waste of Money?

There’s a lot of debate over whether people should strive to own a home, or if renting makes more sense. In a recent article, Business Insider claims the decision to rent or buy depends on your current situation, and there are definitely instances where renting makes sense.

I am a believer that it does depend on your personal situation. While the analyst in me wishes it was easy to do an apples to apples comparison between renting and buying, there are so many factors that come into play.

With that being said, below are some major benefits of owning your home. As long as it fits into your financial plan, I tend to recommend purchasing.

Tax Benefits

Mortgage interest deduction.
Capital gains exclusion when selling.
You are able to access the equity through a refinance or HELOC without it being a taxable event.

Forced Savings

Every time you pay your mortgage, a portion of that pays down your principal, thus acting like a forced savings plan. Of course you could take the amount that you are saving on your rental payment and invest the difference, but many people spend the difference instead of investing it.

Inflation Hedge

You will definitely feel inflation if you are an owner with an increase in things like maintenance costs, insurance and property taxes. But your biggest expense — your mortgage payment — will remain the same, providing you have a fixed rate loan.
Rents are notorious to increase during inflationary periods.

Control

When you rent, you don’t have as much control once your lease ends. Your landlord may increase rent to an amount you don’t think is reasonable. They may not want to renew your lease for a variety of reasons. Or, there may be clauses in your lease placing restrictions on how you utilize the rental property.
Some may say that what renters give up with control they gain in flexibility. If you own your home and want to move, it is usually a more costly exercise than if you are a renter. Renters have more flexibility.

We recently published an article on the pros and cons of renting vs buying that can further help you make a decision.

Answering Your Questions About IRA Planning

The rules around IRA’s are complex, always changing and sometimes confusing. We’re asked a lot of questions about whether something can be done with an IRA. Two questions we frequently get are:

I participate in my company’s retirement plan, can I still contribute to a Roth IRA? Yes, you can contribute to a Roth IRA as long as you qualify under the Roth IRA contribution income eligibility limits. The same holds true for a Traditional IRA contribution. You can deduct your IRA contribution as long as you qualify under the IRA contribution income eligibility limits. The income eligibility rules differ between the Roth and Traditional IRA. Here are two flow charts you can use to see if you qualify: Roth IRA, Traditional IRA.
When do distributions have to begin from a traditional IRA? An IRA, SEP or SIMPLE owner must begin taking required minimum distributions (RMDs) the year they turn age 72 (it used to be 70 ½). It does not matter if they are still working, or if they do not want to touch the money. Remember, your IRA is an account in which you took tax deductions on your yearly contributions to defer paying taxes on any of the gains. So, the IRS looks at it as their time to start collecting taxes on the account. Your IRA custodian is required to notify the IRS that account owners have to take an RMD, but they are not required to tell the IRS the RMD amount. The custodian is required to either tell account owners how much must be withdrawn, or offer to do the calculation for account owners. The deadline for taking the RMD is December 31st of each year. If you are interested in calculating the RMD yourself, here is a worksheet you can use.

We’re hosting a webinar on July 15th called Savvy IRA Planning for Boomers. The focus of the educational session will be on how you can use your IRA during retirement or decumulation years. If you’re interested in joining, register here. We will send a recording of the session to all of those who register.

Peter Thiel’s $5 Billion Roth IRA

While we are on the subject of IRA investing, Pro Publica released an article last week which revealed that Peter Thiel, co-founder of PayPal and early investor in Facebook, has a Roth IRA worth $5 billion.

My first thought is, how did he generate a $5 billion Roth if the max you can contribute is $6,000 per year? Sure, he could have been contributing more if he utilized the Roth option of his 401k — or even more if he utilized a Mega Backdoor Roth contribution — but that would still take extraordinary gains to get to $5 billion.

So how did he do it? Back in 1999, Thiel had the privilege of purchasing PayPal company stock for one-tenth of a penny per share. He bought 1.7 million shares for just $1,700, and he did it inside of his Roth IRA.

It’s unlikely that we’ll see the same gains that Thiel saw on his PayPal stock, but that shouldn’t overshadow the benefits and different uses of a Roth IRA. They can also be a great tool for estate planning.

Spike in Oil Prices

Commentary by Kayla Waller.

This week, oil hit a six-year high. The spike in prices is driven by OPEC and its allies not coming to a consensus regarding an expected production hike. Talks were only expected to last one day. A barrel of West Texas Intermediate for August delivery traded just under $77. Higher crude prices will continue to add to investor’s fears of inflation.

The U.S. is asking for a compromise to be found. A White House official stated that President Biden wants Americans to have access to affordable and reliable energy as the economy continues to reopen.