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The Young Investor’s Playbook

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Seizing the Opportunity That Follows Market Declines

For all our clients, we emphasize the importance of goals-based investing: set goals, invest in line with those goals and maintain discipline with your investment allocation. This discipline becomes even more important during sudden — and sometimes unsettling — downturns. Disciplined investors understand not only that these downturns occur but also the opportunity that follows them.

As young investors encounter what is perhaps their first extended down market (I was born in the 90s, and the most notable down market I witnessed was a 2020 market that had both the quickest decline and quickest recovery ever), this disciplined investment approach is vital.

However, a disciplined investment approach alone isn’t enough. Young investors should view potential returns as part of the plan, but it is by no means the entire plan. Young investors should first create a list of their family’s goals in order to then determine their disciplined investment approach and optimal savings vehicles. While some young investors may overlook the importance of these savings vehicles, there’s better opportunity to be had by connecting the dots to meet their long-term financial goals.

As new parents, my wife and I recently looked beyond today’s needs to discuss long-term goals I believe we can make notable progress on today. Here’s what I’m excited about for our family:

Health Savings Accounts

Health savings accounts (HSAs) are the best of both worlds. HSAs reduce income today and distributions are tax exempt when withdrawn for qualified health expenses. If an investor’s cash flow allows for it, they should consider passing on withdrawing funds from their HSA for current medical expenses to allow the account to accumulate and grow until retirement. Down markets present a great opportunity for young investors to reduce income, invest in the market and pay for future health expenses with tax-exempt earnings.

Education Savings Accounts

My grandfather, father, many uncles and many cousins all went to the same all-boys high school, St. Xavier High School in Cincinnati. My wife and I have been blessed with two sons, and I hope they’ll join another generation of St. Xavier students. Why do I bring this up? Because I hope to pay for part of our sons’ high school tuition with today’s volatility. Earnings from 529 plans may be withdrawn tax free at the state and federal level if used for qualified education expenses[1]. This includes up to $10,000 per year that may be used to pay for tuition and fees for private, public or religious elementary and secondary school, like St. Xavier. At a minimum, those able should consider making 529 contributions up to their state’s income tax deduction limit[2]. If you have more resources to put toward the goal, you or a family member may contribute up to $160,000 per student without being subject to gift tax if you make the five-year election to treat your contributions as being made ratably over a five-year period.

Roth 401(k)s

Many employers offer the option to make Roth contributions to a 401(k) plan. For example, in 2022 plan participants under age 50 can make up to $20,500 in Roth 401(k) contributions, and participants aged 50 and older can contribute up to $27,000. In the spirit of tax-exempt growth during a down market, a Roth 401(k) strategy allows you to do exactly this.

By electing a Roth 401(k) over a traditional 401(k), you’ll pass up the opportunity to reduce your income in the current tax year. However, you’ll give yourself better control over your taxes in later years. Having access to tax-exempt funds later in life will provide you with the flexibility to withdraw funds without falling into a higher tax bracket. There are currently no income-level phaseouts for Roth 401(k) contributions.

Roth Conversions

A Roth conversion is the process of converting a traditional IRA (pre-tax dollars) to a Roth IRA (after-tax dollars). Completing a Roth conversion requires you to pay taxes on the traditional IRA dollars in the year the conversion takes place. However, when you withdraw money from the Roth account during retirement, those funds are tax exempt (assuming you’ve reached age 59 ½ and have held the account more than five years).

Completing a Roth conversion during a down market allows the benefit of converting a greater percentage of your overall account from pre-tax dollars to after-tax dollars without incurring a larger tax bill.

For example, suppose your traditional IRA was worth $1 million on January 1. If you’re targeting a $100,000 income number for your conversion, this would represent 10% of your IRA in a static market. Following a market downturn, perhaps the same IRA has decreased by 20% to $800,000. The same $100,000 income target for a Roth conversion now represents 12.5% of the account instead. As the market eventually recovers, converting a greater percentage of your portfolio will not only lessen your required minimum distribution (RMD) obligations in the future but also give you a greater base in your Roth to grow tax free.

At Creative Planning, we believe a comprehensive plan is a vital component to helping you achieve your goals. Just like there is no single way to manage money, there is no single savings vehicle to save your money. We believe finding the strategy that’s right for you and your financial goals is most important. If you would like assistance connecting the dots between your financial goals and all these other pieces of the puzzle, schedule a call with a member of our team.


  1. Distributions of earnings for non-qualified education expenses are subject to income tax and a 10% penalty.
  2. Contributions are not deductible from federal income taxes. Many, but not all, states offer state income tax deductions for 529 contributions. Check with your state to determine eligibility.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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