Sam Taube
Appearances
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Glad to be back.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
It's definitely not the time to make any impulsive decisions. It can be tempting to panic when the market takes a dive like it has recently, but that's often the worst thing you can do.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Private credit is a little bit technical to define, and I think the easiest way to explain it is by analogy. It's a little bit of a hike, but bear with me here. A lot of listeners have probably heard of private equity. Private equity is kind of like stock, it's shares in a company, but it's shares of a company that hasn't gone public yet, like an early stage startup.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
It has the potential for much higher returns than what you'd get investing in the stock market, but it also comes with more risk. And since it's not publicly traded, you don't necessarily have the ability to sell whenever you want.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
If private equity is like a non-publicly traded stock, private credit is like a non-publicly traded bond. It's a fixed income investment that pays interest income to investors, but it's issued by companies that aren't big enough or aren't established enough to borrow money the normal way by issuing publicly traded bonds. So private credit is to bonds as private equity is to stocks.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
You have the potential to earn much higher returns, a much higher interest rate than you'd earn with conventional bonds, but there's also more risk and you have less flexibility about when you can pull your money out.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
It really is. There was a McKinsey report last year that estimated the private credit market was worth about $2 trillion a year ago. And since then, some other sources have estimated it at $3 trillion. It's really ramped up in the last few years.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
A lot of it has to do with regulation. During the late 2000s financial crisis, a lot of financial institutions got themselves into trouble with bad loans. And in the aftermath of it, we created a lot of rules on bank lending to try to prevent that from happening again. One side effect is that banks became much more reluctant to lend money to small or early stage companies.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
it became harder for those companies to issue bonds which is part of the traditional corporate lending process but for better or for worse people have found a loophole in these post-great recession regulations which is that they only apply to banks they don't apply to other financial institutions like hedge funds and high net worth individuals who can act as non-bank lenders
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Exactly, yeah. Shadow banking is an ominous but also frankly accurate term for unregulated lending, which is private credit. Now, private credit has grown really fast in recent years, partially because it provides this regulatory workaround to less established companies, but also because the returns are really good and that's created a lot of investor demand.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
One investment advisor I spoke to told me that the returns on private credit average around 9% to 11% per year, which is a lot higher than what you'd earn with most investment grade bonds.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
In recent years, some robo-advisor firms have started to offer private credit investments to customers. Of the robo-advisor's nerd wallet reviews, Titan has a private credit strategy and Fidelity does too, although Fidelity only offers it to accredited investors who have a net worth of a million dollars or more. On top of that, a few companies have recently launched private credit ETFs.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
These give anyone the ability to invest in private credit, and they allow you to buy or sell whenever the markets are open, like any other ETF.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
The pros are pretty simple. Private credit potentially offers high returns and it also offers some diversification to a portfolio. There could be a case for devoting a small percentage of a portfolio to private credit if you understand the risks, but there definitely are risks. Such as? Well, as we talked about, private credit, the underlying loans here, are not publicly traded.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
They can't be bought and sold at any time between 9.30 a.m. and 4 p.m. the way that stocks and conventional bonds can. Some private credit investment vehicles, like Titan's RoboAdvisor offerings, will only allow you to buy or sell once per quarter. The new private credit ETFs don't have this limitation, but that's not necessarily a good thing.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
If a lot of people buy shares of these private credit ETFs and the ETF isn't able to buy a proportional amount of private credit loans, or if a lot of people sell the ETF and the ETF can't sell enough investments, then the price of the ETF could really get untethered from the value of its investments.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
It very well might be. When I asked an investment advisor about the potential risks of investing in private credit, he pointed out that this is a very new type of investment that hasn't really been through a big crisis yet. And given that it's outside the guardrails of our post 2008 regulations on corporate lending, it's hard to say how bad a private credit downturn could get.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
We thought it was important to write about this topic in the newsletter, not just because it's this buzzy new thing that people might want to invest in, but also because people might want to keep an eye on this sudden rush into an asset class that isn't really regulated at all. There's potentially money to be made in private credit, but there's also a lot of money to be lost potentially.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
And as private credit goes mainstream through ETFs, the risks and returns may both get higher.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Well, it's 25% tariffs on Mexican and Canadian goods and also an additional 10% tariff on Chinese goods. It so happens that these are our three largest trading partners and they've all announced or threatened their own retaliatory tariffs.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Our tariffs create new costs for businesses that import things, and those costs are either going to eat into corporate earnings or get passed on to consumers as higher prices or both. The market really doesn't like that, especially because we've already been struggling so much with inflation in the last few years.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Those make it harder for US exporters to sell things abroad, and the market really doesn't like that either.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
You know, I don't know if there's a completely logical answer to that question, but basically, people thought the tariff was just a negotiating tactic, and that is something Trump is known to do sometimes. When he first got inaugurated, he threatened these same 25% tariffs on Canada and Mexico, but then he got some concessions from those countries and suspended the tariffs.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Up until a few days ago, I think the market expected Trump to produce some other last minute deus ex machina. But this time he didn't. The tariffs have gone into effect. He seems to have actually meant it this time.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Anything's possible. As we've discussed, investors seem very quick to say, oh, well, Trump probably doesn't mean it. So if there is some news of major new concessions from Canada or Mexico or another delay from Trump, we could see a rally in stocks. Now, does that make sense in the long term? That's a more complicated question.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
It's hard to say what this means for America's trade relationships in the longer term. It's pretty safe to say that our biggest partners don't like all this drama, and it could hurt our ability to make new deals going forward. We're just going to have to wait and see.
NerdWallet's Smart Money Podcast
How Tariffs Could Impact Your Retirement and What to Know for 2025 Taxes
Always happy to come on.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
Generally in a traditional IRA or a traditional 401k, the contributions are tax deductible. So if you convert a traditional account to a Roth account, those contributions aren't tax deductible anymore and you'll owe taxes on them.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
Assuming that David deducted all of his traditional IRA or 401k contributions from his taxes in the years before this conversion, he'd owe income tax on the entire amount rolled over into a Roth account that year. He wouldn't owe the 10% penalty, though. To figure out how much this would actually be, one thing David could do is use NerdWallet's income tax calculator.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
He could run the numbers once with his normal adjusted gross income for the year, and then once with his AGI plus the whole balance of the traditional IRA. And the difference between those two numbers is going to be the amount of tax he owes on the conversion.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
It does have a sketchy sounding name, but as you said, it's a perfectly legitimate strategy. A backdoor Roth IRA involves opening a traditional IRA and then making non-deductible contributions to it, which is a thing you can do, and then rolling over that traditional IRA into a Roth IRA.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
The reason it's called a backdoor Roth IRA is because, number one, it gets around the income limits for Roth contributions. High income taxpayers aren't always eligible to contribute directly to a Roth IRA, and this circumvents that rule. And it also means you'll only owe tax on the profits your investments earned in the traditional IRA before conversion.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
As we talked about earlier, if you convert a traditional IRA that contains tax-deductible contributions into a Roth, you'll also owe tax on the contributions. But the backdoor strategy usually involves making non-deductible contributions, so you get around that. Having said that, there's actually a wrinkle of the backdoor Roth strategy that I'd like to get your input on, Sean.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
Our listener asked about the pro-rata rule. How does that work exactly?
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
Well, I think that a big part of the reason Sean understands this is because he's completed certified financial planner training. And in general, very few people other than licensed financial advisors really know all the ins and outs of Roth conversion rules. I certainly didn't understand how the pro-rata rule worked before Sean explained it.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
So if you're considering a Roth conversion, backdoor or otherwise, it's really worth talking to an advisor. And if you don't know where to find one, NerdWallet's Best Financial Advisors Roundup is a good place to start. You can list your main financial priority like tax strategy or investment advice or financial planning, and you can get matched with an advisor for free.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
We'll put a link to that in today's show notes.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
Sure.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
The process works just like a regular rollover. You can either have your traditional IRA custodian cut you a check and you deposit it into a Roth IRA within 60 days, or some custodians may be able to transfer the funds electronically.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
Well, there's a spotlight on Roths in general at the moment because they offer a little more flexibility than a traditional IRA. The contributions to a Roth IRA are not tax deductible. They're already tax money and you're allowed to withdraw them at any time. The investment earnings in a Roth account are different.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
You'll get hit with income tax and a 10% penalty for withdrawing those unless you're over age 59 and a half. or disabled or liquidating an inherited IRA. Those are basically the same rules as withdrawing from a traditional IRA. But there's one other exception which is only available for Roth IRAs, and that's the first-time home purchase.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
You can withdraw up to $10,000 in earnings tax-free and penalty-free for a first-time home purchase if your account has been open for at least five years. Needless to say, that's an appealing feature with the cost of housing nowadays. That said, there are some trade-offs to consider if you're thinking about a Roth conversion.
NerdWallet's Smart Money Podcast
Can AI Really Manage Your Money? Plus: The Truth About Roth Conversions
They're irreversible, and as David said, they can generate some tax liability.