Your Political Brain vs. Your Investing Decisions

Summary

Motley Fool Money: Your Political Brain vs. Your Investing Decisions
Released on February 4, 2025

In the February 4, 2025, episode of Motley Fool Money, host Ricky Mulvey delves into the intricate interplay between political developments and investment strategies. Joined by Canadian analyst Jim Gillies, the discussion navigates the complexities of the US-Canada trade dynamics, the surprising market reactions to PayPal's earnings, and essential retirement planning tips. This comprehensive summary captures the episode's key discussions, insights, and expert opinions, enriched with notable quotes and timestamps for easy reference.

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1. Navigating US-Canada Trade Tensions

Overview
The episode opens with Ricky Mulvey addressing the ongoing trade tensions between the United States and Canada. President Donald Trump's announcement to halt the proposed 25% tariffs on Canadian goods sets the stage for a deep dive into the political and economic ramifications of this trade war.

Jim Gillies on Canadian Reactions
Jim Gillies provides a candid perspective on how Canadians perceive the trade disputes and Trump's remarks about Canada potentially becoming a 51st state.

“We find it silly. We find it not good silly. We find it deeply, personally insulting, particularly that 51st state nonsense.” ([00:25])

Gillies emphasizes the strong Canadian sentiment against the idea of becoming a US state, highlighting the distinct cultural and economic identity of Canada.

Political and Economic Impacts
The conversation shifts to the broader implications of the trade war. Gillies points out the discrepancies between the stated reasons for the tariffs—such as border security and fentanyl restrictions—and the underlying economic motives.

“The stated reasons don't match what the perception is here. And the perception is here is that bluntly your country covets the resources of my country.” ([05:45])

He critiques the unilateral actions taken by the US, noting that existing tariffs within the Free Trade Agreement complicate the situation further.

Canadian Leadership and Public Sentiment
Gillies discusses the political fallout in Canada, particularly the unpopularity of Prime Minister Justin Trudeau, whose authority has significantly waned amidst the trade tensions.

“This little spat over the weekend galvanized people behind the prime minister.” ([05:50])

Despite Trudeau's diminished standing, the trade disputes have inadvertently bolstered his support base, showcasing the complex interplay between political maneuvers and public opinion.

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2. Investment Strategies Amid Trade Wars

Jim Gillies’ Investment Philosophy
Transitioning to investment strategies, Gillies offers sound advice on handling investments during politically volatile times.

“Sell nothing, period.” ([06:52])

He cautions investors against reacting impulsively to political uncertainties, advocating for a long-term investment approach. Gillies underscores the importance of focusing on underlying business fundamentals rather than transient political events.

Opportunities and Risks
Gillies identifies potential opportunities for Canada to leverage its natural resources and infrastructure to mitigate the impacts of the trade war. He suggests strategic expansions and diversifications as pathways to resilience.

“I think there’s opportunity for Canada here... we should be making long term strategic plans to attract more capital to this country.” ([07:30])

Inflationary Concerns
Addressing the economic consequences, Gillies warns of the inflationary pressures that trade wars can impose, affecting both sides but particularly impacting consumer prices and essential commodities.

“Trade wars, essentially, I mean, it’s going to be inflationary, right? All your prices go up.” ([10:10])

He emphasizes that such outcomes are detrimental to both economies, reinforcing the need for measured investment decisions amidst political turbulence.

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3. PayPal Earnings: A Turnaround Story

Performance Overview
Shifting focus to corporate earnings, Ricky Mulvey discusses PayPal's recent financial performance, noting a 9-10% drop in stock price despite positive earnings reports.

Jim Gillies on Market Reactions
Gillies shares his perplexity over the market's response to PayPal's turnaround, questioning the disconnect between the company's strong performance metrics and its declining stock price.

“Everything is literally up and to the right except for the stock price. And that’s interesting to me.” ([13:12])

Valuation and Buybacks
The conversation delves into PayPal's strategic use of free cash flow for stock buybacks, highlighting a $15 billion share repurchase authorization.

“If you weren’t talking about PayPal today, I would be buying shares today. Additional shares.” ([12:00])

Gillies discusses the implications of such buybacks, cautioning that while they can be beneficial, they must align with the company's intrinsic value and not merely serve as a means to inflate stock prices artificially.

“Buybacks should only be being done when the stock prices is a meaningful discount to intrinsic value.” ([13:56])

Long-Term Investment Perspective
Both hosts agree that despite short-term market fluctuations, PayPal remains a strong long-term investment asset.

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4. Maximizing Your 401(k): Expert Tips

Introduction to Retirement Planning
The episode transitions to a pivotal segment on retirement planning, featuring financial experts Allyson Southwick and Robert Brokamp. They provide actionable advice to help listeners optimize their 401(k) contributions and secure their financial futures.

1. Save Enough to Get the Full Match
Brokamp stresses the importance of contributing enough to secure the full employer match, often 3% to 6% of income, which effectively boosts retirement savings.

2. Choose the Right Type of Account
Southwick explains the difference between traditional and Roth accounts, advising participants to decide based on their current versus expected future tax situations.

“If you want a tax break today at the cost of paying taxes on withdrawals in retirement, then you go with the traditional account.” ([19:10])

3. Save More Each Year
With rising living costs, increasing savings rates annually is crucial. Brokamp suggests adopting policies like saving a higher percentage of raises to avoid lifestyle inflation.

4. Max Out the Account Early—or Don’t
While maximizing 401(k) contributions early in the year can compound growth, Southwick cautions against missing out on employer matches by over-concentrating contributions too soon.

5. Create a Mega Backdoor Roth
For those with the flexibility, Brokamp introduces the concept of a mega backdoor Roth, a strategy to significantly increase tax-free retirement assets.

“It really is the most powerful way to build up even more tax-free assets.” ([23:22])

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5. Final Thoughts and Takeaways

As the episode wraps up, Ricky Mulvey reinforces the importance of not letting political uncertainties derail sound investment strategies. The key takeaway is to remain disciplined, stay informed, and focus on long-term objectives despite the noise of political rhetoric.

“Stay invested, stay diversified, keep adding capital. Try to ignore it as much as possible and focus on the businesses that you own and the reasons why you own them.” ([10:00])

The insights shared by Jim Gillies, Allyson Southwick, and Robert Brokamp empower listeners to navigate the volatile intersection of politics and investing with confidence and strategic foresight.

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Conclusion
This episode of Motley Fool Money masterfully intertwines the realms of politics and investing, offering listeners a nuanced understanding of how external factors can influence financial decisions. From analyzing international trade dynamics to dissecting corporate earnings and optimizing retirement plans, the discussion equips investors with the knowledge to make informed, resilient choices in an ever-evolving economic landscape.

Transcript

[Ricky Mulvey]

Foreign Mr. Market didn't like what PayPal had to say. But how about long term investors? You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by our analyst in Canada. He's bringing an extra 25%. It's Jim Gillies. Jim, thanks for being here.

[Jim Gillies]

Thanks. I think, Ricky, we'll see if you get your money's worth.

[Ricky Mulvey]

This is I, I feel your shoulders up with what we're about to talk about and I understand why it's, it's a tricky subject with what's going on with these tariffs. You're in Canada and I wanted to get your perspective on this because we got it, we got a trade war, a Bruin, even though it's on pause right now. Yesterday we got the American perspective from Dylan and OSSIT on that new round of tariff spats. In the meantime, our President Donald Trump announced that he's holding off on 25% tariffs on your fine country. And in Canada, in addition to Mexico, the 10% tariff for Chinese goods that continues on the political concerns. And then we'll get to the, the business side or you know, migration fentanyl and the restrictions that US Banks face while doing business in Canada. And it's also personal. He's floated Canada becoming a 51st state, which you know, most Canadians would object to. All this is to set up what's going on on the ground where, where you are. What's the reaction been in Canada to this new round of trades? Bats?

[Jim Gillies]

Well, Ricky, I'm going to have to go back and listen to yesterday's show because I want to hear what Dylan and Assad had to say. The reaction largely up here is probably not safe for a family friendly show. I will say we find it silly. We find it not good silly. We find it deeply, personally insulting, particularly that 51st state nonsense. I'm actually fairly pro American as I think you know, I'm a big fan of America. I enumerated this weekend how many of the states I've been to. It's 42, I wager that's more than most Americans, to be honest with you. And I'm one Midwestern road trip away from probably getting up to 48. Look, Canada is, I know this is, I'm going to state the obvious a little bit here. Canada is, it's almost like it's its own sovereign nation. It's a distinct culture. That mean, that doesn't mean we don't like America or Americans at all. There's an old joke, however, there's an old joke that if you ask an American and a Canadian what the difference is between Americans and Canadians, the American will pretty much hand wave away and go, ah, there's really no difference. And the Canadian will give you a 94 point itemized list. We simply have different views than your country about a great many things including healthcare and opportunities, money in politics, various costs of certain things that are kind of important like post secondary education. And I could enumerate much further. You don't have to like these things. Frankly, I like your country more than mine when it comes to things like opportunities for, you know, as a, as a full contact capitalist, I like your country better than mine, frankly. And trust me, you know, some people are going to think I'm going to take some runs at your political leadership today and I might get me on a different day. And trust me, I can take many runs at my own political leadership. So, you know, at this point, maybe I'm going to just coming across as a crusty old man. The problem is that we were getting a lot of very different messages. First off, the tariffs are allegedly tied to border security about fentanyl and migrants coming into your country from both Canada and Mexico. The numbers on the amount of drugs seized, specifically fentanyl. Last year, U.S. border authorities seized 43 pounds of fentanyl at the Canadian border versus 21,148 pounds seized at the Mexican border. Now, I don't know if you've looked at a map recently, but the Canadian border is very, very long, longer than the one you share with Mexico. Now, either Canadian smugglers are really, really good, okay, Or Occam's Razor. It isn't the scale of problem that your political leadership is stirring up their supporters about the way it is being received here. And as well, it is essentially it is an abrogation, a unilateral abrogation of a trade deal that President Trump negotiated himself in his first term, okay, when they replaced NAFTA with the revised Free Trade Agreement. So they will probably get a bunch of folks on the other side of the political divide, I suppose who will say, well, look at all the tariffs Canada already imposes. Sure, there are tariffs built into the Free Trade Agreement between our two countries. You tariff us back on a few things. The trade deficit that you guys have with this is, can be summed up in one. One commodity, you know, starts with O and ends with il. It's not coal. The stated reasons don't match what the perception is here. And the perception is here is that bluntly Your country covets the resources of my country. And so you are going to. Not you personally, obviously, and most of your listeners, not personally, but your political leadership is seeking to beggar my country such that we willingly supplicate ourselves to your tender ministrations. Again, I will not repeat what the general word on the street to that particular subject is. But it's an interesting, it's been interesting to see the impact here because, for example, the current prime Justin Trudeau, deeply unpopular in this country right now, so much so that basically he lost the authority to govern within his own party and he has basically shut down Parliament while they look for his replacement. Boy, did this little spat over the weekend galvanize people behind the prime minister. I don't. There's literally nothing in this country that would have done what President Trump did for Justin Trudeau. So I'm hoping Trudeau is sending Mr. Trump flowers today.

[Ricky Mulvey]

Frankly, you've galvanized Canadians. I'm noticing more Canadian flags on my X account. There's a lot of intense personal feeling about this. You know, I've been hearing stories from members who are deeply concerned, rightfully so, about the economic consequences of trade wars. They rarely end well for both economies. The impact of this is they're thinking about moving to cash. At the same time, the S and P is up the, the tsx, your composite, the Canadian index hasn't really budged on, on these trade war threats. And granted, we've seen this happen the first Trump administration. But I wanted to see if you had any thoughts on that disconnect as someone with intense personal feelings about what's going on with this trade war and also being a disciplined investor.

[Jim Gillies]

Yeah. Sell nothing, period. The end. I'm going to really shorthand it for you, unless it's an individual company where you had a very specific thesis that hinged on a very specific exit and you have reached that exit goal. Okay. At that point, it's rational to sell. Like, you know, if a company you bought because you thought it would be taken over for whatever reason, in fact receive a takeout offer and the stock prices say 2% below where the ultimate takeout price is going to be. So don't ever react to political machinations, regardless of how intense you feel them. And you are correct. You know, this is, again, it's been pretty galvanizing up here. Do not substitute your investing long term investing thinking brain for short term political ramifications brain. Because, and we have a very good example, literally Yesterday at the 11th hour again, President Trump said, oh, we'll take it off for 30 days. Now, I'm going to say the attitude, the prevailing attitude is basically going to be, yeah, that's cool and fine up here. We're probably not going to trust the thing you say going forward. Okay? Put it bluntly. I think there's opportunity for Canada here and I am almost positive our political leaders will fumble the ball. But I think Canada should be essentially expanding east west pipelines. I think we should be fast tracking refineries. I think we should be seeking to end the discounted oil we're selling to you guys by putting it out to both of our coasts to Tidewater and shipping it to the rest of the world. I think we should be making long term strategic plans to attract more capital to this country. Folks can go Google the Celtic tiger economic miracle in Ireland in the 1990s and 2000s for an example. I think we should be exploring other trade agreements. I think I've even thought, frankly, we should go explore the concept of joining the EU or at least affiliations there. But all of these are wonderful things to think about. But from your investing brain, if you were selling yesterday morning, because, and you are correct, trade wars, you know, if they get intense, can beggar everyone, okay? And you guys are bigger than us, so we'll suffer more than you, and that's fine. But you know, we will take our pound of flesh and that's not like it doesn't benefit anyone really. Right? And trade wars, essentially, I mean, it's going to be inflationary, right? All your prices go up. If our oil coming to you costs 10 or 25% more, you're going to feel that at the pumps. If our potash, you guys, you need potash to grow food. You import 95% of your potash. 90% of those imports come from Canada. If you slap a 25% tariff on it, or if Canada, for example, were to respond, slap, I don't know, 50% export tax or something on it like that, you're going to feel the pinch at the grocery store. And no one's unaware of this, right? Like, you know, it's like, okay, if we're going to get into a spat, it's going to be worse for the population on both sides. And so I like that we step back. But I don't know that because it's so volatile, because it's so unpredictable, I have no idea what's going to happen in 30 days. It would not shock me if Canada gets the apologies in advance. The Kim Jong Il treatment. Kim Jong Un treatment. I guess it was in the first term where Trump was aggressive with them and then all of a sudden they fell in love or something. If I remember misremembering the quote like North Korea went from the biggest problem in the world to buddies. Okay, cool, great. I am equally expecting in 30 days time, President Trump says, hey, Canada's our best friend or hey Canada, get ready for a trade war beat down. Both of those are on the table. You can't know what it's going to be. You can't know how fast it'll be rescinded. If they pick one or the other lane, it could get rescinded a day later because you can't know. Stay invested, stay diversified, keep adding capital. Try to ignore it as much as possible and focus on the businesses that you own and the reasons why you own them.

[Ricky Mulvey]

We can continue our conversation about Potash, North Korea and your run for Canadian Prime Minister after the show. Let's move on to PayPal earnings. It's one of the biggest turnaround stories. Taking a step back, PayPal down about 9 to 10% this morning. I'm still kind of struggling to figure out what the market doesn't like as Alex Chris is pointing that PayPal has returned to profitable growth with transaction margin dollars up 7% while take rate slipping a little bit. What this means for you is that PayPal is making a little less on every transaction, but it's getting more efficient with the dollars that come in. Or at least that's the way I read it. To be fair, PayPal still up 30% about over the past 12 months. But I mean what questions does Mr. Market have about this PayPal turnaround story?

[Jim Gillies]

Jim Honestly, I don't know. I think the transaction margin has to be the thing. Full disclosure, I am a PayPal shareholder. As I shared with you before we started recording. Were we not talking about PayPal today, I would be buying shares today. Additional shares. Our friend, our mutual friend, foolish analyst Jim Mueller, longtime PayPal shareholder and follower, has some wonderful charts that he updates every quarter with basically KPI's key product, key performance indicators, key product indicators, depending on your point of view. Basically things to watch. He tracks KPI for, for PayPal and has done so for like a decade. But when, whenever they, I think there was it was 2015 when they split from ebay, so, so it's at least a decade and showing basically these how everything is literally up and to the right except for the stock price. And that's interesting to me. I think the valuation looks perfectly fine Today I like what new management is doing here or newish management. I suppose I'm joining you that I'm kind of befuddled by this market reaction, to be honest with you.

[Ricky Mulvey]

Yeah, PayPal is one of my largest individual stock positions. And when I am allowed to on the show, if we talk about a stock, we can't trade it within a few days. But it's one that I'm looking at continuing to add. As a long term shareholder, I felt loved and considered in this earnings report. With a $15 billion share repurchase authorization, PayPal likes using a lot of its free cash flow on stock buybacks. That 15 billion, that's not nothing for an $80 billion company. You know, sometimes management can get a little ahead of their skis in terms of big stock buybacks. But I don't know, it seems like I should be cheering this on. Jim.

[Jim Gillies]

Well, I mean, yes, now, now recognize they're not going to spend that full 15 billion this afternoon. And in fact, many share repurchase authorizations are authorizations only. They never actually enact anything meaningful. And even if they do chase down some of the they actually do go and actively pursue buying back stock on this plan. You know, there's always the question when companies have, you know, the buybacks don't fully accrue valuation wise to the remaining shareholders. Quite often, frankly, companies are just overpaying, frankly. So, you know, if you're buying something worth $1 for $2, that's not good use of shareholder capital. You should only, in theory, buybacks should only be being done when the stock prices is a meaningful discount to intrinsic value. That's when you maximize the value of your buybacks. I've already said I think PayPal's valuation here actually is pretty good. So I'm not terribly worried if they're buying back here. I would be worried if they're buying back at say $300 a share. And what I also want to see is what percentage because especially in the tech world or things with a tech flavor and PayPal qualifies a lot of times buybacks barely sop up dilution to insiders. So if, for example, I'm just going to make up a hypothetical here, PayPal goes and spends the entirety of this $15 billion over the next year. But at the same time they hose out $15 billion worth of new shares to insiders and what have you, then it would be more efficient just to get a big pile of money and set it on fire. You know, that's not value Creative for outside shareholders. I understand why you'd want to give equity to workers. I mean, I get that. But as a perspective of someone who only makes money when the external share. External shareholders only make money when stock price go up. That's the interest that I'm going to have to argue from. But overall, yeah, I looked at this and go, okay, business is decent. Valuation is decent. They seem to be pursuing at least a reasonably intelligent pursuit with their, with their shareholder capital capital allocation plans. Again, I, I would be adding shares personally today if we weren't talking about it.

[Ricky Mulvey]

Shrug emoji.

[Jim Gillies]

Shrug emoji. Good. Yes.

[Ricky Mulvey]

All right, Jim Gillies, appreciate you being here. Thank you for your time and your insight.

[Jim Gillies]

Thank you, Ricky.

[Ricky Mulvey]

Up next, Allyson Southwick and Robert Brokamp offer up some tips to get your 401k in better shape.

[Allyson Southwick]

For most Americans, their number one strategy for accumulating enough money to retire is to contribute to a defined contribution plan. You know them as a 401k, a 403b, or the federal Thrift Savings Plan. Now, according to the Investment Company Institute, these accounts held a total of 12, $12.5 trillion as of the third quarter of 2024. To put that dollar amount into context, it's higher than the annual GDP of every country except China and the U.S. these accounts are so popular because they offer valuable tax advantages, but they also have some major drawbacks.

[Robert Brokamp]

Yeah, so I would say, first off, the defined contribution system really requires that people become their own financial planners, their own investment experts, their own, you know, in their spare time, on top of a career and raising a family. Because each participant has to determine which account to choose. Traditional Roth how much to save, how to invest those savings, and then how much they can safely withdraw once they retire. And then there's sort of the captive nature of the system. Employees are usually stuck with the plan chosen by the employer with limited control over cost investment choices.

[Allyson Southwick]

Still, while not perfect, contributing to your employer's plan year after year can provide a foundation upon which to build your retirement, especially if you follow these 11 recommendations. Yeah, that's right.

[Robert Brokamp]

Right.

[Allyson Southwick]

This amp of financial advice goes all the way to 11. All right, and just a programming note before we get into it, when we say the term 401k, we really mean all types of defined contribution plans. You try saying Federal Thrift Savings Plan a million times over and see how that goes for you. All right, today we're going to tackle the first five, and then we'll be back next time with another six. So first up, you'll want to save enough to get the full match.

[Robert Brokamp]

Yeah, the consensus among experts these days is that workers should aim to be having a savings rate of 15% of their household income and maybe even higher if they're getting a late start on saving for retirement. Fortunately, the majority of workers don't have to come up with that all on their own because more than 90% of employers match contributions, with the most common formula being a match of 50 cents for every dollar saved up to a savings rate of 6%. So for those workers, they need to save 12%, and then the employer will kick in another 3%. Unfortunately, most people aren't saving that much. In fact, a third of employees don't even contribute enough to get the full match, according to Vanguard. So at the very least, make sure you're grabbing that free money that your employer is offering.

[Allyson Southwick]

All right, the next piece of advice is to choose the right type of account.

[Robert Brokamp]

Yeah, most 401 s allow for both the traditional and Roth account contributions. So your first decision is really, when do you want a tax break? If you want it today at the cost of paying taxes on withdrawals in retirement, then you go with the traditional account. But then make sure you're doing something smart with the money you saved by having a lower tax bill this year by contributing to that traditional right, you should use that money to maybe save even more for retirement or some other goal like college. Don't just squander those tax savings. Now, on the other hand, if you're willing to give up a tax break today in exchange for tax free withdrawals in retirement, perhaps because you expect to be in a higher tax bracket in retirement, then go with the Roth. And the other benefit of the Roth is that you aren't forced to take required minimum distributions at age 73 or age 75 if you were born in 1960 or later. And just know that this doesn't have to be an either or decision. You can actually contribute to both the traditional and the Roth account as long as the combined amount that you can contribute doesn't exceed the annual contribution limits. Now, there are some situations in which an employee actually has a choice of account provider. This is most common for teachers where some school districts allow for more than one 403 provider. And you have to choose the one from Fidelity, Vanguard, TIA, Voya, whoever's there. And some government employees can contribute to a 457 in addition to their 401k or 403b. So in these cases, go first with the account that offers a match and then choose the provider with the lowest cost and the best investment choices. A good resource for teachers and other employees of nonprofits is 403.org which rates the 403 and 457 plans offered by many of the school districts here in.

[Allyson Southwick]

The U.S. all right, third piece of advice is to save more each year.

[Robert Brokamp]

Everyone loves getting a raise, right? But a 2020 report from Morningstar found that it actually can postpone a worker's retirement. Why? Because most people use a raise to increase the cost of their lifestyle rather than sort of banking that extra money, which in turn increases how much they need to have saved by the time they can retire. Because everyone wants to maintain their lifestyle in retirement. The report found that even those workers who save a percentage of their income save 10% or so even though they're contributing more to their 401ks after a raise. It's often not enough. They need to also increase their savings rate. Morningstar suggested a few guidelines, with the most effective being a rule they dubbed spend twice your years in retirement. So, for example, if you plan to retire in 15 years, spend 30% of your raise, but then contribute the remaining 70% to your 401.

[Allyson Southwick]

Fourth piece of advice is to max out the account early. Oh, wait. Or don't.

[Robert Brokamp]

Yes, it might make sense. Or it might not. So let's start with the contribution limits, right? This year, 2025, the amount that you can contribute is $23,500 for those who will be 49 or younger by December 31st. That's up from $500 from last year's limit. The additional catch up contribution for those 50 and older will remain 7,500, but with a twist. This year, the additional limit for employees 60 to 63 will be $11,250, something that's sort of becoming known as the super catch up. And I'll point out that these figures are just how much you can contribute the employer matches on top of those numbers. Now, some savers try to max out their accounts as soon as possible because, as the old saying goes, it's not about timing the market, but time in the market. And in most scenarios, the sooner you invest your money, the more money you'll eventually have. So contributing the maximum to your 401k as soon as possible, rather than gradually over the course of the year should result in a bigger nest egg. However, before you pursue this strategy, it's very, very important to make sure this won't reduce the match you'll receive from your employer. The match is distributed on a per paycheck basis. And if you max out your 401 early, you may miss out on some of those matching contributions. The key here is to find out if your plan offers what's known as a true up. That's T R U E U P in which any mismatches are sort of deposited toward the end of the year. If your plan does not offer a true up, then you should avoid maxing out the account before the final paycheck of the year.

[Allyson Southwick]

All right, and our fifth piece of advice is to create a mega backdoor Roth if your plan allows it. Oh, people get so excited hearing backdoor Roth, don't they?

[Robert Brokamp]

They should.

[Allyson Southwick]

And then you put mega in front of it.

[Robert Brokamp]

Oh, it really is the most powerful way to build up even more tax free assets. So in addition to the previously mentioned contribution limits, there's another sort of all in limit in 2025 of $70,000 plus the relevant catch up limits for Those who are 50 and older or 100% of compensation, whichever is less. And this includes the employee contribution and the employer contribution, the match or profit sharing. If your office does that, if your account hasn't reached that annual limit, you can make additional so called after tax contributions, but only if your plan allows it. And now don't confuse these after tax contributions with Roth contributions which are also considered after tax, but they grow tax free. The growth attributed to these other after tax contributions is tax deferred. That is you don't pay taxes until you make withdrawals and then the withdrawals are taxed as ordinary income. Now this is where things get interesting. When you leave your employer, you can segregate these after tax contributions from the growth, transfer the after tax contributions to a Roth IRA and then the growth into a traditional ira. On top of that, some plans allow for in plan Roth conversions, or sometimes called in plan Roth transfers of these after tax contributions, which then basically allow them to grow tax free. This is the strategy that has come to be called the mega backdoor Roth. It can get complicated, so make sure you take the time to learn more about it. And it's only available to 401 s that allow for one after tax contributions and two in Plan Roth conversions, which unfortunately most plans don't. So ask your plan administrator if it's available to you.

[Allyson Southwick]

Okay, so we just covered five ways you can make the most of your 401k, but because we are so rock and roll, we promised 11. So come back next time for six more ways to make the most of your 401k or 403b or thrift.

[Ricky Mulvey]

As always, people on the program may have interests in the stocks they talk about. The Motley fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. All personal finance content follows Motley editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.