Why I’m Buying $20,000 AMZN in IRA

I love investing and an increasing number of readers have been requesting more information on my investments. I’m down. I will try to share all of my investment decisions moving forward and welcome feedback.

So here’s my most recent investing decision. This week I invested $20,000 more in AMZN in my SEP-IRA.

As you probably know, I am a huge believer in index funds and 80% of my Millennial Money portfolio is invested in funds that track the domestic and international stock indexes. But I also buy (and very rarely sell) individual stocks occasionally when I think they’re a good value.

If you’re new or have just started investing then I strongly recommend focusing on index funds, but as your portfolio grows, it can make sense to take 5-20% of your portfolio and invest in individual stocks. Even though I don’t recommend day-trading, I’ve recently started exploring the nuances of more sophisticated trading platforms like CMC Markets. I’m curious what all those crazy things that are going on on traders screens.

My new living room! Isn’t it pretty? j/k

trading screens

But be careful – it’s easy to make money investing in individual stocks. But I’m confident AMZN will continue to dominate e-commerce, cloud storage, and it’s rapid expansion into shipping/logistics are super exciting. Even though the stock is trading above $800 and has increased in value significantly over the past year, this a hold it for the long term play in my IRA.

My Investing Tax Advantaged and Non-Tax Advantages Accounts

Here is a quick background on my multiple investing accounts:

401k at one of my companies (which I max out at $18K every year and also contribute via profit sharing depending on the year). Last year I was able to contribute $52,416 dollars to my 401k. The mix is mostly total market index funds with a little REIT thrown in.

Traditional IRA: This account is solely used for the purpose of doing a Roth conversion on the $5,500 I contribute every year. I do not hold a balance in my traditional IRA.

Roth IRA: I <3 my Roth. I luckily opened it when I was 25 and have maxed it out ever since. All index funds. And despite the fact that my income is higher than the max, I can use a backdoor conversion from my traditional IRA to continue to contribute each year. However I do have to pay a % of tax on the conversion due to the balance in my SEP-IRA.

Brokerage Account: I own APPL, FACE, AMZN, BAC, NFLX, CRM and a number of other stocks. I’ve made money in most of the stocks, but also once lost $3,000 in one hour trying to day-trade. I no longer try to do any day-trading and plan on keeping all of these stocks in my portfolio for the foreseeable future.AMZN Stock

SEP IRA: Every year I put as much as I can into my SEP IRA from my personal projects. An SEP IRA is essentially an easy to administer self-employed or small company plan. The max contribution rates are 25% of net-profit or up to $53,000 (in 2016) or $54,000 (2017), whichever is lesser.

I had a good year in 2016 so was able to contribute 25% of my earnings to my SEP IRA account. It’s a no brainer if you have side income from consulting or a blog and you want to minimize your tax burden. All contributions are tax deductible.

“Minimizing your tax burden is essential to building wealth.”

For me personally, one the keys to building wealth is finding any and every way to minimize my tax burden. So my SEP IRA is definitely my homie in that pursuit.

Benefits of Trading Stocks in an IRA

While I have traditionally always invested in index funds in my SEP IRA, over the past few months I have been considering using my SEP IRA to also trade stocks, with a focus on building a dividend growth portfolio, as well as testing my own individual strategies.

The primary and most attractive benefits of investing in stock in my IRA:

1. No reporting of capital gains (this is a really nice feature especially if you are going to be doing a lot of trading

2. No worry about taxes until you take out the money

3. Tax free growth on re-invested dividends

There is one complicating factor worth mentioning when you invest in individual stocks in and IRA. The total growth of your holdings in the SEP IRA will get taxed at your income tax rate (based on your tax bracket) when you withdrawal the money in the future.

Critics of investing in individual stocks in an IRA point to the fact that capital gains tax (currently 15%-20%) is likely lower than your income tax level (20-40%), so you lose that long term capital gains tax advantage in an IRA since you get taxed at your income rate.

But honestly, it’s tough to anticipate what my future tax rate will be, or what tax rates will be generally in the future so it’s advantageous for me to push the tax burden into the future on some of my stock investments. As I previously mentioned I do everything I can to reduce my current taxable income and gains.

There are many people who believe that capital gains taxes will inevitably increase in the future, so that advantage might erode as well. Who knows what capital gains taxes could be even next year. I’m not counting on it staying low.

Why I am Buying Amazon Stock

I first bought AMZN when it was $298 a share. I have bought AMZN a few times over the past 3 years, most recently in February 2016 at around $511. I think this stock has significant long term growth potential and I plan on continuing to invest in the company.Amazon Drone

Not only have they continued to dominate the e-commerce game.

According to Forbes, “A recent report by the Institute for Local Self-Reliance (ISLR) claims that roughly half of all U.S. households are subscribed to Amazon Prime, half of all online shopping searches start directly on Amazon, and Amazon captures nearly one in every two dollars that Americans spend online.”

That’s crazy. I don’t see Amazon slowing down anytime soon and they have become such an institution they have become the definition of online shopping – which is still in its infancy. Amazon are also continuing to diversify and growth their other lines of business – specifically their cloud storage and new logistics offerings. Eventually, I am confident they will also give traditional shippers like UPS, FedEx, and the Post Office strong competition with their own shipping network – they have already leased 40 planes and plan to hire over 100,000 new employees in 2017.

And the drones, who can forget about the delivery drones! Amazon just made its first delivery by drone in the UK in December 2016. Although it’s not legal in the US yet, it’s an exciting development in the future of delivery. I mean, who doesn’t want to get their Bulletproof coffee delivered in 13 minutes? I’ll invest in that.

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  • Comment Author image blank
    I have 120k in a 1.73 rate savings account...inherited 75k ML CMA and a 50K inherited ira...managed. 26k Vanguard Sep 225K inherited paid home in NC Im 55 self employed contractor averaging 40-50k a year income before tax. I been self employed for 20 years...I make a living but late in my own retirement savings. I have $0 debt, credit rating 849. My sep ira has a limits as you know...7k or 20% of income. I want to invest money from 120k inherited and money made from the CMA and RMD's from my inherited ira...but im capped with my sep ira…..should I roll my sep into a 401(k) traditional?
  • Comment Author image blank
    Glad I found your blog, Grant. I agree with your investing strategy and tend to do the same. Years ago when I was making great money with my business I would do crazy things like take the $20-30,000 I made from my inventory and put it into one stock, then sell it. Crazy daytrading! I tripled my portfolio, but ended up losing it all in the crash and couldn't hang on. After years of eating Raman noodles I have changed my gambling habits and play things much safer.
  • Comment Author image blank
    Hey Grant, Big fan of your blog and your writing. I reference the $50/day path to retirement all the time. Thanks for all the great stuff. Hey, I was wondering about this Amazon strategy recently. I was thinking about buying into Amazon during the (current) dip and wondered if you had any thoughts on this. Are you currently adding AMZN while it's lower, or just keeping an eye on it right now? I imagine it's been a bit of a hit, but maybe this is the sale we've been looking for, huh? Thanks, TJ
  • Comment Author image blank
    Though older I am following a similar strategy. I invest in low cost index funds, a few managed funds that do well, all in a classic Bogle/Swensen type asset allocation, but in my Roth we own some Amazon as "play money" knowing we can afford the risk. Obviously it has performed beyond any expectations and I am considering buying more now (March 2018).
  • Comment Author image blank
    Hello Grant, Great blog and your story is awesome. Amazon's growth has been huge over the years, and I am very bullish on them to continue to grow. I am curious your thoughts on Autonomous Driving technology, AI, and AR technology? I am looking to invest in companies focusing on these 3 technologies. Higher risk because much of the technology is still in testing and hasn't hit mass market yet, but there is potential for big future payoff. Thoughts?
    • Grant Sabatier
      Hi Matt. There is a big potential payoff for a lot of industries, but too early and risky for me. I too am bullish on AMZN.
  • Comment Author image blank
    Thank you, just opened my SEP IRA account today, save some tax for 2016 filing for my side hustle income.
    • Comment Author image blank
      Yesssss! Nice.
  • Comment Author image blank
    I find your blogs very fascinating and informative. . I appreciate the transparency and the candid style. Sounds like you got burned day-trading, which I know is easy to do. Once I lost $7k in an hour in a trade that went south! (Luckily I held the position for a few weeks and it bounced back). At any rate, I was wondering if you had any opinions on triple ETF's. They are highly-leveraged instruments that are solely meant for day-traders. They are very volatile, but you can make some quick $ if you are crafty. They have triple ETFs for the S&P, financials, gold, oil, etc. Both "long " and "short". I trade the Direxion triple ETFs. Just wondering if you had any thoughts on this subject. Thanks for all the great info!
    • Comment Author image blank
      Oh man. Those highly leveraged ETFs are wild. I don't really understand them, so I stay clear. I only invest in what I know! There are tons of ways to make quick money if you are crafty, but honestly most of them are luck instead of skill. Too volatile for me. I find that consistent savings in index funds, real estate, and selectively buying individual equities works best for me. Thanks for the kind words. Be careful out there!
  • Comment Author image blank
    I have just moved from actively managed funds to index funds last year. I do not buy much individual stocks other than two that I love tracking. Philip Morris (PM) and Altria Group (MO). I have owned them since 2002 and have learned a ton from holding them about dividends, stock price appreciation, splits, spinoffs, etc. I do purchase more of both each month through their drip plans, but it's a very small percentage of our overall investment strategy. I would say that Amazon is quite a safe bet and they are going to continue to dominate in the future as well!
    • Comment Author image blank
      AMZNs gonna take over the world :) Definitely pricey, though. Yeah, a majority of my portfolio is in index funds, but active stocks are a bit more fun :). I've also done well with them as a small overall percentage of my portfolio. Thanks Steven.
  • Comment Author image blank
    I totally don't have the guts to go with individual stocks, but my buddy (who happens to help me run my blog) will love to hear this because he's always playing around with individual stocks. And he's a huge Amazon fan boy, so he'll really like this. Curious, with your SEP-IRA, couldn't you roll it all over into your Solo 401(k) and that way, avoid the taxes on the backdoor Roth conversion?
    • Comment Author image blank
      Yeah individual stocks are scary. That's why I only invest in products I've used and businesses I believe have a unique competitive advantage. One I'm not as sure of is Netflix just given the insane competition popping up globally. Interesting question. I don't technically have a Solo 401(k), I have a regular 401(k) plan at the company I own since I have employees, so I am able to contribute profit sharing - but my plan does not allow rollovers into it. That's a great idea though if each year I could (in this order): 1. Contribute 20% or up to $53,000 into to my SEP-IRA 2. Then roll over the SEP-IRA immediately into my 401k (effectively eliminating my IRA balance that would have an impact on my conversion). 3. Then contribute $5,500 to my Traditional IRA, and immediately do a backdoor conversion it would be tax free I could effectively save about $1,732 in taxes on the conversion each year. The reason I could save the $1,732 is because of the SEP-IRA I owe taxes on the Roth IRA conversion based on the proportion (approx. 95%) of the before tax money all of my IRAs. BUT, and a big BUT. I unfortunately can't currently trade individual stocks in my 401k. You really got me thinking though and I am going to look into adding both of these options (the rollover) and (trading individual stocks) to the plan. Hopefully it's possible. Look at that, you might have just saved me at least $1,732 per year on my Roth conversions! Thanks Financial Panther. That's a high value comment right there! Might have to bring this up on the podcast. ?