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Amazon‘s (NASDAQ: AMZN) plan to do a 20-for-1 stock split has investors flocking to the stock in droves. If you’re thinking about loading up on shares of stock before the split, the Roth IRA (individual retirement account) may be an option for you.
This coveted account grants you access to tax-free income during retirement. That means if the value of your Amazon stock reaches $1 million in your Roth IRA, you’ll be able to withdraw it all without paying a penny to the IRS, so long as you follow the rules.
Here, we’ll dive into Amazon’s stock split and present questions to consider as you evaluate Amazon’s potential role in your Roth IRA.
Image source: Getty Images.
Behind the scenes of Amazon’s stock split
On March 9, Amazon revealed that the board of directors approved a 20-for-1 stock split. Shareholders will have to vote at the company’s annual meeting on May 25 to make the stock split official. If all goes as planned, shareholders of record on May 27 will see 19 additional shares for every one share they own on June 3. If you own five shares before the cutoff date, you’ll wake up to 100 shares of Amazon on the day of the split.
Although this may sound like a major victory for shareholders, a stock split by itself won’t fatten your wallet. The total value of your shares will remain the same, because the value of each new share will be roughly 1/20th what the old shares were worth. If your total shares are valued at $15,000 before the stock split, your shares will be worth the same amount after the stock split (absent a change in stock price). That means your decision to buy Amazon in your retirement account should not be based solely on the stock split.
How well do you know Amazon?
Amazon is one of the largest companies sin the world, boasting a market cap of over $1 trillion. If you’re an online shopper, you probably use Amazon Prime and are aware of the recent price hikes. But what do you know about the company’s business model and long-term outlook?
Here are a few questions you should consider before adding Amazon to your retirement account:
Do you understand how the company makes money?
What are the company’s long-term goals, and how effective is the management team?
Does Amazon have a competitive advantage, and who are the company’s competitors?
What drives the company’s revenue?
Benefits of adding Amazon to your Roth IRA
Roth IRAs are loaded with benefits that appeal to many investors. You can:
Withdraw money tax-free after you turn 59 1/2 and met the requirements of the five-year rule.
Pull out contributions at any time without being subject to taxes or penalties.
Avoid required minimum distributions so you can keep your money in your account as long as you want.
Use money to pay for college expenses or buy a home.
As long as you meet the income requirements, you’ll be able to make a direct contribution to a Roth IRA. If Amazon enjoys extreme growth during the life of your Roth IRA, you’ll have a chance to enjoy all the money in your account tax-free.
Consider this before you buy
Roth IRAs can be a great way to fund your retirement goals tax-free, but they do come with limitations.
For 2022, you can contribute up to $6,000 to a Roth IRA if you are under 50. If you’re over 50, you can contribute an additional $1,000 to your Roth IRA. Because of the contribution limits, you won’t be able to buy many whole shares of Amazon. If you do buy a whole share in 2022, almost half of your Roth IRA contributions will be allocated to Amazon’s stock. Diversification is key. You shouldn’t depend on one investment to fund your entire retirement lifestyle.
Fortunately, you can still contribute to your Roth IRA for 2021. If you contribute $6,000 for 2021 and $6,000 for 2022, you’ll have $12,000 in your account. Now, your exposure to Amazon would drop to less than 25% at current share prices.
If you’re nearing retirement, you want to consider your investment strategy carefully. Amazon doesn’t pay dividends yet, so you won’t have that extra income flowing into your account every year. You’ll have to sell shares if you want to profit from your investment.
Let the countdown begin
You have to be a shareholder of record on May 27 to qualify for the stock split. That means you have a couple months to decide if you’re going to buy Amazon before the split. But don’t let the stock split drive your decisions.
Even if you don’t buy now, your opportunity to buy Amazon won’t fade away. You’ll be able to purchase a whole share of Amazon at a reduced price later and stretch your Roth IRA dollars further.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charlene Rhinehart, CPA owns Amazon. The Motley Fool owns and recommends Amazon. The Motley Fool has a disclosure policy.
