Maybe you’ve heard the phrase “kiddie IRA”: it’s not a technical term. It refers instead to the use of a Roth IRA to help a young person start their investing career. Never too young?
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The history of the stock market can be summed up pretty well: it goes up and down. As for the future, we cannot know for certain whether it will continue to go up and down—or on what schedule—but it seems reasonable to take the liberty of guessing this whole “up and down” thing may persist.
When things are down 20% from their most recent peak, and we recognize it goes up and down, this may well be as good a time as any to invest.
We might have a recession, but current lower prices already reflect a lower outlook. You could say sentiment is already in the mix, already baked into prices. And anyway, where there’s a recession, there’s surely a recovery to follow.
Do we know the timing? Nope. But we never do. (That’s where the whole up-down thing comes back into focus.)
There is much we do not know, but we have faith that perhaps our guesses may be good enough to get by. We believe, for example, that in the future there is money to be made by companies that meet our needs. We have a hunch we will continue to eat, shop, entertain ourselves, wear clothes, go places, communicate, create, and do all those other things humans tend to do. And we have an opportunity now to invest in companies that could provide those things then.
Clients, some things to consider at such a moment as this:
It goes up and down. And when we invest for the long run, we commit to the ups and the downs both. One never knows when the trend will change, just that it very well may.
If it’s time for you to add to long-term holdings, please email us or call the shop—anytime.
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We’ve got Roth IRAs on the brain. Why? How would you like to never, ever pay income tax on investment gains and dividends and interest on some fraction of your money? Oh—and your beneficiaries never would either. Well?
That’s the magic of the Roth IRA, properly used.
Every single person may convert existing IRA or rollover balances into a Roth IRA, by paying income tax on the converted amount. Many believe income taxes will rise in the years ahead, above the scheduled increases in the current law.
Anyone may do a conversion of the amount they choose from existing IRA or rollover accounts, although other factors determine whether you are also eligible to contribute as much as $7,000 for 2021.
Here are some reasons that people are using this technique:
It allows folks to take advantage of the perhaps low tax brackets they are in currently: why leave the 12% or 22% or 24% bracket partly unused if you believe your tax rates will be higher in the future?
It provides a bucket for your most dynamic investments, where gains will never be taxed.
It offers balance to your retirement assets, between traditional “pay tax later” accounts and Roth “pay tax now” accounts. This reduces future RMDs (required minimum distributions) and increases your cash flow flexibility.
Like so much of life, we cannot know the future, so we simply do the best with what we do know. “A little of this, a little of that” may be a prudent way to deal with uncertainty. Future tax rates, future investment results, and your future cash flow needs are all unknown. So it might make sense to take a middle-of-the road approach—and build more flexibility into your retirement situation.
Roth conversions go by calendar year, so if you would like to talk about your options, please call or email us in the next few weeks.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
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Some things that seem complicated can be made simple. Other things, like college funding accounts for descendants, may get more complicated over time when more than one child is involved.
Consider how disparities may develop across account balances:
… And all this is before we even consider the differences in children’s needs.
One approach to simplify this reality is to think of college funding as a consolidated endeavor for the group, not as individual accounts. With a 529 plan owned by grandparents or a Roth IRA earmarked for education, this can be done. (We should note: owners of 529 college savings plans may change the beneficiaries among siblings or cousins with no adverse tax consequences.)
Consider this example. If there are seven grandchildren, you can allocate 1/7 of the total college fund balance to the oldest, then 1/6 of what remains to the second-oldest, and so on as each grandchild reaches college age.
In the case 529 college savings accounts are used, transfers may be needed to set up the oldest with the proper balance. If a Roth IRA is used, a withdrawal in the proper amount can be made by the grandparent to meet education expenses, then the “paid” child is removed from the beneficiary (or contingent beneficiary) provision.
Proceeds of a gift via Roth may of course be used for purposes other than education, a house down-payment for example.
Some clients who have 529 accounts for grandchildren make adjustments from time to time among grandchildren’s accounts to reflect each child’s individual needs and to maintain a better sense of equity. Others deposit equal amounts for each grandchild and do not worry about differences that emerge later.
One general rule in college funding: the more removed the funding is from the child, the less impact it may have on college aid formulas. A 529 account owned by the child is 100% available for college expenses, but a Roth IRA balance of a grandparent or parent has little or no impact.
Clients, we talk about options and alternatives; you make decisions. If you would like to talk about strategies for your children or grandchildren, email us or call.
Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
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Recent market action featured normal stock market volatility in a remarkably compressed time period. (We all know which direction the volatility took us, don’t we?)
Some clients see a silver lining in stock market downturns. They are able to do Roth IRA conversions on a more favorable basis. These transactions are taxed on the value transferred from traditional IRA or rollover accounts into Roth IRA accounts.
Think about $60,000 invested that temporarily declines to $50,000 before bouncing back to $60,000. If the conversion happens at the low point, tax is paid on $50,000 but the Roth ends up with $60,000 of assets. This is a way to build after-tax wealth over the long term. If the rules are followed, gains in the Roth are never taxed, even when withdrawn.
By intentionally selecting the specific holdings with the most potential to snap back, an additional edge may be gained. (Of course, we have no guarantees on the selections we make.)
Many of you are looking at the lowest tax brackets in years, due to recent tax reform, changes that are scheduled to disappear in the years ahead. And income tax rates may rise anyway, as the government seeks to deal with record borrowing and national debt.
So the silver lining in the stock market decline is a pair of potential advantages in Roth IRA conversions: we may be converting assets at a temporary market value discount, taxed at temporarily low tax rates.
We have a crystal ball. It does not work. We could be wrong about future tax rates, and nobody knows their own specific future tax situation. And there is no guarantee that depressed investments rise again. We just do the best we can with what we know.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
A long time ago, a coach told us 80% of success was in the footwork. I can’t remember if it was in reference to playing linebacker, or fielding a baseball, or defending the basket. Certainly, in all those endeavors, one’s position is important.
Add this to the list: how your investments are positioned. Many people have a number of different kinds of accounts, from traditional retirement accounts to Roth IRA’s to regular taxable accounts. Where you own what may make a big difference.
For example, because the gains in Roth IRA accounts will never be taxed even when withdrawn, if the rules are followed, it makes sense to hold the most dynamic investment opportunities inside Roth IRA’s. (Of course, no guarantees – we can’t know the future.) There is little sense in having your most boring investments in your Roth account.
Conversely, investments you might own forever, blue chip stocks for example, might best be owned in taxable accounts. If you don’t sell in your lifetime, you will not owe tax on gains. And heirs get a stepped-up cost basis, a big tax break if there are large unrealized gains.
The key to this idea is managing your investments on a household basis. If you are thinking about the big picture, you do not need to have each individual account be balanced and diversified, nor do you need to make sure you are making transactions in each individual account every year. It could benefit you to have just a few high-potential holdings inside your Roth, and ‘buy and hold’ stocks in your taxable account, as part of a coherent household strategy.
Later in 2020, LPL Financial will start performing investment advisory account supervision on a household basis, rather than an account by account basis. This will make it easier for us to maintain the positioning strategy, with fewer conversations behind the scenes to be sure we can do our best work for you.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Recently a client asked us a common question. With a little room in the budget, should more money be added to retirement savings, or a regular investment account? Which one is better?
Of course, the answer depends on the situation. In the early and middle career stages, one might not put funds to be used before retirement into a retirement account. Saving for intermediate term goals like buying or trading homes, or buying a boat or camper, perhaps should be done outside of a retirement account.
But getting it down to fine points, some retirement plans have provisions for using money before retirement without penalty. We believe you can gain an edge by paying attention to the fine points. We like to outline all the alternatives so you can make a good decision.
On the other hand, money to be devoted to growing the orchard – a pool of capital that you may someday live on – should almost always be sheltered from taxes, if possible. This typically means into some form of retirement plan. The tax advantages may make a big difference over the years and decades ahead.
And retirement plans come in different flavors. Individual retirement accounts, employer plans of various kinds, Roth… there are many options.
Just as one cannot know whether the better tool is a hammer or a pair of pliers, one cannot know the best way to invest without understanding the job the money is supposed to do for you. That’s why we talk back and forth! You ask us things about our area of expertise, we ask you things about yours. A meeting of the minds is just the thing to make progress, with a collaborative process.
Clients, if you would like to talk about this (or anything else), please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economy is doing well by many measures. Every small rise in GDP (gross domestic product, our total output of goods and services) brings us to a new record. The unemployment rate sits at a 50 year low.
Yet the federal budget deficit is in excess of one trillion dollars, a record. A massive deficit when the economy is this good is unprecedented. When the next recession strikes, we may need to spend an additional trillion dollars a year on top of the current annual shortfall.
The moral of the story: some believe that tax rates will be higher in the future.
If you have 401(k) or traditional IRA balances, you might think about converting some fraction of those balances into a Roth IRA. The downside: you will have to pay income tax on the amount you convert. The upside: once those taxes are paid, those funds will be immune from higher tax brackets later.
The future growth will also be free of tax, if withdrawal rules are followed. And Roth balances are exempt from Required Minimum Distributions, the requirement that you take money out every year after age 70.
Each of you has a different situation, different circumstances. We cannot know the future. But it makes sense to talk about and think about what may happen in your situation. A Roth conversion might make sense.
If you are in a low bracket this year relative to what you believe you might be paying later, we should talk. You can use up the lower brackets with Roth conversions instead of letting them go unused.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
The Roth IRA concept was passed into law in 1997. It may be more pertinent than ever before. You see, once dollars are placed in a Roth, all the growth is free of tax when withdrawn, as long as the account is five years old and you are older than 59 ½.
Traditional retirement savings provide a tax advantage up front: contributions are not subject to income tax. Later on, withdrawals are taxed. The conventional wisdom was that tax brackets could be lower in the retirement years, so the tax later might not be too bad.
The way things look today, we may never see lower brackets than we have today. There are reasons to think that income taxes will be rising:
• The federal income tax changes passed in 2017 were temporary, with the old higher rates coming back after five years.
• Sooner or later the government may need more revenue to deal with record budget deficits and record national debt.
So the old conventional wisdom about lower tax brackets later may no longer apply. The Roth route may be the way to go.
What does this mean?
• Anybody with earned income may contribute to a Roth IRA, even past age 70, subject to a maximum income limit.
• Some employer plans (401k, 403b etc.) have Roth-type options that many employees could change to.
• Young adults with gifted UTMA accounts or other investments could use those funds to start Roth IRA’s.
• Parents or grandparents looking to give the next generation a boost could fund Roth IRA’s for any who have earned income.
• Anybody with IRA balances may convert any amount they choose to Roth, regardless of income. The converted amounts are subject to income tax, but ever after, the Roth benefits are in place.
The tax implications of a Roth conversion can be complicated. You should seek advice from a professional tax consultant. Your own situation and views should rule any decisions you make. Since we cannot know the future, there is no way to know which path is best. Like so many things in life, we will do the best with what we know.
Clients, if you would like to talk about this or anything else, please write or call.
One key aspect of investment management often gets overlooked. When you have a variety of investment accounts with differing tax treatment, it can make a great deal of difference where you place which investments. At 228 Main, our portfolio management system enables us to choose our spots.
Roth IRA accounts have a wonderful attribute: used properly, you will never pay income tax on the gains made inside them. So when particularly dynamic investment opportunities arise, we prefer to place them in a Roth IRA bucket, when possible. There are no required distributions in later life, and heirs inherit Roths free of income tax.
Traditional retirement accounts like IRA’s and 401(k)’s are another category. Gains and portfolio income may not be taxed for years or decades into the future. This is called tax deferral, and is a powerful way to build your balances. (You or your heirs will pay the piper eventually.) Withdrawals are taxed as ordinary income, so preferential treatment on capital gains and dividends is not available.
Taxable accounts—your single or joint or revocable trust accounts—generate tax consequences year by year. You receive a Form 1099 listing everything each year. There are a couple of things to note, however. Capital gains and qualifying ordinary dividends are taxed at lower rates than ordinary income. And, there is no income tax on lifetime gains for assets held until death. So heirs get an income tax break.
Tax features of these different kinds of buckets are only part of the picture. Your need for current income comes into play, and other aspects of your situation. Unique portfolios for unique people—hey! What a great motto that would be.
Clients, if you would like to talk about this or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
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