roth ira

Silver Lining Playbook

© Can Stock Photo / AnglianArt

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 If the rules are followed, gains in the Roth are never taxed, even when withdrawn.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.

Footwork is Key

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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.

Hammer or Pliers?

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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.