tax brackets

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 If the rules are followed, gains in the Roth are never taxed, even when withdrawn.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

Higher Returns, or Minimize Taxes?

© Can Stock Photo / joebelanger

In the course of our research, we recently came across a survey of investors published by a large investment organization1. It contained an example of a technique that might be used to manipulate investors into a less-than-optimal path.

Would you rather minimize taxes, or achieve the highest investment returns? Many people might think that this is a straightforward question: the survey reported that 61% of baby boomers preferred to minimize taxes. In our opinion, it is indeed straightforward—just not in the way they think it is.

We pondered that question, and wondered why there was even a choice between minimizing taxes and going for higher returns. Generally, an investor comes out better off if she or he aims for the highest after-tax returns.

Peddlers of financial products know that if they can get a prospect to focus on taxes, then it doesn’t matter whether the investment is really any good or not. It merely needs to meet that very important objective of minimizing taxes. A tight focus on taxes takes the spotlight away from the actual investment and its performance.

We think a better approach is to include the potential impact of taxes in our investment decision-making. You may hate taxes, but it would make no sense to go for 1% tax free instead of 6% taxable (all other things being equal)—the higher rate would leave you better off even after you paid the tax.

Some of you are more concerned about income taxes than others. It doesn’t matter what your object is, we need to agree that seeking the highest after-tax returns is a more sensible goal than either minimizing taxes or achieving higher returns. In our reality-based approach, we can integrate both objectives to work towards a more sensible plan.

Each of you is free to make whatever decisions you would like to, with your money. (We never forget whose money it is.) If you bring it us, we are never going to focus on just minimizing taxes, or just focus on achieving high returns. That is a false choice, and a seller who presents that to you may be trying to manipulate you.

We seek to achieve the best after-tax returns—that is the path that potentially leaves you with the biggest bucket. No guarantees, of course. Clients, if you have questions about this or any other pertinent issue, please email us or call.

1 2016 U.S. Trust Insights on Wealth and Worth survey, U.S. Trust Bank of America Private Wealth Management


The opinions voiced in this material are for general information only and are 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 situation with a qualified tax advisor.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.