Month: February 2024

A mountaineer’s decision of whether to trek in snowshoes or crampons involves numerous factors. How deep is the snow, and is the trail beneath it packed? Is the snow crusted on top, and if so, how much weight can it support? How hard is it snowing, and how fast is the fresh snow firming? Is the terrain too steep for snowshoes, and can you safely swap traction? At first glance, choosing between a Traditional and Roth Conversion IRA seems straight forward, but proper due diligence reveals that, like with the climber’s selection of traction, the implications are a bit more complex than they first appear.

The basics

Traditional IRA contributions are tax-deductible, earnings grow tax-deferred, and withdrawals are fully taxable as income. Withdrawals are penalized 10% if taken before age 59½, and required minimum distributions (RMD’s) begin at age 73 (increasing to age 75 in 2033).  

Funds converted from a Traditional IRA to a Roth IRA are taxed as income in the year of conversion, earnings grow tax-deferred, and withdrawals are tax free (when the rules are obeyed). Roth Conversions have no RMD’s, but earnings withdrawn prior to age 59½ are taxed and penalized, and each conversion requires a five-year holding period (to avoid a 10% penalty) and must be tracked.

The macro question is, will you benefit more by deducting contributions to retirement accounts (Traditional), or by avoiding taxes on retirement account earnings (Roth)? While advanced financial planning software can quickly find the apparent answer, even keeping ‘all other factors’ constant, there are additional factors.

The ‘not so’ basic

By reducing taxable IRA withdrawals, a Roth Conversion can keep you in a lower tax bracket in retirement and reduce the taxability of Social Security benefits. Additionally, beneficiaries will pay income taxes on Inherited Traditional IRA withdrawals, but not on Inherited Roth Conversion withdrawals (provided the five-year rule is met), enhancing the multi-generational aspect of your wealth-building.

Conversely, for those already receiving Social Security and Medicare benefits, a Roth Conversion will increase taxable income, which can raise both Social Security taxes and Medicare premiums. The Roth Conversion can also be problematic for those already receiving taxable distributions from Traditional IRA’s, and for those without sufficient non-retirement savings to pay the Roth Conversion tax due. It is inadvisable to have the Roth Conversion tax taken from the IRA itself, especially for those under age 59½, as the amount withheld will involve an early distribution 10% penalty. ¹

The strategic approach

Capitalize on strategic Roth Conversions and help minimize the taxation of your total retirement savings without increasing Social Security taxes or Medicare premiums by having your investment adviser work through the Roth Conversion option with your tax preparer annually. Never miss a highly beneficial Roth Conversion opportunity to neglect!

On two occasions, I have been endangered in the mountains by the wrong choice of traction. How you navigate the tax terrain with your retirement accounts is as financially consequential. God bless your planning efforts!

Shaun.

“Render to Caesar the things that are Caesar’s, and to God the things that are God’s.” ~Matthew 22:21

1 Smart Asset, “Ask an Advisor: Help Me Understand the ‘Best Way’ to Manage an IRA. Is It Better to Pay Taxes Now or in Retirement?”, by Michelle Cagan, CPA, February 2, 2024

The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

History offers the investor reliable assistance to navigate the counterintuitive stock market, an enterprise adequately equipped to dispense the maximum amount of pain on the largest number of investors possible. Mark Twain observed that “History doesn’t repeat, but it often rhymes”, and from a world operating under the principle that “What has been is what will be, and there is nothing new under the sun” (Ecclesiastes 1:9). This principle was not lost on January, which has a history of accurately predicting the behavior of the stock market for the remainder of the year, but proceed with caution, for there is a greater principle at work which renders great suffering to non-observing investors. Let’s first consider January’s message:

• Over the past 74 years, stocks, as measured by the S&P500, have appreciated 11.4% over the remainder of the year following a positive January, while all 11-month periods averaged 6.9%. Stocks also rose 86% of the time following a positive January, and only 76% for all periods.

• Of the eleven times since 1950 a positive January followed a 20%+ return year (like 2023), the average remaining 11-month return was 14.8%, and stocks rose 100% of the time (vs. 6.9% and a 76% rise rate for all periods).

• Newton proved, “A body in motion tends to stay in motion”, and the stock market, in a new bull market following the bear market low in October, 2022, rose another 1.6% in January and set a new all-time high.¹

An investor can get excited adding to January’s impressive record the fact election years have enjoyed a very bullish history of their own, and the fact Fed policy (2024 rate cuts) is now favorable to the stock market, but remember Warren Buffet said, “an investor’s emotions are the primary enemy”! More importantly, observe an even greater principle: there are exceptions to principles. Exceptions do not invalidate principles, but they do radically alter the outcome in instances. King Solomon put it this way, “Give a portion to seven, or even to eight, for you know not what disaster may happen on earth” (Ecclesiastes 11:2).

The stock market is a brute that routinely destroys unwary investors. Be intimately familiar with your investment objective and risk tolerance level, and be sure your investments reflect both at all times. Stay diversified. Practice position sizing. Have an exit strategy and honor it. Be bullish, but remain vigilant.

Think about it, Shaun.

1 Stansberry Research, “Review of Market Extremes”, Brett Eversole, February 7, 2024

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. Investors should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not insure a profit and does not protect against loss in declining markets. 

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

For my first 31 years in the investment business, and until the “Covid Lockdown of 2020” (‘The Lockdown’), college tuitions increased consistently faster than the national inflation rate, to the extent a higher annual increase was built into financial planning models for future education costs, like future health care costs. While ‘The Lockdown’ had an overwhelmingly negative impact on nearly every aspect of American society, it was the impetus that awakened millions of citizens who were being duped into paying a ridiculous sum of money for, at best, a marginal education. This in no way reflects upstanding colleges and universities which soundly educate students in fields useful to society, like science, medicine, nursing, mathematics, engineering, info tech, and architecture, institutions which remain in high demand and continue to raise tuitions today; rather, it refers to the thousands of lesser-known schools capitalizing on the misguided demand for college degrees offering little practical use, institutions now slashing tuition rates and scrambling for economic relevancy.¹ Consider the facts as you plan the funding of your own family’s future education:

• ‘The Lockdown’ forced students into a digital setting, exposing the cost and distraction of college entertainment. For serious students, this raised a wonderful question, “what is the marketable value of the education I am receiving in the workplace?”.

• Lacking an encouraging answer, scores of serious Gen Z students are rethinking the whole process of their secondary education and taking a good look at the alternatives, discovering a highly marketable, credentialed trade or skill can be acquired in a specialized field of interest for a tiny fraction of the cost and time!

• This development has led to 14 colleges being closed in 2023 alone,²  many more slashing tuition drastically,³ and is the most encouraging development in America’s educational system in generations. Go Gen Z!

Free enterprise has re-entered the setting of secondary education and is having a profoundly positive effect, showing promise of a more competitive future for America. Encourage young people everywhere to understand the basic principles of finance and economics, and the importance of a valuable, marketable, specialized education, and warn them well in advance not to pay a penny more than is required to obtain it.

Think about it, Shaun.

“Do you see a man skillful in his work? He will stand before kings; he will not stand before obscure men.” ~Proverbs 22:9

“An investment in knowledge pays the best dividends.” ~Thomas Jefferson

1 The JOLT, by Stephen McBride, “College tuition prices dropped for the second year running”, January 31, 2024

2 Inside Higher Ed, “A look Back at College Closures and Mergers”, December 21, 2023 https://www.insidehighered.com/news/business/financial-health/2023/12/21/look-back-college-closures-and-mergers-2023

3 Inside Higher Ed, “Tuition Resets Continue Amid Public Skepticism of College’s Value”, September 15, 2023 https://www.insidehighered.com/news/business/revenue-strategies/2023/09/15/amid-skepticism-colleges-value-tuition-resets-keep

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.