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As we go to press, the S&P 500 is down 15.57% year to date. How does this affect your Roth IRA conversion strategy? If you were a good candidate to make a Roth IRA conversion, should you make it now? If so, should you invest the Roth the same way you would invest funds in IRAs, retirement plans, or after-tax brokerage accounts?
Unfortunately, they don’t ring a bell when the market hits the top or bottoms out. Since I am not a market timer, I usually don’t even consider the market as a critical marker for either making or not making a Roth conversion.
Furthermore, I am not going to predict which way the market is going from here. Maybe we had an overheated market, and this correction is permanent or long-lasting. Maybe the market will continue to tank. Maybe it will go back to previous highs and beyond by the end of the year. Honestly, even the educated guessers (a.k.a. economists) can’t agree and even if they did, they could still be wrong.
That said, with hindsight, now is a much more attractive time to make a Roth conversion than on January 1, 2022, when the market was 15.57% higher than today. Given that, what observations can I make that will help guide your decision-making?
One common mistake I see when I review a new or potential client’s Roth investments have to do with asset allocation and the less discussed strategy of asset location. Frequently, the asset allocation for their Roth accounts is similar to their other investment accounts. For example, if they are a 60% stock and 40% bond investor, they often have their Roth invested the same way. Even if they have 100% of their Roth investments in stocks, they still aren’t investing optimally.
The consideration of asset location comes into play on a somewhat finer scale. Your Roth investments should be invested much differently than your traditional IRAs and retirement plans and even your after-tax brokerage accounts because of their likely long investment time horizon in your portfolio.
We normally advocate that subject to exception, the last dollars you should spend are your Roth dollars—the tax-free growth of Roths is generally something you want to maintain for as long as legally possible. If you have Roth accounts, you likely have other investments and other retirement accounts that you will spend first and those accounts will probably take you through your retirement. That means you, and if you are married, your spouse will likely die with your Roth IRA intact, and likely it will have grown substantially.
Your beneficiaries, in keeping with the dreaded SECURE Act, will no longer be able to defer distributions from the inherited Roth over the course of their lives, but they will be able to defer distributions for ten years after you and your spouse die. That still confers a long-time horizon. Of course, if one of your beneficiaries qualifies as an exception to the ten-year rule, that offers an even longer time horizon.
Let’s assume, that you think you and your spouse have a 30-year joint life expectancy (which means only one of you must survive for 30 years). Let’s also assume that neither you, your spouse nor your ultimate beneficiary needs the Roth money over the next 40 years because there are other funds to spend. That provides you with a potential 40-year tax-free investment horizon.
Under those circumstances, it probably makes sense to alter your asset location strategy with a longer time frame in mind for Roth investments. For instance, rather than focusing on a well-diversified portfolio or even a portfolio heavily weighted in large U.S. companies or an S&P Index fund, why not invest the Roth in asset classes that you think will do better in the long run?
It is axiomatic for advisors to caution past performance is no guarantee of future results. That said, small-cap or value company stocks have significantly outperformed large-cap companies in the long run. Investopedia reports that over the same period, small-cap funds yielded an average annual return of 9.12% and large-cap funds yielded a return of 7.12%. Yes, they are more volatile, but with a 30-or-40 year or longer investment horizon, long-term performance will outweigh concerns over volatility. There are arguments why small-cap/value companies will do better or worse in the next year or even ten years. Again, I am not so interested in their short-term performance. A better question is which asset class will likely outperform in the long run?
In addition, since the Roth IRA grows tax-free, you can invest in assets that are tax-inefficient like an index fund that throws off phantom gains. Other index funds can be designed to be at least somewhat tax efficient. A likely asset location for that type of asset would be an after-tax brokerage account. But the index funds that are not designed to be tax-efficient belong in either IRAs or Roth IRAs. This is a prime example of asset location—that is to say where you place investments with different investment characteristics. We cover both Roth IRA conversions and asset location at length in our upcoming update of Retire Secure.
Learn More by Reading our Most Recent Edition of Retire Secure
Do yourself, your family, me, and all U.S.-based charitable organizations an enormous favor. Kindly sign up to receive a PDF of my latest, best, and most comprehensive book for IRA and retirement plan owners.
The only cost will be two dollars for the final digital copy when we formally launch the book to the public in October—at which point you might even want to get additional copies for friends and family. In fact, if you generously wanted friends and/or colleagues to get the PDF, you could invite them to participate now.
This is the most comprehensive book we’ve ever written to help IRA and retirement plan owners dramatically reduce their taxes, increase their wealth, and cut taxes on charitable gifts. It is in the final pre-publication stages, and if you join our Book Launch Team, you will receive immediate access to the working manuscript.
We do ask for something in return, though our request could actually be fun and informative. Plus, you will be helping other IRA and retirement plan owners and charitable organizations throughout the country by helping us “spread the word” about our new book!
Fair warning. I have been wanting to do a specialty book for professors for at least ten years. I have a particular fondness for academics courtesy of my mother and brother who were both in academia, and 632 of our clients who are college professors. I wanted the update to include information specifically for them. So, this book is called Retire Secure for Professors. That said, all but several chapters will be applicable to all IRA and retirement plan owners.
To join our Book Launch Team, go to: https://PayTaxesLater.com/ProfessorBookLaunch and complete the form!
After you complete the form to join the team, we’ll email you your PDF copy of the manuscript.
If this appeals to you, please go to https://PayTaxesLater.com/ProfessorBookLaunch to sign up to be a launch team member.
We look forward to receiving your feedback about the book and partnering with you on the Book Launch Team!
All written content is provided for information purposes only and is not tax or legal advice. Information and ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
How IRA and Retirement Plan Owners Should Respond to High Inflation While the Market is Down
Tuesday & Wednesday, July 19 & 20, 2022
Register to Attend 1, 2, 3, or all 4 FREE Webinars at:
Janet Yellen, the Treasury Secretary, predicted inflation will get much worse and there isn’t an end in sight. In response on June 15, 2022, the Federal Reserve announced the biggest interest rate hike in 28 years.
To add to the financial misery index, the S&P 500 briefly fell into bear market territory with a 20% drop from its previous high.
According to the Congressional Budget Office, last year’s deficit was $2.8 trillion and the gap between spending and revenue will grow starting in 2024.
Forbes.com reports that the national debt surpassed $30 trillion, and that is only recorded liabilities. Economists point out the unrecorded national debt is likely more than double that amount.
So far, I haven’t even mentioned problems with the financial implications of the Russian invasion of Ukraine, COVID, and threats from China and North Korea.
These problems are bad enough if you are working, but what if you are you are close to retirement or already retired.
You may have heard about the 4% safe withdrawal rate, but you also must factor in the sequence of returns. The Sequence of Returns Risk looks at what happens if the market goes down in the early part of your retirement. Even if the average rate of return may be OK and the market goes down in the early years of your retirement, you could run out of money because you are withdrawing money from your portfolio when the market is down.
As a firm that advises many retired and soon-to-be retired clients on retirement and estate planning, Roth IRA conversions, and estate planning, we want you to be informed of the risks and what you should be doing about them. We also want you to hear it from the top experts including Larry Swedroe on the investment side and me on the retirement, tax, Roth IRA conversion, and estate planning side.
Which makes it all the more disturbing to see less-than-reputable financial professionals attempt to seize upon retirees’ legitimate fears to peddle products and services that come with big price tags and commissions but do little to address the problem…
As you will learn from our July webinars (described below), we believe there are things retirees can do to protect their families’ financial security during a market downturn (and that those same strategies will also help preserve wealth and minimize taxes for the surviving spouse, children, and grandchildren many years down the road).
We’ve helped hundreds of our clients implement the retirement, tax, and estate planning strategies you’ll learn in these four sessions, and now we want to share that knowledge, expertise, and experience with as many people as possible. Because we want everyone to feel financially secure throughout their retirement years and to have the peace of mind that their surviving spouse and family are protected for the long-term.
Don’t underestimate the importance of getting your retirement decisions right the first time—mistakes can be very costly and difficult, if not impossible, to recover from.
We invite you to discover our proven methods for improving and protecting your retirement finances.
Session 1: Tuesday, July 19th (10 am-Noon Eastern)
What Retirees Can Do Now to Combat Market Downturn: A Roth IRA Strategy Webinar
In this session, you’ll discover:
- The tax-minimizing benefits of well-timed Roth IRA conversions and the potential strategic synergy of making Roth conversions during a market downturn.
- The tax-accelerating impact the SECURE Act will have on your retirement plans and how Roth IRA conversions can help defend against it.
- How SECURE Act 2.0, if passed, could impact Roth IRA conversion planning.
- The peer-reviewed math & optimal timing for Roth IRA conversions.
- The one single financial decision that can get you bigger Social Security checks.
- The implications of the back-door Roth and what to do about it in 2022.
Session 2: Tuesday, July 19th (1 – 3 pm Eastern)
Tax-Minimization & Financial Planning Strategies for IRA Owners: Plus What You Need to Know About Inflation
In this long-term planning-focused session, we’ll dive into:
- Inflation: it’s a big topic on American’s minds today, and with good reason. We’ll look at our current economic situation in historical context.
- What million-dollar IRA owners need to know about the pending SECURE Act 2.0 legislation.
- Gifting strategies to maximize family wealth.
- A quantitative analysis of combining multiple long-term financial planning strategies.
- Which assets you should spend first and which assets you should spend last during retirement? Please note the answer has changed since the SECURE Act.
Session 3: Wednesday, July 20th (10 am – Noon Eastern)
The Best Estate Plan for All Economic Climates + Optimal Trust Planning
In this session we will explore an estate planning system based on a series of disclaimers. Disclaimers allow enormous flexibility for planning for your estate, and one important feature of that flexibility is that it allows you to create a plan that can be adapted based on the economic climate at the time of your death. We believe flexible estate plans should be used routinely, but in practice, they rarely are.
We’ll also look at:
- The details of the best estate plan for married retirement plan owners known as Lange’s Cascading Beneficiary Plan.
- Should your heirs inherit your IRA and other retirement assets directly, or would naming a trust be wiser?
- Charitable trusts as beneficiary of your IRAs and retirement assets.
- Do you need the ever more popular “I don’t want my no-good son-in-law to inherit one red cent of my money trust?”
- We will combine our newest thinking with some of our classic strategies for protecting your children or grandchildren from themselves, but also creditors, possibly including their spouse.
Session 4: Wednesday, July 20th (1 – 3 pm Eastern)
A Live Q&A with Larry Swedroe and Jim Lange: Your Questions Answered on Inflation, Investing, Tax Minimization, & More
Larry Swedroe, Chief Research Officer of Buckingham Strategic Wealth, educates individuals on the benefits of evidence-based investing. Larry is one of the top financial authors in the world. His books include Successful & Secure Retirement and Reducing the Risk of Black Swans. He has authored nine books and co-authored seven books on investing, and has appeared on NBC, CNBC, CNN, and Bloomberg Personal Finance.
Larry and Jim will answer attendees’ questions submitted in advance of these online workshops as well as those submitted during the webinar. Take advantage of this opportunity to have your most nagging investment questions answered.
Register to Attend 1, 2, 3, or all 4 FREE Webinars at: https://PayTaxesLater.com/Webinars
Past performance is no guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any strategy will be successful. Indexes are not available for direct investment.