We all know about making hay while the sun shines. The investment clouds are dark right now – hard to say the sun is shining but maybe we can still make some hay … and turn some lemons into lemonade. The lemons look like Large Cap, Small Cap, Growth, Value, Foreign, Emerging, even inter-galactic—if it has “stock” attached to it, it is down. A very sour taste in our mouth. Let’s see if we can sweeten the outlook.
The old adage “buy low, sell high” sounds good, but when we are fully invested, we don’t have a lot of cash sitting around to invest. And if we do, we are likely to hold onto it for dear life or buy toilet paper at Costco. Let’s consider a different version of “buy low, sell high”: the Roth conversion. You don’t need cash, just the ability to push (convert) those low-valued stocks or stock mutual funds from your Traditional IRA into your Roth IRA.
Why would we want to do this? If markets are low and we can get shares into a Roth IRA, all the future appreciation and income will be tax-free. And I like tax-free! Yes, you will have to pay taxes on the Roth conversion, but the prospect of future tax-free growth is very appealing.
I’ll mention another time that a Roth conversion should be considered. In the case of a married couple where one spouse is chronically (or terminally) ill, it might be a good time to convert regardless of market levels. A married couple has lower tax rates; an individual has higher tax rates. A married couple has twice the standard deduction of an individual. Tax Brackets and Standard Deductions are two strikes against a widow/er. The year after a person loses his/her spouse, the survivor’s tax rate will likely be higher for many or all future years. Paying taxes (now) as a married couple can significantly lessen taxes during their joint life expectancy.
Most people choose to permanently defer as much as they can for as long as they can. The end result may be counter-intuitive: paying more taxes over their lifetime. We have no control over financial markets, however we know that strategic tax planning will enhance your market returns over the long haul.
At Inspired Financial, we place a heavy emphasis on tax planning as evidenced by our staffing and emphasis in our continuing education. We aggressively seek to give you superior after-tax results.
A Roth conversion is specific to each individual and not right for everyone. If you think that a Roth conversion might be a good strategic move for you, please call us for a consultation.
“I’m a problem solver and pride myself on my ability to recognize tax nuances, evaluate complicated estate and tax planning issues and provide sensible easy-to-understand solutions that fit each unique client situation. 95% of financial planning has tax implications, and most wealth management firms do not have the estate and tax horsepower that we have at Inspired Financial.”