Stock Market Recap after the First Quarter

From what you heard on news you might think the stock market had a horrible first quarter.  With 3 individual trading days that had very large drops, that seemed to be the big news in the stock market.  But in reality the market didn’t really do too bad in the first quarter.  The following is an excerpt from the Matson Money quarterly statement.

“The 1st quarter of 2018 saw a reversal in course in broad equity markets, with both domestic and international equities declining. U.S. stocks fell by 0.76% as represented by the S&P 500 index, while international stocks also weakened, with the MSCI World Ex-USA Index declining 2.04% for the quarter. In unusual fashion, fixed income also finished mostly negative over the quarter. As a result of increasing interest rates, the Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index lost 0.98%.

In the previous quarterly letter, we mentioned how the S&P 500 Index was on a run of 14 consecutive positive quarters. It was noted that although this can give investors a euphoric feeling, it can be dangerous because it can lure them into believing that volatility and downside risk are no longer a reality in equity investing. Stephen King has a succinct yet profound quote in the book The Colorado Kid that states “Sooner or later, everything old is new again”

This quote is applicable in many disciplines, but can be especially useful when applied to investing. When returns are negative, it can feel like they will never turn around. Conversely, in times where returns have been positive for an extended period, it can feel like they’ll go up forever. But inevitably, downward volatility will return to the market, and periods of negative returns will show up again. This is what we have experienced over this past quarter, downward volatility returned, equity returns turned negative. What was old is new again.

Why is this an important concept to remember? Because so many investors react on emotion to what is occurring in the present moment, which can undermine their long-term investing success as a result. Each year Dalbar Inc. puts out a comprehensive study titled “2018 QAIB Report” which looks at the individual investor return of all mutual fund investors in the U.S. In this study, they show that the average equity fund investor only received an annualized average return of 5.29% over the 20-year period ending 12/2017, compared to 7.20% for the S&P 500 Index. One of the main contributors to their underperformance is the fact that the average investor had a retention rate of only 4.03 years. What this means is that every 4 years they decided to change the course of their current investment strategy and go in a different direction.

One can surmise that many of these investment changes result from an emotional reaction to the current market conditions. While the difference between 7.20% and 5.29% may not seem that large, over that 20-year period, the average investor would have received over $120,000 LESS than the S&P 500 on a $100,000 initial investment.

We know the historically these cycles of volatility come and go, and that bear markets follow bull markets and vice versa. But over long periods of time, if an investor remained disciplined and consistent with their investment philosophy, they could have been rewarded with generous market returns. The ability to ignore the noise and keep a long-term focus is an extremely important component for an investor, and as the Dalbar data reveals, can also be extremely difficult.

In the end, choosing a wise financial strategy – and sticking to it  – can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market.”

References

  1. Matson Money. “Account Statement.” Letter to James Hancock. 15 Apr. 2018. MS.

Books Make the Best Christmas Presents

main street moneyChristmas time is here again! This is the time I get frantic about finishing up buying gifts for everyone on my list.   To those who are interested, books make great gifts.  We can offer you the book “Main Street Money” by Mark Matson for free this holiday season.   This book is perfect for your spouse, parent, or child looking for not just good, but great financial advice.  This book is a simple and personal text with some invaluable information on investing, retirement planning and the like.

If you have not read the book Main Street Money yet, here is a brief into explaining why Mark Matson wrote this book and how it can help you to receive investing peace of mind.  The following is a direct quote from the introduction to the book, “Main Street Money”.1.

“Chances are you’re one of the 95 percent of Americans who are destined to retire broke. It’s not really your fault. Goodness knows it’s confusing out there for the average American trying to secure their financial future. Contradictory advice and information, misleading promises, portfolio-gutting investment strategies – and that’s just from my fellow Wall Street investment professionals. Maybe that’s why the finance industry’s leading lights can be counted on to say one thing one year and the opposite the next. Market timing? It will never work. Oh wait, yes it can. Asset allocation? A big winner – until a real bear market comes around. Buy and hold? The best thing since sliced bread. That is, until the market tanks and the buy and hold model is tossed onto the scrap heap by so-called market experts.

It’s almost like financial professionals want to confuse the investing public. Where is the continuity? Where is the unvarnished truth about investing strategies? Why won’t anyone step up to the podium and admit that nobody can predict the future? After all, people scoff at astrologers and tarot card readers. But some guy in a suit and hang a “stockbroker is in” sign on his door and people can’t wait to see what he has to say during a bull market or during the latest market crash. There is no shortage of talking heads who pretend they have the forecast about the future that will magically allow you to own all of the best stocks and get into and out of the market at the perfect time.

These prognosticators prey on the psychology of Main Street investors. Often causing them to take risks they don’t understand and lose more money than they could possibly imagine. I call these posers Bullies because they take advantage of investors to line their own pockets with your hard-earned money. The money you will need for your retirement and most important life dreams. But it doesn’t have to be that way. I can teach you how to outwit, outsmart, and out invest the biggest Wall Street Bullies and icons. And help you create true peace of mind in your investing experience. And the good news is that it is not that hard. Once you are armed with the basic knowledge you need, you can adopt an investment philosophy and strategy beats the vast majority of all the blow-hards on Wall Street. You will soon see that your problems are their profits – the trick to getting their hands out of your pockets once and for all. Make no mistake, Wall Street does not want you to read this book and they don’t want you to take the actions outlined in this book.”  

If you would like a copy of this book, get in touch with us and we can get one for you at no charge to you.  We give out copies at our monthly coaching classes.  It is our job to educate investors about the wall street bullies.

References

Matson, Mark. “Changing the Status Quo.” Introduction. Mason, OH: Mcgriff Video Productions, 2013. IX-X. Print.





You Can’t Afford to DIY Investing

do-it-yourselfWith the proliferation of the Internet and continued expansion of online investment tools, the role of an Investment Advisor is now of crucial importance. Personal investors have access to more information than they ever have before, but wading through the data to find that path to success and discipline still requires the eye of a trained investment coach. Given the daunting amount of different investment advice, options, funds, accounts,  stocks, bonds, annuities, and timelines available to investors planning for your future is intimidating to say the least. When you take the inherent danger that follows bad investments into consideration , it quickly becomes clear your retirement isn’t worth that risk, and should instead be left to a professional. The following five points are some of the more common DIY investor mistakes that a qualified investment advisor can help you avoid, while better planning for your future.

1) Buying “cool” stocks, or giving too much attention to brand loyalty
This is one of the most common mistakes of beginning investors. Although you might feel a certain pull to invest in a company whose products you already support, it’s important to remember that you’re not buying their product; you’re buying their future performance as a company. In the long run the advantage of having a globally diversified portfolio is much bigger than the cool feeling you get when you buy your favorite companies stock.  Remember, your investments’ future earnings are more important to your well being than owning a fraction of a “cool” brand.  On top of this, usually the “cool” stocks that people buy are extremely massive companies, which have a lower expected growth rate than small cap companies.

2) Investing too conservatively
With the previous point in mind, it’s important to not be overly conservative when it comes to planning your future. Ever since the crash of 2008 new investors have been very skittish when taking on risk, many opting out of the stock market entirely. That being said, it’s important to remember the old adage that “without risk, there is no reward.” A financial professional can better assess the highs and lows inherent with ownership of  stocks. A more evenly balanced portfolio (that means one with stocks), while carrying an additional degree of risk, offers much greater rewards to the investor, and under a watchful eye it will continue to grow for years to come.

3) Hoping to beat the market “bad gambling”
This tip, more than almost any other, is extremely important to new investors. We’ve all seen a movie or heard a story with someone offering “a deal too good to be true,” and when it comes to investing that old cliché is worth its weight in gold. While we can all think of an example when a company’s stock value went through the roof seemingly overnight, it’s important to remember for every success story there are many more of failure and bankruptcy. Putting everything on a single stock or position is just as risky as taking your life savings to Vegas and hoping for the best at a roulette table. Any investment you care about should be made as part of a balanced portfolio and a long-term plan.

4) Thinking they are saving money by not having an advisor
This is a very common thought by most do it yourself investors.  They think with the advisor out of the picture they take out the middleman and thus lower their investment costs. The problem with this thinking, is that it is completely wrong in most cases.   Online, the extremely high fees for trading must be paid.  Depending on the website, they usually run $7 to $10 per trade.  If you are diversified like you should be, that would be hundreds if not thousands of dollars just to buy into all the stocks you should be holding.   The advantage to working with us is that there is no fee per trade.  You are no longer treated as an individual investor and thus you have a flat discounted fee no matter how many trades are made in your account.

5) Ignoring your investment horizon
To be frank, you need an investment coach to accurately accomplish your goals. Many new investors forget that investments are made for a purpose, and if you don’t have access to your money when you need it that investment has failed you. Different accounts have different tax implications that must be matched with your time horizon and age.  If you are putting away money for retirement that is not for 20 years, then you should not invest your money conservatively.  Your risk tolerance should be directly correlated with your time horizon for your investments.  You can be more conservative with investments that you will need in a short time frame.

By Jimmy Hancock

References

Do It Yourself Lobotomy. Digital image. Smithlhhsb122.wikispaces.com. N.p., n.d. Web. 21 Nov. 2016.

Picking Winning Stocks

buy sellYou think you can pick winning stocks consistently, and I’m here to tell you that you can’t.   But even if I cannot convince you that you can’t pick stocks, I hope to at least convince you that it is not in your best interest to try.   We look at examples like Warren Buffet and see how much success he had “stock picking”. But the funny thing is that Warren Buffet believes that the best strategy for most investors is to buy low-cost index funds.

Bad Advice

The most dangerous advice in investing is often that which seems most practical, which is why the worst investing advice you will likely ever receive is that you should try to pick “good” stocks and sell “bad” ones. Yes it seems very sensible and almost too obvious that you should try to do this.  You will get this advice like this from innumerable sources, including a lot of investment advisers, friends, work associates, and most especially Wall Street/investment media. But…You should ignore it.

If you pursue a stock-picking strategy, you are almost certain to lag the market.

Stock pickers always underestimate the number of variables that are involved in the pricing of stocks.  There are literally trillions of variables that could occur on any given day that could change the price of a stock instantly.  Stock prices are based on every single investor which all have different feelings about companies, reasons for investing, and regional bias.

The big problem for investors is that even though stock-picking usually hurts returns, it’s extremely interesting and a makes for a great conversation. If you are wanting to wean yourself of this bad habit,  the first step is to understand why it’s so rarely successful. The quick answer is that the overall market provides most investment returns, not particular stock picks, so stock pickers get credit for gains that came merely from being invested in stocks generally.

Although it is relatively easy to pick stocks that beat the market before costs (just like a monkey you have a 50% chance), it is much harder to do so after costs are added in. So lets say you happen to pick stocks well enough to boost your return by a couple of points, the expenses you rack up along the way (ie. research, trading, taxes) will usually more than offset your gain.

Most stock pickers believe that they are among the 1% of investors who happen to beat the market after costs, and, for inspiration and encouragement, they point to legends such as Warren Buffett and Benjamin Graham. But as I mentioned before, such investors often don’t know that even Buffett has said that the best strategy for most investors is to buy low-cost index funds and that the great Benjamin Graham eventually changed his mind to advocate a passive approach to investing.

Stock picking is not only a dangerous activity for you to be involved in as an individual investor, but it is also dangerous to invest in mutual funds that employ stock picking strategies.  These stock picking strategies are used in most of the mutual funds out there, also known as active investing.  These mutual fund managers think they have a crystal ball and can predict the best stocks and drop the worst ones.

The Opposite of Stock Picking

Instead of stock picking, invest in a globally diversified portfolio managed by a low fee investment coach that will help to educate you on the investing process.  Instead of constantly turning the portfolio over by stock picking and active trading, buy and rebalance when necessary.  Long term you will see the fruits of your decision.

By Jimmy Hancock

References

1.Blodget, Henry. “Why the World’s Greatest Stock Picker Stopped Picking Stocks.” Slate Magazine. N.p., 22 Jan. 2007. Web. 28 Jun. 2016. http://www.slate.com/articles/arts/bad_advice/2007/01/stop_picking_stocksimmediately.html.

2.Stock Market People. Digital image. Opinion-forum.com. N.p., Aug. 2012. Web. 28 June 2016. <http://opinion-forum.com/index/wp-content/uploads/2012/08/stock_market.jpg>.





What is a Wall Street Bully?




wall street bullyWall Street Bullies are not just found in New York City, they are found in investment brokerages throughout the country.  In fact, your investment guy, might just be a wall street bully.

I explain a Wall Street Bully as an individual or institution that uses fear, greed, intimidation, and misleading information to get an investor to act in a certain way.

The core issue behind all of this is that people that work on wall street make money every time there is a trade made on stock or other security.   Acting like any salesman, it is in their best interest to get people to buy and sell every week, every day, every hour.  But the problem is, actively trading by buying and selling on impulse is not in the best interest of the long term investor.

Wall Street Bullies try to take advantage of under educated and uninformed investors by instilling fear in them and getting them to become short term focused even when they are long term investors.  They create the illusion that they are genius’s that can outsmart the market with little to no risk if you just trust them.  There are 3 main types of Wall Street Bullies as stated by Mark Matson in his book “Main Street Money”.

The 3 types of Wall Street Bullies

The Conman

This is the easiest one to identify, at least after they have been convicted.  Think of Bernie Madoff.  These people gain your trust with a great reputation and promise you great returns with no risk or downside.  If it seems to good to be true, it probably is.  Often times these con men send out false statements showing growth when in reality they are stealing your money.

The way to protect yourself from a con man is to never allow someone to manage your money that does not use a third party custodian to hold the money.  Without a third party custodian, the fox is guarding the hen house.   There were a lot of so called “sophisticated” investors who got caught up in the Bernie Madoff scheme and lost millions of dollars.

The Prognosticator

There is no shortage of self proclaimed genius fortune tellers who will convincingly claim that they know exactly what is going to happen in the stock market in the short term future.  They pull out charts, graphs, economic theories and data galore.  Investing in the stock market would be a whole lot easier if these “experts” really could predict the short term future.  Ultimately they are trying to sell newsletters or get media attention for their hedge fund or alternative strategy they are selling.

If your portfolio needs a prediction about the future to be successful, it is already broken.  If anyone tells you they know what the market is going to do in the next few days, or next few months, don’t walk, run away.

The Guru

These are the sharply dressed people you see on the front cover of any investment magazine.  They are the ones have beaten the market in the past and think they can continue to do it forever.  They are reported to have amazing insights into which stocks are undervalued and which stocks to stay away from.  But the issue here is, there is ZERO correlation between a Guru’s market beating performance in the past and his ability to do it in the future.

Guru’s are the most common form of Wall Street Bully.  Many investment advisor’s, Brokers, and money managers claim to be guru’s who study and pick the best stocks that will beat the market as a whole.  Staying away from them can be hard, but instead, you should work with a investment coach who educates you on why stock picking is not necessary to have a successful long term portfolio.

What should you do?

At Preferred Retirement Options, we call it Bully Proofing Your Portfolio.  Not all investment professionals are Wall Street Bullies.  We help our investors follow the simple rules of investing, which are own equities, diversify, rebalance.  No crystal ball is necessary.

By Jimmy Hancock

References

  1. Wall Street Wolf Cast. Digital image. N.p., n.d. Web. 20 Nov. 2016. <http://tse1.mm.bing.net/th?&id=OIP.M1ee62057658b9c97e8d311a77a7a7d78o0&w=300&h=204&c=0&pid=1.9&rs=0&p=0&r=0>.
  2. Matson, Mark E. “1.” Main Street Money: How to Outwit, Outsmart & out Invest the Wall Street Bullies. Cincinnati, OH: McGriff Pub., 2012. 3-5. Print.



1st Quarter Stock Market Recap

1st quarter returnsIf you pay attention to any financial media you probably assumed 2016 has been a horrible year for stocks so far, but you would be wrong.  Although it wasn’t a great quarter for stocks, The Free Market US Equity portfolio (Diversified US Mix) was in the positive by just over 1%.  Bonds were slightly better as the Free Market Fixed Income portfolio returned almost 2%.  1
The following is an excerpt from Matson Money’s Quarterly Statement with analysis on the market.
 
“2016 started out with brand new fears of a bear market taking hold after a steep decline in the stock market occurred over the first few weeks of the new year. After only 5 trading days, the U.S. stocks were down almost 6%, and by early February they were down as much as 11%, as measured by the S&P 500 Index. While this may have seemed perilous at the time, those investors that did not act hastily and react to this short term downturn saw the remainder of the quarter recoup all of that lost return and then some; the S&P 500 ended up 1.35% for the quarter. The renaissance wasn’t limited to U.S. stocks, however. After lagging behind last year and getting off to a rocky start in 2016, emerging market stocks shot up late in the quarter, with the MSCI Emerging Markets Index finishing up 5.75% for the quarter.
 
There was a common perception among investors and those in the media that a precipitous drop like the one that occurred to start the year was a harbinger for the rest of the year or even multiple years to come. This discourse can lead investors to have fear and trepidation about how their investment portfolios might weather such a storm. If one is operating under these assumptions, it is only natural for their gut instinct to tell them to panic and make potentially harmful decisions regarding their portfolio.
 
While many believe during a decline that the market will be slow to recover, history tells quite a different story. According to an article by Paul Lim in the NY Times, for the 60+ year period from 1946-2007 the average recovery for a stock market decline between 10% – 20% was only 111 days, meaning the market had fully recouped the losses in just over 3 months.  Even for bear markets where stocks sustained losses of more than 20%, the recovery time was still under 2 years.
 
For those preaching fear over a negative January being an omen for a bad remainder of the year, consider that the S&P  has dropped by at least 2% in January 24 times since 1926, and of those years, the average return over the remaining 11 months was +7.6%. Unfortunately, it appears that many investors out there may not have had the benefit of an advisor coach to keep them disciplined. By in large, investors were fleeing out of the market, as evidenced by $41 Billion of outflows from mutual funds worldwide in January according to ICI data.
 
In the end, choosing a wise financial strategy -and sticking to it -can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good  decisions can help an investor bridge that gap between what the average investor makes and the return of the market.” 1
 
By Jimmy Hancock
 
References
 1. Matson Money. “Account Statement.” Letter to James Hancock. 17 Apr. 2016. MS. N.p.


3 Simple Rules

With our Myths of Investing presentation coming up in Idaho Falls today I would like to go over a part of the presentation discussing the 3 simple rules of investing.  Investing can be very complicated and confusing, but it also can be very simple.  Today I am going to try to simplify investing with these 3 rules.

1. Own Equities

Equities is just another word for stocks.  Why is this the first and most important rule?  Stocks have historically out performed fixed income (Bonds/Money Market/Savings Accounts) over the long term, and that is including the few crashes we have had.  In fact, that battle is not even close, especially now that fixed income has stayed so low the past few years.  Check out this chart which compares the annual return from 1926-2013 of the S&P 500 (Stocks) with Treasury Bills (Fixed Income).

stocks vs bonds

You can see Stocks have outperformed Fixed income by over 6% per year over the long term.  It is obvious to see the long term advantage of owning stocks in your retirement portfolio.

2. Diversify

Diversification, if done correctly, can increase return and decrease volatility (Risk).  Diversification in your investment portfolio is measured in part by the number of stocks you are invested in, as well as the different categories and countries those stocks are located in.   For example, if you invest in the S&P 500 Index, you are investing in 500 very large US companies.  You are not really diversified if you only invest in the S&P 500.

There are many different categories of stocks to invest in.  There is Micro cap (very small companies), Small Cap, Value, Growth, International.  Matson Money specifically invests our clients in over 12,000 stocks in all of those categories throughout the world.

The benefit of diversification is to lessen the risk that any one stock or group of stocks will crash, go bankrupt etc.   The standard deviation (volatility) of your portfolio can also be managed through proper diversification.

3. Rebalance

Rebalancing at a simple level is just buying low and selling high.  If your portfolio is 50% in Stocks and 50% in fixed, rebalancing would keep it that way through many different market swings.  If stocks go up faster than fixed, then you need to sell stocks (high) and buy fixed (low), and the other way around if the opposite happens.

Rebalancing most importantly keeps your portfolio at the risk preference that you choose, and especially helps to reduce risk in down markets.   It can also give your return a slight boost over the long term as well.

Now that you know the 3 rules of investing, you need an investment coach that understands and implements these rules as well.  If you can keep these 3 rules then your retirement portfolio will be in good shape over the long run.

By Jimmy Hancock

Reference

Matson Money. The Market Factor. Digital image. Matsonmoney.com. N.p., 23 July 2014. Web. 4 Nov. 2014. <https://www.matsonmoney.com/>.



The Genius of Rebalancing

balanceToday we are going to discuss the topic of Rebalancing your portfolio and why it is so important.  I will explain to you how a continuously rebalanced portfolio is one that is constantly buying low and selling high.  

 “Rebalancing -The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.”

Rebalancing for Dummies

Rebalancing can be very complex and confusing, but I will give a simple example to explain some of the benefits.

For example, lets say you have a retirement portfolio with $50,000 invested in stocks, and $50,000 invested in fixed (Bonds and Money Market accounts). This is the 50/50 portfolio which is pretty safe and best for those closer to retirement.  So you let it go 1 year and lets say it was like 2013 and stocks had a great year.   After 1 year you now have $65,000 in stocks and $51,000 in the fixed portion.  You are no longer invested like you wanted to be, and are opening yourself up to way more risk than you originally planned on.   Rebalancing is then needed to sell off what is high, which stocks, and buy into what is low, fixed.  The beautiful thing about it is there is never a time when rebalancing forces you to buy high, or sell low.

Why doesnt everyone rebalance?

Rebalancing never seems like the right thing to do at the time.  For example in 2008 when stocks were plummeting, rebalancing would have been to sell safe fixed income to buy stocks.  If you think about it though, you are buying low and selling high.  During these times you need an investment coach to keep you off the ledge.

So by rebalancing a portfolio, what you are really doing is lowering the risk and keeping to your individual risk preferences.  That is really the main goal of rebalancing, but an added benefit is being able to consistently buy low and sell high.  This can help over the long term to increase your return as well.  

The Proof

Take a look at this chart by Forbes which visually explains all of this.

 

Rebalancing chart forbes

 

You can see from the chart that rebalancing really does its work when the downturns in the market come.  The chart shows that the rebalanced portfolio made more than the portfolio that was left alone, and with much lower risk.

Make sure that your money is invested with an investment coach that has a scientific and predetermined way for rebalancing your hard earned money.

By Jimmy Hancock

 

References

1.”Rebalancing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 17 Sept. 2014. <http://www.investopedia.com/terms/r/rebalancing.asp>.

2. Brown, Janet. The Impact of Rebalancing. Digital image. Forbes.com. Forbes, 16 Nov. 2011. Web. 17 Sept. 2014. <http://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/>.

Is a Roth Conversion Right For You?

roth iraMany people are taking advantage of the tax benefits that come along with Roth accounts.  No matter what your income or tax status is, you can take advantage as well.

What is a Roth Conversion?

A Roth conversion is when you convert a pre-tax account (Traditional IRA, 401k, 403B) to a Roth IRA.   By doing this you pay the taxes now on any money converted over, and get the benefit of never having to pay taxes on that money or its growth ever again.

Advantages of a Roth IRA

With a Roth IRA you have many tax advantages over a Traditional IRA.  The most obvious one is that any money you take out after age 59 1/2 and after having the account open for at least 5 years is 100% tax free.  As a part of this benefit is that there are no required minimum distributions at age 70 1/2, and your Roth money can go tax free to future generations at your passing.   Another advantage is that you can always take the total amount contributed to a Roth IRA out without any tax penalty, even if you are not 59 1/2.  It is just the growth on the account that would cause a penalty if taken out early.

Do I qualify for a Roth Conversion?

There are no income restrictions or limits for who can convert to a Roth IRA.  There are income limits for contributions to a Roth IRA, but not conversions.  Because of this anyone who wants to can take advantage of this possible huge tax saving trick.

What is a Backdoor Roth IRA?

A backdoor Roth IRA is for savers that don’t qualify to contribute to a Roth IRA because their income is too high.  There is a way for them to contribute to Roth IRA by first contributing to a Traditional IRA with after tax money and then immediately converting the money in the Traditional IRA to a Roth IRA.   Because there are no income limits on after tax Traditional IRA contributions this is legal, and can be very beneficial in terms of tax savings.

How much will it save me?

Just to show you the power of a Roth account vs a Pre-tax account, I will give you an example.  Elicia is 30 years old and plans to contribute $5500 a year into a Roth IRA until retirement at age 65.  Ryder is also 30 and plans to do the same but into a Traditional IRA.   In this example I will assume they both get exactly the same return(8% before retirement, 6% after), are in the same average tax brackets each year(30% before retirement, 15% after), and take the money out over a 25 year span in retirement.    During the working years Ryder would have saved $57,750 on taxes compared to Elicia’s $0 saved.   But as they took the money out in retirement Ryder will pay $250,667 to Uncle Sam while Elicia will pay $0.   In this example, a Roth IRA saved Elicia almost $200,000 in tax payments to the government.

Is a Roth Conversion for Everyone?

A Roth Conversion is not right for everyone.  There are a lot of things to consider depending on your age, tax bracket, and current investments.  A Roth Conversion may be very beneficial to you, especially in the long run, but you need the help and advise of a knowledgeable investment coach to decide if it is best in your situation.

By Jimmy Hancock