Growth Of FAANG Stocks Helps Mask Some Selling Activity

Since May, 8 stocks have been responsible for over half of the growth of the S&P 500. Annex Wealth Management’s Mark Beck and Derek Felske discuss why now may be a very prudent time to look at rebalancing your investments.

“My favorite part of the Axiom is the MoneyDo because there is something for everyone in this section. I especially like the estate planning tips, such as considering a basic estate plan for young adults to reminders to review your own plan periodically.”

– Guest Editor:
Cathy Lange | Compliance Specialist
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Consider A Roth Conversion

Some savers approaching retirement have managed to amass a significant nest egg in retirement accounts. Commonly, the money was saved on a traditional or pre-tax basis, which means that the money contributed has never been taxed. The upside of this strategy is that a tax deduction received up front can be very beneficial. The downside is that now, the saver faces the responsibility of unwinding these funds in the most tax-efficient manner.

Many find themselves in a higher tax bracket during working years and lower during retirement years – a good example where saving pre-tax can make sense. Saving pre-tax is especially true if we’ve reached our peak earning years in the middle and end of our working career. Those peak years could be the ideal time to get a tax deduction with every dollar saved, while waiting until retirement to withdraw these funds in a lower tax bracket.

Think about your situation. Have you saved money on a pre-tax basis? If so, in this week’s edition of the Money Do, we encourage you to explore a similar and related strategy. Consider if it makes sense to strategically withdraw money from your traditional retirement account and convert those dollars to a Roth IRA. This strategy is called a Roth conversion.

Roth IRAs are funded with after-tax dollars, which means the contributions are not tax-deductible. However, if a Roth approach is implemented correctly, all future growth in the Roth account is tax free and no tax is due when funds are withdrawn. We therefore suggest that you consider the benefits and drawbacks of a Roth IRA, and the impact it could have on your tax situation.

BENEFITS OF A ROTH IRA

• Funds in a Roth IRA can generally be withdrawn free of income tax, if you follow the rules
• A Roth IRA is a tax-free “bucket” of savings which offers tax diversification throughout retirement
• Roth IRAs aren’t subject to required minimum distributions
• Roth assets provide insulation against increases in future tax rates by paying the tax now
• Given the economic and political environment, many believe our country may see increased income tax rates in the future

DRAWBACKS OF A ROTH IRA

• Taxes must be paid up front
• You must navigate complex rules to ensure that the funds can be withdrawn tax free (but don’t worry, a financial professional can help)
• Undertaking a Roth conversion without expert planning can lead to tripping tax thresholds which can result in unexpected, increased taxation

WHEN IT MAKES SENSE TO CONVERT TO A ROTH IRA

• Lower income years, such as extended periods between jobs
• Generally, after retirement but before required minimum distributions begin

Essentially, a Roth conversion is a tax management technique. The overall idea is to save money in a tax deferred retirement plan when income is high and convert it to a Roth IRA in years when income is low, creating tax efficiency in your financial plan. If passing wealth to the next generation in a tax-efficient manner is important to you, Roth conversions may be a strategy to explore.

Although you may be able to handle a Roth conversion yourself, we suggest consulting an advisor you can trust. There are many intricate factors to consider. A competent, fee-only financial planner can help evaluate if this strategy is right for you.

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