For the first time, the S&P 500 and the Barclay’s Aggregate Bond Index were down for three successive quarters. The Fed is still focused on halting inflation, which likely means more rate hikes. Is fixed income looking any better than it has in the past? Annex Wealth Management’s Dave Spano and Derek Felske discuss.
Last week we asked your opinion on travel.
8% of polltakers said traveling by train would be the safest way to travel 100+ miles, while the rest of responders were nearly split evenly between airplane and automobile, at 45% and 47% respectively.
While it may seem like being tens of thousands of feet up in the air inside a big metal tube isn’t the most reliable way to get around, it’s actually the safest means of transportation you can choose from.
Earlier this year, turbli.com shared statistics from 10 years’ worth of data that analyzed 10 types of vehicles. Commercial flights came out as the safest transport, with train and bus having similar results.
https://turbli.com/blog/the-safest-transport-modes-ranked-by-statistics-from-10-years-of-data/
This week we’re looking at geography:
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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 the money contributed has never been taxed. The upside of this strategy is 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 of when saving pre-tax can make sense. Saving pre-tax is especially valuable 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 Money Do, we encourage you to 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 in 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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Annex Wealth Management’s Sarah Kyle and Randy Winkler, CFP® answer several Ask Annex questions:
“Years ago, Randy mentioned an app or a website he used to help budget, what was that?” – Tim
“My plan was to retire in 2023 at 66, is my timing terrible?” – Carol
“Discovered my wife has about $4,000 in pre-tax contributions she made to a defined benefit pension plan at her old government employer. She didn’t stay long enough to be vested in the pension, but we can request that the contributions be refunded to us or rolled into another plan. Is there a downside to investing it all at once?” – Justin
“Why are 60-40 portfolios getting such bad press?” – Anonymous
Do you have a question for Annex Wealth Management? Drop it here: annexwealth.com/ask
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UPCOMING EVENTS →
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