There’s no question that this has been a difficult year for investors. Markets have been on a downward spiral and it’s anyone’s guess as to when the recovery starts. For as long as I’ve been in the investment world, I’ve been a firm believer that it is impossible to try to time the market. Good news is bad news and bad news is good news, sometimes things just don’t make sense. As investors, we shouldn’t focus on what is happening in the market day to day but rather, our own individual situations. In this type of market, we should focus on opportunities we can take advantage of. I believe there are a few opportunities investors should consider.
Down markets create a unique opportunity to take advantage of a Roth conversion. Since Roth conversions are taxable events, those who take advantage of this market will have a lower tax bill than if they had converted at the beginning of the year. After all, money in a Traditional IRA will always be subject to income tax. If you meet the following criteria, I believe a Roth conversion makes sense for you:
- The conversion will not move you into a higher tax bracket.
- You can afford the tax liability associated with the conversion and you do not have to touch any of the money converted to cover the expense.
- You can leave the money untouched in the Roth IRA for at least 5 to 7 years.
If you meet these three criteria, a Roth conversion can be beneficial to you. Remember, when the recovery comes, which it will, the money will be in your Roth IRA as opposed to your traditional IRA. As a result, when you withdraw that money, it will be tax free to you. Therefore, by taking advantage of the low market, you’re not only getting a tax break, you’re also in a position to benefit once the recovery comes.
Today’s lower market also creates opportunities for those of you who are sitting on cash. Of course, I would say use some of that cash to pay the taxes on your Roth conversion and if you still have excess cash, this could be an excellent time to invest. After all, I don’t know about you, but I go shopping when the stores have sales. Wall Street is on sale and that is the time you should be shopping.
I know some of you are thinking that you should wait to do a Roth conversion or add new money into the market until the market hits its bottom. Unfortunately, we have no idea when that will be and how fast the market will recover. I’ll remind you what happened in 2020. When the pandemic first became an issue in mid-February, the market tanked and by mid-March, markets were down over 30 percent. The general view was that it would be a while before markets recovered – thankfully that didn’t happen. In fact, markets recovered relatively quickly and by the end of the year, U.S. markets showed a nice profit. I have no idea if markets will recover as fast as that or if it will be a while; but, I do know markets will recover and some people will be kicking themselves for not taking advantage of this unique opportunity.
If you need assistance deciding whether you should do a Roth conversion or whether your individual situation justifies adding new money to the market, never hesitate to call Bloom Advisors. We are here to help you make the right decision.