The Bear market is upon us.
With the recent rise in inflation and the Fed's subsequent rising of interest rates the stock market has been looking less than stellar lately.
After an already rough start to 2022 we've officially entered what is typically referred to as a "Bear market". That is a -20% or more decline in the stock market.
So the big question is now what?
Do we panic and sell everything? - most experts (including myself) would tell you that's a terrible idea.
Should we just buy more? - you could and maybe you should. If you're comfortable with the fact that things could get worse before they get better.
Instead of guessing what will happen in the short term I'm a fan of using what we know today to our advantage.
The Roth Conversion
Okay so your accounts are down and it's painful to look at your account statements.
But how do you use that to your advantage?
Let me introduce you to the Roth Conversion.
This is where you are able to take pre-tax money from your Traditional IRAs and move it to an after tax Roth IRA.
If you're unfamiliar a Roth IRA allows you to invest for retirement in a place where, as long as you follow a few rules, all of your investment growth is completely tax free.
This is in contrast to most Traditional or Rollover IRAs where all of your investment growth will be treated as taxable income once you withdraw the funds in retirement.
The Roth Conversion allows you to take any portion of a Traditional IRA, pay the taxes on it today, and move it to a Roth IRA.
There are several reasons why I'm personally a big fan of getting money into a Roth, and if you haven't yet I suggest you check out my ebook "4 Questions Pharma Employees Should be Asking" where I cover this in depth.
But a simple explanation is in the same way you diversify your investments, you can diversify your retirement assets from a tax standpoint.
If, like most people, all of your retirement savings is in pre-tax vehicles (401k, traditional IRA, pension, etc.) then getting a bit of money into a Roth might not be a bad idea.
And the great thing about Conversions is there is no income limit on doing these.
Since you work in Pharma there's a good chance you've been told you make too much money to contribute to a Roth.
That does not apply to Conversions. So this might be one of your only ways to get money into that tax-free vehicle.
There are two reasons you'd want to consider this now.
Reason #1
The first is it could actually save you taxes in the long term.
Consider this example - let's pretend you hold ABC stock in your Traditional IRA trading at $200/share at the start of 2022.
Let's say you own 100 shares totaling $20,000 ($200 value per share x 100 shares) of value in your account.
If you were to convert that to a Roth IRA that $20,000 value would be considered taxable this year.
Now let's pretend that due to current market trends the stock goes down -20% and is only worth $160/share.
Your Traditional IRA is now valued at $16,000 - meaning if you were to convert this to a Roth IRA only $16,000 would be considered taxable.
If the stock goes back up and your account grows back to $20,000 that's $4,000 of earnings that is completely tax free.
Not to mention all future growth until you retire and spend the money is also tax free.
By the time you need it, it's possible that account could have grown to $30,000 or more.
All of that growth will be treated as taxable income if left in a Traditional IRA.
Reason #2
The second reason is a bit less concrete and depends on your specific tax situation.
But when it comes to non-retirement accounts, and the associated taxes that come with capital gains and dividends realized throughout the year, there's a chance those could end up being much lower this year with the poor performance we've seen so far.
Obviously there is still time things could turn around, but as it stands right now it's looking like most people will be realizing more capital losses then capital gains this year.
That could make the tax bill for many less then what they've experienced in the last couple of years when the market was performing very well.
Simply put, if there's a year when raising your taxes a bit due to a Roth Conversion makes sense it very well could be this one.
I'd suggest speaking with a tax professional about your specific situation to estimate how something like that might affect your tax bill.
Looking Ahead
If you're still nervous about where things are headed, or how they might affect your future, I'd suggest speaking with a professional.
That's exactly why I'm offering free, no obligation strategy calls for anyone in the Pharmaceutical industry.
And before you come up with a million excuses of why you shouldn't:
-Yes it is free
-It's barely takes any time (no more than 30 minutes)
-There are no commitments required whatsoever
-It takes less than 2 minutes to schedule
Click Here to Schedule a call!
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.