What a year 2022 has been.
Both stocks and bonds - investments are down across the board.
To put it frankly, it sucks.
And while the future is impossible to predict there is a silver lining that I think could be a great opportunity for people in Pharmaceuticals.
And that is something called a Roth conversion.
What is a Roth Conversion?
If you're not familiar a Roth conversion is the process of taking pre-tax IRA retirement savings and moving or "converting" some or all of those funds to an after-tax Roth IRA.
You will have to pay taxes on the money you convert but once it's in the Roth position, as long as you follow a few rules, any potential future investment growth will be tax free.
Like any major investment decision everyone's situation is different and you should always talk with a financial professional before deciding what makes sense for you, but there are a few reasons I think 2022 could be a great year for Pharma employees to at least consider a Roth conversion.
You may take nontaxable withdrawals before age 59½ if the Roth IRA is held for at least five years and you meet certain distribution guidelines. Otherwise, an early withdrawal before age 59 ½ may be subject to taxes and a 10 percent federal tax penalty. This should not be construed as individual advice. Please discuss with your tax and financial advisors prior to making financial decisions.
Unemployment is Still Low
Despite the talk of a possible recession on the horizon there are still some fundamental signs the economy is healthy.
Unemployment is back to pre-covid levels - the lowest it's been otherwise in decades.
Wages are up on average about 8.5% over the last year, and although inflation is also quite high there's a good chance your income hasn't taken nearly the same level of decline as your investments have.
If you've built an adequate emergency reserve of cash, and still have a surplus on hand you might wish you could do what most investment gurus suggest and "buy low".
Unfortunately when it comes to retirement benefits, the IRS limits how much you can contribute each year.
A Roth conversion could allow you to use that money in a way that still takes advantage of the current market decline, but in a different way.
Tax Less Now vs. Tax More Later?
The stock market is unpredictable and we've certainly seen that in 2022.
High inflation and an aggressive Fed have led to a lot of fear, declining stocks across most asset classes and even bonds which usually are not nearly as volatile as stocks.
But a Roth conversion may actually be a better idea when you're IRA accounts are down because you're able to move more of the account without as much of a tax burden. For example if stock XYZ is valued at $100 and you move it from an IRA to a Roth IRA, you now owe tax on that $100.
But if that same stock drops to $75 and you convert it you only owe tax on that $75, even if that stock drop is only temporary and the value goes back to $100 later in the future.
Roth accounts are designed for tax free growth - by converting while the stock market is down you have the potential to gain tax free earnings if the market should go back up again.
So even though it might be scary to see your accounts go down it could be a great opportunity to convert to a Roth.
Tax Rates Are Low
Among other things one of the topics I discuss in my free ebook "4 Questions Pharma Employees Should be Asking" is how much tax rates have gone down over the last few decades.
For example the average highest marginal tax rate between 1950 and 2015 was roughly 58%. After the recent 2017 tax cuts currently the highest marginal tax rate is 37%.
This means that it could be an ideal time to consider a Roth conversion.
If taxes are historically low that means any amount you convert will be paid at the current lower tax brackets.
This is especially interesting when you consider that the 2017 tax cuts are set to expire in 2025.
Not to say that they can't be extended but still, it's another reason thinking about this now might make sense. Since any amount that is moved from a Traditional to a Roth IRA creates a tax liability doing so when taxes are lower could be a smart move.
LPL Financial and its representatives do not offer tax advice.
Get My Pharma Investment eBook for Free
A Roth conversion is one of the options that could be great to consider for 2022. And though every strategy might not make sense every year it's always worth understanding what your options are.
That's part of the reason I wrote my free ebook - 4 Questions Pharma Employees Should Be Asking. It discusses various topics that I believe everyone in the Pharmaceutical industry should be aware of. Opt in with your email address and get your guide now!
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. The information presented does not constitute a solicitation for the purchase or sale of any security and is not a recommendation of any kind. Please consult your financial advisor before making financial decisions.