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Ponderings For the Week of October 19 to 25, 2020

Stock Rally Continues With Small Gains

The three major stock indexes finished the week higher thanks to gains on Monday and Friday. Not so for international stocks that posted losses for the week. Small company stocks also reversed recent strength. So if you factor in stocks of all species, the average diversified stock portfolio declined slightly for the week. A lesson here is that investors who read the headlines and conclude that their money performed the same may be mistaken.

The investment markets thrive or dive depending on progress with respect to two matters of moment: emerging treatments for the coronavirus and the on-again, off-again stimulus package. Last week’s news on both fronts was less encouraging and was reflected in investment market results. Investment professionals were also concerned about disappointing reports of weekly jobless claims which reached a two-month high. The worry is that a lot of jobs are being eliminated altogether by the pandemic.    

Quarterly earnings reports aplenty are issued this week. Analysts expect year-over-year profits to fall 20% on average with great variation among individual companies.

It’s Time to Consider a Roth IRA Conversion

Roth IRA conversions can be made regardless of your income. While Roth IRA contributions can be made as late as April 15th of the following tax year, the annual deadline for Roth IRA conversions is December 31. Taxes on the conversion are due in the year the conversion is made. Careful analysis is required before making a Roth conversion, including the following three matters:

  1. Can you afford to pay the taxes due on the conversion out of non-retirement money?  If retirement account assets will need to be withdrawn to pay the taxes, the conversion shouldn’t be done. Paying taxes and, perhaps, penalties by using retirement money to pay the taxes on the conversion doesn’t make financial sense.
  2. Do you expect to be in the same or a higher income tax bracket when the converted funds are withdrawn?  If you anticipate being in a lower tax bracket, a conversion should generally not be done, because it’s better to avoid the taxes due on the conversion now and pay them when traditional IRA withdrawals are made later on at a lower rate.
  3. Will you be able to wait at least ten years before withdrawing money from the converted Roth?  The longer the money can grow tax free, the better, but in no case should the money be withdrawn within the first ten years to give the Roth conversion time to grow sufficiently to offset the taxes that were paid when the conversion was made.

So long as the above rules can be satisfied, Roth IRA conversions can work almost as well for retirees as they do for those who are still in the workforce. Many Roth IRA conversion evaluators are available on investment company websites, including Fidelity, T. Rowe Price, and Vanguard. The ability to enjoy tax-free income in your later retirement years can be very attractive. Also, passing on Roth IRAs to your heirs can provide them with tax-free income over many years, although I encourage you to spend the money instead of passing it on.


Smart Money Tips

  • Cash isn’t trash. Many investors are in a dither. Stock prices are high. Bonds, usually used as the solid foundation of a diversified portfolio, are also expensive since interest rates are very low and when they rise sometime in the future, as they will, the principal value of bonds will decline, perhaps a great deal. So what’s an investor to do? You might just mimic holding your nose (adhering to COVID-19 protocols) and invest a portion of your money in cash. You’ll make little or nothing in interest (the three-month Treasury bill is paying 0.1% interest). But your principal will be safe although, since the paltry interest isn’t near enough to keep up with inflation, the cash stash will be losing a bit of purchasing power over time. On the other hand, you’ll know that a portion of your money is sleep-tight safe.
  • Never underestimate the value of common sense. It’s easy to conclude that paying proper attention to the vast and diverse array of matters affecting your personal finances should be a full-time job. But I hope you find that personal financial planning isn’t really that complicated, despite the efforts of many in the financial services industry to make you believe otherwise. All it takes is some discipline and a little time. If successful financial planning can be boiled down to two words, they are “common sense.” Everyone makes financial mistakes and if you look back at those you’ve made, you’ll probably attribute them to a lapse in common sense. Here’s something to keep foremost in mind as you strive for a better financial future:  It takes a lot less time to make the right moves with your money than it does to undo any wrong moves.



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