You can bet on it.
Things like the following will all affect your decision:
Size of the account being converted
Do you have other funds available on hand to pay the taxes (federal and state) due on the conversion
Number of years before you intend to retire
Anticipated rate of return between now and retirement
Current tax bracket (both with and without the conversion amount)
Anticipated tax bracket at retirement
Do you intend to take only RMD in retirement
As with anything else regarding investments and taxation, seek competent advice.
Seriously, get professional advice from a CFP. These are big decisions. And while I respect many opinions on this forum, Retirement advice is not one of them.
KPC is correct, you need to answer the questions he posted. Age is definitely a big one and also your taxable income in retirement and currently. Also are you currently in a high tax state and retiring in a low tax state. There are calculators you can use on the web that can help you decide. Me personally, I have a blend of both but switched over years ago to just a traditional 401K.
Taxes (and the CPI) have no place but to go up long term...
If you had said that 10 years ago, and many did, you would have been wrong.
What will be your taxable income (bracket) in retirement compared to now?
With a traditional IRA, (or any pre-tax qualified plan) It is known exactly, to the penny what the benefit will be in the year the taxes are filed and the contribution is made. No guessing. The exact tax bracket is known, the exact marginal tax rate is known , and therefore what the deduction is going to be, and what it means now.
Furthermore, there are no concerns about some future congress taking away the tax free status of any Roth distributions because they've come to the conclusion that they need the revenue. The government can take away the tax free status of a Roth rendering it useless, but it's considerably harder to retroactively charge tax on income never reported.
A bird in the hand is sometimes worth two in the bush...especially if you allow the birds that are actually in your hand to multiply into more, and more, and more birds.
No offense to the poster, but an increase in the CPI (which is sure to happen), is of no relevance to the question.
It's been my experience that for many it is, even if they've planned well. The transition from accumulation to distribution is a difficult one for many. It is an entirely different mindset.
But had I said that 12 or 15 yrs ago, I would have been 100% right.
So, what's your point..?
You actually made it for me.
My point was that none of us have any clue whatsoever what tax rates, tax law, and tax policy is going to be from year to year let alone a decade or more from now. We only know for sure what the tax rates, tax law, and tax policy is for the current year's return.
But, electoral history shows in 10 yrs from now, we will have a democrat in the Whitehouse and likely one house in congress will be democrat. Taxes will go up in that case and with a rising debt, taxes will go up.
I hope I am wrong...
You are welcome to think whatever you like, but I would respectfully disagree. You apparently assume, incorrectly I might add, that tax rates are the only relevant factor in determining whether one should convert a traditional IRA to a Roth. In my first post, I listed some important questions that have a bearing on whether or not converting to a Roth makes sense or not. Some of which are not even thought of by the DIY'ers. Tax rates are but one of the questions, and for many not even the most important one.
A competent advisor or CPA knows this and would be able to advise accordingly.
As an FA and planning for the future, you should always assume cost of living to increase and the devaluation of today's dollar to happen. This includes tax rates to rise. No, I DO NOT think that is the only relavent factor - that is where you incorrectly assumed, I might add.
Hiring a "finance guy" who thinks otherwise is foolish...
Indeed that was the question, but that wasn't the only question. That question was asked in conjunction with, and in reference to another question:
"Is there a preferred time to move money over to the Roth?"
As to the OP's question, one part simply cannot be taken out of context with the other. And that is why I posted what I did, along with the later caveat, "seek competent advice."
Based on your answer, the OP could reasonably assume that because " Tax rates will increase in the next 10 years. You can bet on it," it would be a good idea to move his money into a Roth. That may be correct, and it may be a VERY costly mistake.
Furthermore, an increase in cost of living (or as you originally said CPI,) and the devaluation of the dollar over thime have very little to do with whether money should be left in a traditional IRA or moved to a Roth.
Your answer to the OP's question is the reason why people should NEVER take financial advice from someone on the internet.
"As an FA and planning for the future, you should always assume cost of living to increase and the devaluation of today's dollar to happen."
Which we always do. Always!
So just what does a rise in the cost of living have to do with whether or not a person should convert into or out of a Roth?
Answer: ABSOLUTELY NOTHING!
That you seem to think otherwise is simply evidence that you shouldn't get anywhere near following your own 'financial advice.'
He's buying dinner for everyone at the seminar at a fancy pants restaurant called Andiamo's...
I'm nervous about the whole retirement thing as far as the money goes. It should be interesting.
My advice is to ask yourself what you actually learned from the seminar, not what you realized you don't know yet. It's not rocket science.
My question on this is why, if an FA has been successful in helping clients succeed financially, he then needs to put up a bunch of money to buy free dinners for people.
In my experience, the best advisors spend NO money to attract new clients because their existing clients not only give them more business, but also continually refer potential new clients to them.
With all due respect Matt, not only is this unbelievably disrespectful to those who take their careers (whatever they happen to be) seriously, it doesn't even make sense.
First, ALL learning is a matter realizing what you don't know yet. If I wanted to, I could learn how to build a house, rebuild a transmission, write computer code, set up a trust, or do tax planning. Those tasks aren't "rocket science" either, to those who are interested in them, and willing to spend the time and resources necessary to learn how to do them properly. Hell, rocket science isn't even "rocket science" to those that are interested in that sort of thing, and take the time to learn the principles involved. I have neither the time or inclination to learn how to do those things, so when needed, I hire someone who does. Then, you have the issue of "learning" vs the application of what you've learned. Learning the right answers means little if you don't apply what you've learned properly.
At the end of the day, if handling money and planning for retirement was so easy, everyone would retire wealthy, nobody would panic and sell at the bottom, nobody would have debt problems, and casinos would be out of business, and threads like this one wouldn't be necessary...yet we all know how that is working out.
Google will give you the answers to everything you want to know, including whatever it is that you and I do. All you need to know is the proper search query. Planning for retirement is less about knowing the proper answers and more about knowing the proper questions. The original topic of this thread (and many of the responses) is proof of that.
I meant no disrespect to your profession. The fact remains that most "seminars" are intended to drum up business for those who sponsor the seminar, not to educate the attendees on the subject of the seminar.
I stand by my advice for BB to ask himself what he actually learned at this seminar. The fact that BB is attending the seminar indicates he already knows he needs to be educated. If the seminar only reinforces that BB needs to pay the sponsor for that education, and nothing else, which most of them do, then I'd be skeptical.
Of course they are. No different than an attorney having a living trust seminar, architects and home builders having booths at the home show, physicians offering free blood pressure checks and diabetes screening, and Home Depot having children building bird houses on Saturday mornings.
I'm not a big fan of what we call the "plate licker" events but every business owner has their way of getting in front of potential new clients. I'd rather get one good referral from a satisfied client than have a room full of seniors wanting a free chicken breast and a red skin potato. Personally, I find that when you get a client that way, you lose them just as fast when the next free dinner invitation comes along.
This is not directed at you or anyone in particular but my knowledge and years of experience are worth someone paying for it. No different than any other professional. The "it's not rocket science" and "anyone can do it" mantra is getting tired.
At the end of the day, free advice is worth exactly what you pay for it. That's is why when it comes to my profession, the only advice I give here is to seek competent advice.
I'm working right now on trying to unwind some "free advice" that someone got from the president of a local bank. They were told that the 400k that they inherited from a non spousal IRA, and was deposited in their own savings account, could just be rolled over into an inherited IRA within 60 days. If it can't be unwound, neither the client or the bank president is going to be very happy when 400k of ordinary income has to be reported in one year. At that point, oops and "it's not rocket science" doesn't quite cut it.
There's a vast difference between taking and acting upon "free advice" versus doing your own research to educate yourself, then acting upon what you've learned.
I've never questioned the value of a professional FA for some people. Many folks simply aren't inclined to educated themselves on financial matters, and would rather hire someone to do it for them. But, just like there are DIY hunters who don't need a outfitter and a guide to be successful, there are investors who don't need a FA to be successful. Whether or not BB is one of those types only he can determine.
But I am the guy who cringes at the ups and downs of investing.... I'd rather have peace of mind and know my principle isn't going to tank with the market. I'm the crazy miser who stashes cash in a coffee can (really).......
My hope is to learn if there is a safe place to have my money where I can sift out enough for a monthly house payment and have very little risk of my principle tanking if the market crashes.
One of our retirees made the grave mistake of taking all his money out of his DROP account when the economy took a dump... then he was left with a fraction of what he started with.
My DROP account will be my primary thing I have to decide what to do with. Most of the guys tell me they are leaving it with the city in the DROP account when they retire.......
This FA has discussed our DROP account with the lady at the city that handles all our retirement stuff so he's up to speed on it...
Telling someone "it's not rocket science" is insinuating that something can be easily accomplished. For some it is, for many it's not.
Seldom are the people that say such things ever around to pick up the pieces when things go wrong.
Let's assume you are an structural engineer. Some people have the ability to design and build a quality structure, however most do not. Let's assume someone started a thread asking questions about the structural integrity of "XYZ".
How would you react if a guy like me, who knows virtually nothing about the person who started the thread, suggested that stuff like that "isn't rocket science" and that he should have no problem figuring it out on his own? I mean after all, I managed to build my own hunting cabin 20 years ago and it hasn't fallen down yet.
I would hope you would call me out for being an ignorant fool, because you would be correct.
Thinking you have a good retirement plan because you've managed to accumulate a large amount of assets is about as accurate as thinking you are a good bow hunter because you've accumulated a large amount of arrows.
How old are you?
Hmm, yet, on another thread you said this...
"When I get a new client one of the first things I explain to them is that whether you are an advisor or not, everyone has the same access to investment advise. It ain't rocket science."
So which is it?
I think there was a little more to what I said Matt.
"When I get a new client one of the first things I explain to them is that whether you are an advisor or not, everyone has the same access to investment advise. It ain't rocket science. My biggest job is to prevent you from doing something stupid once your money is invested.
I think I've been quite consistent Matt. As I just said, there is a big difference between investing and accumulating assets, and successfully planning for retirement. Just as there is a big difference between accumulating arrows and successfully bow hunting. A monkey can accumulate arrows.
Take BB's questions for example. Even thought you've been successful at accumulating some assets, do you know what a DROP account is? Or how about what happens if he decides to move his DROP into some other investment vehicle, and then how will any pre-59.5 distributions be treated? Will they be subject to a penalty? How will his DROP distributions eventually be taxed? How might his DROP distributions affect social security? Will his DROP distributions count toward satisfying his RMD from all qualified plans? Does he or you even know that any of those things might be a concern?
Accumulating the asset was the easy part...
Honestly, I can't answer any of those questions off the top. But, I bet with a few hours of research I could. And I wouldn't have to spend a dime to do it either.
In fact, I encourage BB to ask those same questions at his seminar, and carefully record the answers to share with us. That will tell us if the seminar was to truly educate the attendees, or just solicit their business.
You keep disparaging Kevin's and my profession, saying "it's not rocket science" and thereby implying anyone could successfully handle their own investing.
Yet on another thread a couple of weeks ago, when I asked you a couple of very basic questions about your investments, you had no idea what I was asking about, let alone have the answers.
As Kevin alluded to above, you could also pull your own teeth. Just tie a strong cord around a doorknob, tie the other end of the cord to a vice-grip, clamp the vice-grip on the offending tooth, then slam the door shut.
I mean, c'mon! "It's not rocket science! "
I haven't disparaged your profession. In fact, I used the same words to describe financial advice as Kevin did...."it ain't rocket science".
My simple philosophy has always been “what one man can do, another man can do too, if he’s inclined to research, learn, and educate himself.
A few examples. I restored my old CJ from the frame up, including rebuilding and swapping in a new engine and transmission, new suspension, and repairing and repainting the tub. Prior to that, my auto mechanics experience amounted to knowing how to change the oil. My final product isn’t Concours d'Elegance, and I know I could do the next one better and more quickly, but I’m proud of the results, and most people who see it say “WOW!”.
I also taught myself how to do taxidermy and to tie my own fly-fishing flies for the same sense of satisfaction of doing something myself. Now, I’d stack my mounts and flies up against virtually any “professional’s” work.
I didn’t pay a dime for anyone to advise me on any of those endeavors. Instead, I spent hours of my time researching, learning, and practicing them myself.
Now, I suppose one could legitimately argue the learning curve on those examples isn’t as steep, nor as important, as financial planning. But, that doesn’t mean the DIY approach isn’t possible or prudent, if one is inclined. Many people aren’t.
I really want to move out of the city and hopefully have deer hunting out my back door when I retire.....
Numerous studies show that the more financially successful people are, the more likely they are to hire a financial advisor.
Why do you suppose that is?
I fully expect it to be a seminar where he explains in detail how it would be to my benefit to hire him to manage my retirement accounts.....
I'm guessing they'd rather spend their time earning than investing. And that's fine, if that's their preference. Most people would rather pay someone to change the oil in their cars, too. I'd rather do it myself and save the labor and overhead costs to have a shop do it. Neither approach is right or wrong.
Assuming one's time is worth zero, the same could be said for whatever it is you charge your customers for, so I fail to see your point.
" In fact, I encourage BB to ask those same questions at his seminar, and carefully record the answers to share with us. That will tell us if the seminar was to truly educate the attendees, or just solicit their business."
That's might big of you Matt, seeing that had I not brought those questions up, there is a good chance that neither he, or you, would have ever known to ask them.
Like I've said a number of times before, knowing the questions to ask is often more important than the answers.
Here's an interesting question for you. Why do you invest in mutual funds? You realize that you're paying a fund manager or a team of managers and analysts to do your research for you, right? Couldn't you do that on your own?
The goal of a good seminar should be to teach, discuss various situations, common problems, and to open your mind to potential issues and options you'd never thought about.
No seminar could possibly teach everything every attendee could need to know because everyone is different - different experiences, different goals, different objectives and different concerns.
Over my many years in the business, I've often had potential clients tell me in our first interview that they already know what they want to do.
My response is on the order of, "I'm sure that's the case. But I would suggest that until you know what all of the options are that are available to you, you may not know what you want to do. It's my job to get to know you and then help you understand what those options are and the positive and negative sides of those options."
I've had people almost jump out of their seats in agreement when they hear that.
I also frequently tell potential clients, "Most investment portfolios that people bring to me to look at are a compilation of good ideas, accumulated over time, that collectively make no sense what-so-ever."
On more than one occasion, I have had people laugh and tell me, "YES! That's exactly what we have!"
I fully expect it to be a seminar where he explains in detail how it would be to my benefit to hire him to manage my retirement accounts..... "
You are going in with exactly the right expectations BB, but some people expect just what you described. It's a little like seeing your doctor at church and asking him to diagnose that weird shaped mole is on your a$$ so you can save the office visit charge.
Yes, Kevin, I realize that, and I probably could do it on my own. In fact, I do exactly that with a much smaller portfolio of equities. I might add, that my smaller self-managed portfolio has out-performed all my mutual fund accounts on a percentage basis over the last 20 years. I choose not to manage the larger sums in our mutual funds because that would cut into my hunting, fishing, and skiing time too much. I'm stubbornly self-sufficient, but I'm not stupid. ;-)
Anyway, thanks for the discussion. It sounds like this seminar is exactly what BB needs and/or desires. I hope it works out for him.
"I might add, that my smaller self-managed portfolio has out-performed all my mutual fund accounts on a percentage basis over the last 20 years."
Compared to what?
Unless your asset allocations and the amount of risk you are taking in your two portfolios are identical, your comparison is of little value.
As you know, most mutual funds are invested in a collection of equities in whatever sector of the economy the fund is targeted at. With a bit of research, anyone can learn which companies those funds are invested in and what percentage of the fund is allocated to each company. I make a point of checking that data on our collection of mutual funds almost daily.
I've noticed over the years that the top 2-3 equities held in each of our mutual funds, and the percentage of those holdings, often stays roughly the same for months at a time. So, I base my self-managed fund on those same equities and percentages.
For example, I have a Blue Chip Growth mutual fund that has the top 23% of its holdings in Amazon (8.85%), Facebook (5.26%), Microsoft (4.51%), and Google (4.35%). So, I maintain holdings in those same companies at roughly the same percentages in my self-managed account. I do the same thing with the other 3 mutual funds we have in different sectors. So, basically my self-managed fund is a mirror of the top 25% of holdings in our 4 mutual fund accounts. I just cherry pick the top few companies over 4 sectors instead of focusing on just one sector.
That strategy has outperformed each of my sector-targeted mutual funds consistently over the years.
That would mean your self-directed portfolio is not nearly as diversified as is your mutual funds portfolio.
Hence, that also means it's highly likely you are taking far more risk in your self-directed portfolio than you are in your mutual fund portfolio.
Which brings me back to the questions I asked you a couple of weeks ago:
1. What is your risk-adjusted return on your portfolio? and;
2. Are you being rewarded for the risk you're taking?
Then, again, What is your time-weighted, dollar-weighted rate-of-return?
1. I've never calculated the risk-adjusted return on my portfolio because, frankly, I don't care to. I figure if my portfolio is a mirror of the top 25% of my 4 top-rated mutual funds, then I'm taking an acceptable risk, especially considering my portfolio has a much smaller total amount than my mutual funds.
2. Yes I am being rewarded for my risk, since the percentage of return has been greater than in my mutual funds over the same periods.
As for time and money-weighted rate of returns, I'll leave that for you "professionals" to calculate. I've been pleased with the returns in all of my equity funds, and they stack up nicely compared to returns in other similar funds over the same periods. That's all I need to know.
"2. Yes I am being rewarded for my risk, since the percentage of return has been greater than in my mutual funds over the same periods."
Yet you admit you have no clue if you are being rewarded for the risk you are taking.
If you are taking twice the risk of your benchmark, then you need to be getting TWICE the returns in order to be compensated for the extra risk. If you are taking 50% more risk, you should be getting 50% more returns
Simply getting better returns means nothing by itself.
Did you get twice the returns? 50% more?
Don't know, do you?
Just one more piece of evidence as to why do-it-yourselfers should never be do-it-yourselfers.
Not that it matters to your personal return, but you’re comparing apples to oranges. Sector funds are limited to a certain sector, even within that sector, they are required by law to be more diversified than your “fund.” In addition to that, you really aren’t doing your own research, your piggybacking off of someone else’s research.
It’s akin to saying that you can build a faster car than Lamborghini can. All you have to do is utilize all their research, except leave off all the emission control crap that they are required by law to use.
Grey Ghost's Link
Here are the percentages of returns from a few major indexes over the last year, per my link.
DJIA - 25.20%
NASDAQ - 24.50%
US broad market - 18.10%
Highest Sector Return - US Technology at 32.29%
My self-managed portfolio - 45%
Can I pat myself on the back for doing something right with my self-managed portfolio, considering it has outperformed any of those major indexes consistently of the last year, as well as much longer periods?
Sorry, but by your own admission, you are NOT invested according to ANY of those indecies, nor, it seems, do you even remotely have a clue about what I'm asking you.
Why would I include all the emissions crap on my Lamborghini if I didn't have to? I didn't say I did all the research. I just figured out whose research to copy. Isn't capitalism a wonderful thing?
You know I have great respect for you, but you are totally screwing this up!
Indeed it is. It's the best system ever designed for creating wealth.
Apparently right up until someone uses a seminar to market their services.
I've answered all your questions to the extent I'm willing to over a public forum. If you want additional information, you know how to contact me privately.
It's always a pleasure, my friend.
You've totally avoided answering my questions as you are seemingly admitting.
I can only take your asking me to take my questions 'private' as an admission you do not want to address them in public because you can not.
You assume wrong. I'm happy to discuss my financial situation with you privately. I won't discuss it, specifically, over the internet. Capeesh?
I am not asking you to disclose private information.
I am simply asking you to answer a few simple questions, which obviously you cannot do because you haven't got a clue as to how to answer them.
OK. you're right. Thanks for chatting.