After the first few days of trading to start 2016, I am sure this question is on the minds of many investors. The start of 2016 has been less than stellar for the stock market and I am sure it has caused some nervousness in the investment community. There are many problems in the world today and it seems that the news only reports the negative; rarely does the news report the positive that is happening around the world. This tends to exacerbate the negativity surrounding the market and causes more volatility. While volatility can make your stomach churn, it can also create opportunity.
Let’s take a look at the historical significance of the last five days of the trading year and the first five days of the trading year. The last five days of the trading year are usually termed the “Santa Claus rallyâ€, because the market is up most of the time during that period. We did not see this at the end of 2015. Historically speaking this is an indicator that the following year will be negative. The first five days of the trading year are a very good indicator of what the market will do for the rest of the year. In fact, when the market is up the first week of the year it usually finishes positive over 85 percent of the time. If the market is down the first five days of the trading year, the chance that we have a positive year drops to just over 50 percent. That is a very large drop in odds that we will have a good year in 2016.
I know what everyone reading this is thinking. The world is a mess. China is falling apart. There’s a credit bubble that was created by the Federal Reserve. North Korea has an H-bomb. I could go on and on, but I won’t. The one factor that we need to look at with any investment is how much money does this company earn? At the end of the day, earnings are what moves stock prices. There are many solid companies that have already reached bear market territory. By definition that means they are down more than 20%.
There is one question you need to ask yourself, am I an investor or am I a short term trader? Investors make money over the long term by taking advantage of selloffs like the one we are experiencing. Traders try to pick the direction of the market on a daily basis. In my 20 years of experience, I have rarely seen someone who is a successful trader, but I have seen many successful investors. Make sure you know what camp you fall in or you will lose money.  The opinions expressed in this article are that of the authors and should not be considered investment advice for your unique financial situation.
Am I eligible to Convert my Traditional IRA to a Roth IRA?
Converting your Traditional IRA to a Roth IRA can be one of the best financial decisions made when saving for retirement if done correctly. Prior to 2010 there was an income limit that restricted the conversion to a Roth IRA if your (AGI) was over $100,000. As of 2013, the income limitation does not exist for a conversion, but it still exists for contributions. This does not mean it will not come back in the future, but for 2013 and beyond anyone can convert an existing Traditional IRA to a Roth IRA regardless of income.
For example, someone has a Traditional IRA with $350,000 invested, that IRA can be converted to a Roth and all the taxes need to be paid for the tax year the conversion was completed. After converting to a Roth, the money grows tax-free. Paying the taxes on this money now might sound like a tough pill to swallow, but the potential tax savings down the road can be significant. Wouldn’t you rather pay taxes on $350,000 now than pay taxes on $1,000,000 in the future? One of the keys to doing this correctly is paying the taxes with funds outside of a qualified plan. Paying the taxes with money from the IRA defeats the purpose and will negate the full tax saving potential.
This is just one example of completing a Roth conversion. You can do partial conversions as well. This means you do not have to convert the entire account. You could develop a strategy of doing partial Roth conversions over multiple years. The key is to consult with your tax advisor or accountant to make sure the conversion will not put you into another tax bracket. Every dollar you convert is taxed at your ordinary income tax rate. This strategy works best for younger investors who have longer to allow the money to grow and compound. It can also work well for an older investor who is in a low tax bracket. Another reason to convert to a Roth is that Roth IRAs are not subject to the Required Minimum Distribution after you reach age 73. For those of you out there that do not plan to use your IRA money to live this can be a huge advantage when it comes to passing along your IRA to your beneficiaries. Roth IRAs continue to grow tax-free after the conversion and after you die. There are distribution requirements for the beneficiaries, but the distributions are tax-free as well.
This strategy might not be right for everyone. I would advise you to consult with a Certified Financial Planner™ or your tax advisor prior to taking advantage of this potentially large tax savings. One of the best times to complete a Roth conversion is when the value of your Traditional IRA has fallen due to a market correction like we experienced in 2022. If you have questions on this article or would like to schedule a free financial review. Please contact Jay Chapman at 772-320-9658 or email [email protected].
