July 08, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to email@example.com
Daniel and Amy in Cincinnati: Do you see the stock market crashing anytime soon? Because we’re due at some point, right?
Answer: While everyone would like to know the exact bottoms and tops of the stock market, it’s not possible. But consider this: every “bear market” (defined as a price drop of at least 20 percent) in the past 50 years occurred when there was an economic recession (except for one). At Simply Money Advisors, we pay close attention to recession risk as a guide for a general view of the markets. The good news is that, right now, the risk of a recession happening over the next six to nine months is very low.
But you should also look at the stock market from a broader perspective. Just think about some of the really terrible and scary events in our country’s history that have caused stocks to fall: The Great Depression, World War I and II, the Cuban Missile Crisis, a presidential assassination, the tech bubble in the 2000s, the terrorist attacks on September 11th, the Great Recession. Yes, markets have big drops from time to time. But after every single event or crash, stocks eventually recovered!
So take a long-term view and try not to worry about the day-to-day noise. Simply Money Advisors recommends working with a trusted financial planner (preferably a CERTIFIED FINANCIAL PLANNER™ or a Chartered Financial Consultant®) to help you develop a personalized financial plan that will get you on track to reach your financial goals and objectives. When you have a well-defined goal in mind (and a strategy to achieve it) it’s easier to handle the ups and downs of the stock market. Your planner can also support you through the occasional wild swings of the market by becoming your emotional sounding board.
The Simply Money Point is that, yes, one day in the future, something will trigger the stock market to drop 10 percent, 20 percent, maybe even 40 percent… but no one knows precisely what or when. Your best line of defense is to have a long-term financial plan in place to help you navigate the market turbulence. And try this, too: constantly remind yourself that just like America, the stock market is resilient.
Joseph in Delhi Township: I want to save in a Roth IRA, but I make more than what’s allowed. I’ve heard of something called a backdoor Roth. Is this something I should consider?
Answer: A Roth IRA allows you to make after-tax contributions in exchange for tax-free growth on earnings once you’ve held the account for five years and are at least 59 ½ years old. However, as you mention, there are income eligibility limits for saving in a Roth IRA: if your 2018 adjusted gross income (AGI) is more than $135,000 as a single tax filer, or more than $199,000 if you’re married and filing jointly, you cannot contribute.
This is where a “backdoor” Roth IRA can come into play: in its simplest form, all you do is convert a traditional IRA to a Roth IRA. Doing this allows you to avoid the income limit and even the annual contribution limit.
But here’s the important point to keep in mind: converting your money via this backdoor method does not mean you’re avoiding taxes. Since the money in your traditional IRA is pre-tax money (in most cases), you’ll need to pay taxes on that money when you do the conversion. Ideally, the money you use to pay that tax bill should come from an outside source – not from the money you’re converting.
As for whether or not you should do a backdoor Roth IRA? That’s dependent on your personal circumstance. At Simply Money Advisors, we like the idea of having some tax-free money available in retirement. But you should seek the advice of a trusted financial planner and/or tax professional before you make any decisions – especially since certain aspects of a backdoor Roth IRA can be a tax minefield.
The Simply Money Point is that a backdoor Roth IRA can be an option if you make too much money to contribute to a Roth IRA the “normal” way. And if you don’t want to mess with doing a backdoor Roth IRA, don’t forget: if you have access to a Roth 401(k) through your employer, there are no income eligibility limits for contributing to that type of account which also gives you tax-free growth.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email firstname.lastname@example.org.