Articles for May 2016

Why Roth IRA Conversions Can Make Sense in a Down Market

When stocks struggle or tread water, going Roth gains merit.

Converting a traditional IRA to a Roth IRA is no easy decision. After all, it is a taxable event. When the stock market is down or sluggish, however, a Roth conversion has more appeal.

Traditional IRA owners “go Roth” for some very good reasons. A Roth IRA can be a resource for tax-free retirement money. When you are 59½ or older and have owned a Roth IRA for at least five tax years, you can make tax-free withdrawals from your account.1

Original owners of Roth IRAs never have to contend with Required Minimum Distributions (RMDs). They can also contribute to their IRA all their lives, provided they have earned income below a certain ceiling.2,3

In a sense, a Roth IRA functions as a tax management tool in retirement; you can put just about any investment subject to taxable income into a Roth IRA and forego paying taxes on that income in the future.3

Many people retire to a lower tax bracket. That fact alone is a good argument for timing a Roth conversion to coincide with retirement.

For example, say you contribute to a traditional IRA while you are working, all while you are in the 25% federal income tax bracket. Those contributions come with a perk; you may be saving up to 25 cents on every dollar you put into that traditional IRA, because traditional IRA contributions are tax-deductible in many instances. In this scenario, as you retire, you drop into the 15% federal income tax bracket. Making a Roth conversion at this point also comes with a perk: the conversion now costs 15 cents on the dollar instead of 25 cents on the dollar.3

Why is a poor year for stocks an auspicious moment for a Roth conversion? In a beaten-down market, the cost of conversion can be lower for retirees and pre-retirees alike.

As a mock example, suppose you own a traditional IRA that had a balance of $180,000 at the end of last year. You had hoped the bull market would push its value higher this year, but then the market waned, and now your traditional IRA is worth $170,000. Bad news, yes; if you want to “go Roth” with that IRA, though, there is a silver lining. The lower value of your traditional IRA means the tax bill on the conversion (i.e., the tax owed on the distribution of assets out of the traditional IRA) will be slightly lower. Additionally, when the market rallies in the future, you get growth in a Roth IRA with the potential for tax-free withdrawals, rather than growth in a traditional IRA where withdrawals will be taxed as regular income.4

Other financial factors can make a Roth conversion opportune. If you are unemployed, have major health care expenses, or face a net operating loss (NOL), it may also be a good time for this move. Any of these circumstances could leave you in a lower income tax bracket. An NOL, in fact, can offset the taxable income resulting from the conversion.4

If you are retired and in a low income tax bracket and have not yet claimed Social Security, those three factors may put you in a nice position for a Roth conversion.

A Roth conversion need not be all-or-nothing. Some traditional IRA owners opt for partial conversions; they “go Roth” with just a portion of their traditional IRA funds. A Roth conversion can even be recharacterized; that is, undone. If you want to undo a Roth conversion, in most cases, you have until October 15 of the following tax year to do so.5

When is a Roth conversion a bad idea? A few scenarios come to mind. One, you lack the ability to pay the income tax resulting from the conversion. Two, you are positive that you will be in a lower tax bracket than you are now when you start taking RMDs from your traditional IRA. Three, you have plans to relocate to a state with minimal or no state income tax. Four, you think you might make a major charitable IRA gift either at or before your death. Five, you are in your peak earning years and, correspondingly, in the highest tax bracket of your lifetime.

A Roth conversion is not for everyone, but it could be for you. The short-term tax hit may be a small price to pay for the potential benefits ahead. If you want to explore this move, by all means, talk with a tax or financial professional first. That conversation is essential.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – nerdwallet.com/blog/investing/know-rules-before-you-dip-into-roth-ira/ [1/29/16]
2 – irs.gov/Retirement-Plans/Roth-IRAs [12/17/15]
3 – time.com/money/4277306/how-to-contribute-to-a-roth-ira-if-youre-retired/ [4/4/16]
4 – usatoday.com/story/money/columnist/powell/2015/12/19/time-consider-roth-ira-conversion/75152514/ [12/19/15]
5 – irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Recharacterization-of-Roth-Rollovers-and-Conversions [7/14/15]

Puerto Rico Defaults

The island’s debt crisis worsens. Will Congress act before July 1?

On May 2, Puerto Rico defaulted on its debt again. As it managed to negotiate with some of its creditors, its Government Development Bank did pay part of the $422 million it owed this week, but about $270 million in payments were missed.1,2

Puerto Rico’s fiscal crisis made headlines last year when its total debt passed $70 billion, more than any U.S. state except for New York and California. Its government has defaulted three times on its debt since the start of 2015.3,4

Puerto Rico has been in a recession for the better part of a decade. About 45% of Puerto Ricans live in poverty, and people are leaving the commonwealth at a rate of 1,500 a week. Its schools, hospitals, and social services programs have already been hit with severe budget cuts.3,5

On May 1, Governor Alejandro García Padilla called the default “a painful decision,” but also a necessary one. Faced simultaneously with “the inability to meet the demands of our creditors and the needs of our people, I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”5

July 1 presents a critical deadline. On that day, the commonwealth must make about $2 billion in debt payments. Analysts are highly skeptical that Puerto Rico will be able to do that.1

Will Congress intervene? The pressure is certainly mounting on Capitol Hill lawmakers.

Will a bailout be necessary? Maybe not. Last spring, the House Natural Resources Committee attempted to put together a relief bill in response to the crisis. If passed, it would not represent a bailout, as it would not deliver any federal money to Puerto Rico. The bill is still in the works.1

In 2015, House Speaker Paul Ryan (R-WI) gave Congress a March 31, 2016 deadline to address this issue, but that deadline came and went without action. Treasury Secretary Jack Lew and the White House implored Congress to address the problem this week. In a letter to congressional leaders, Lew stated that minus “a workable framework for restructuring Puerto Rico’s debts, bondholders will experience a lengthy, disorderly, and chaotic unwinding, with non-payment for many a real possibility.”1,2

Lew also warned that without legislation including “appropriate restructuring and oversight tools, a taxpayer-funded bailout may become the only legislative course available to address an escalating crisis.” Since Puerto Rico is not a state, a Chapter 9 bankruptcy is not an option.4,5

What does this mean for bond investors? Greater levels of concern. American investors have bought Puerto Rico’s bonds for years, as they are exempt from federal and state income tax. Earlier this year, the commonwealth defaulted on $37 million of bonds issued by the Puerto Rico Infrastructure Financing Authority, which were not constitutionally backed. This week, Puerto Rico defaulted on bonds backed by its Government Development Bank. If the GDB cannot make the huge debt payment due July 1, then Puerto Rico will default on some of the general obligation bonds issued by its government.4

Most municipal bond funds have sold off their Puerto Rican debt and have not been greatly affected by these developments. Small investors holding Puerto Rican debt can take some solace in the fact that several Puerto Rican bonds are insured; in case of a default, the principal and interest would be protected by a bond insurance company. Contrast that with the plight of the funds still heavily invested in distressed Puerto Rican debt; as the commonwealth cannot declare bankruptcy, they may have to turn to regular courts in pursuit of payouts.4

Mike Moffitt may be reached at ph# 641-464-2248 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – thehill.com/policy/finance/278352-puerto-rico-defaults-as-islands-governor-pushes-congress [5/2/16]
2 – fortune.com/2016/05/03/puerto-rico-default-more-political-fallout-than-market-impact/ [5/3/16]
3 – bloombergview.com/quicktake/puerto-ricos-slide [4/28/16]
4 – abcnews.go.com/Business/wireStory/qa-puerto-ricos-debt-crisis-explained-38803972 [5/2/16]
5 – usatoday.com/story/money/2016/05/01/puerto-rico-expected-default-further-debts/83794076/ [5/1/16]

You Retire, But Your Spouse Still Works

That development may mean lifestyle as well as financial adjustments.

Your significant other may retire later than you do. Sometimes that reality reflects an age difference, other times one person wants to keep working for income or health coverage reasons. If you retire years before your spouse or partner does, you may want to consider how your lifestyle might change as well as your household finances.

How will retiring affect your identity? If you are one of those people who derives a great deal of pride and sense of self from your profession, leaving that career for life around the house may feel odd. Who are you now? Who will you become next? Can you retire and still be who you were? Hopefully, your spouse recognizes that you may have to entertain these questions. They may prompt some soul-searching, even enough to affect a relationship.

How much down time do you want? That is worth discussing with your spouse or partner. If you absolutely hate your job, you may want weeks, months, or years of relaxation after leaving it. You can figure out what to do next in good time. Alternately, you may see every day of retirement as a day for achievement; a day to get something done or connect with someone new. Your significant other should know whether you prefer an active, ambitious retirement or a more relaxed one.

How will household chores or caregiving be handled? Picture your loved one arising at 6:30am on a January morning, bundling up, heading for work and navigating inclement weather, all as you sleep in. Your spouse or partner may grow a bit envious of your retirement freedom. One way to offset that envy is to assume more of the everyday chores around the house.

For many baby boomers, caregiving is also a daily event. When one spouse or partner retires, that can rebalance the caregiving “equation.” One or more individuals have to provide 100% of the eldercare needed, and retirement can make shared percentages more equitable or allow a greater role for a son or daughter in that caregiving. Some people even retire to become a caregiver to Mom or Dad.

Do you have kids living at home? Adult children? Right now, in this country, every fifth young adult is living with his or her parents. With so many new college graduates having to accept part-time or low-paying service industry jobs, and with education loan debt averaging roughly $30,000 per indebted graduate, this situation will persist for years and, perhaps, even become a new normal.1

You and your loved ones may find yourself on different timetables. Maybe your spouse or partner works from 8:00 a.m. to 5:00 p.m. in a high-stress job. Maybe your children attend school on roughly the same schedule. How do they get to and from those places? Probably through a rush-hour commute, either in a car or amid the crowds lined up for mass transit. If you have abandoned the daily grind, you may have an enthusiasm and a chattiness in the evening that they lack. Maybe they just want to unwind at 6:30pm, but you might be anxious to reconnect with them after a day alone at home.

Talk about retirement before you retire. What should your daily life look like? What are the most important things you want out of the retirement experience? How do your answers to those questions align or contrast with the answers of your best friend? As you retire, make sure that your spouse or partner knows your point of view, and be sure to respect his or hers in the bargain.

Mike Moffitt may be reached at ph# 641-782-5577or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – chicagotribune.com/business/success/savingsgame/tca-boomerang-children-affecting-parents-retirement-plans-20160413-story.html [4/13/16]