When is it a good idea to pay the tax?

Who really enjoys the US tax paying process?  Most of us would not volunteer to pay more taxes than we owe.  But in some cases it may be a good idea to pay more tax this year.  How about if you could pay no taxes later? Converting your Traditional IRA to a Roth IRA may allow you to do just that!

A Traditional IRA defers a portion of income before taxes to an account in which the principal and growth are tax deferred until the saver withdraws the money in retirement.  The idea is to delay paying taxes now when the saver is in a high tax bracket and wait to withdraw the funds in retirement when the saver is presumably in a lower tax bracket.  A Roth IRA works differently in that the saver pays the tax on the income now but withdrawals the money in retirement tax free.
 
When to consider a Roth IRA conversion ?

1.        Tax bracket this year?  If you are in a high tax bracket or if the additional income from the conversion pushes you into a higher bracket it is generally not favorable to convert to a Roth IRA.  However, if for you are in low bracket this year it may be a good idea.  For example, if you were laid off during the year and your taxable income is significantly lower a Roth IRA conversion might make sense.  If you have substantial tax deductions such as medical expenses which lower your income a Roth IRA conversion may be right for you. 
 
2.       Tap current IRA funds in the next five years?  Generally, you must wait five years to tap any of the gains from your Roth IRA.  If you may need the IRA funds a Roth IRA conversion may not be right for you as you may end up paying taxes twice on the same funds.

3.        Time until retirement?  A long time horizon can make the conversion to a Roth IRA a better idea.  The longer your savings can accumulate tax free the more savings you should accumulate. 

Use our Roth IRA Conversion calculator on our website at www.marketcapitalmanagement.com and to determine if a Roth IRA conversion is right for you.

We would love to hear what you think. Feel free to follow our blog, give us a call or email us…until next time

John H. Heil, Senior Financial Blogger
 
This information is for general purposes only. This information is not intended to be a substitute for specific professional financial advice. Please see a financial professional in regards to your own individual situation.

Start by making your bed, start investing even if it is a little

Last June at University of Texas at Austin 2014’s Commencement Admiral William H Raven, Ninth Commander of U.S. Special Operations, Command gave the commencement speech to the new graduates.  Admiral Raven is a Navy Seal and his speech was about the things he learned at Seal training 36 years ago.

One of the things Admiral Raven speaks about in his commencement speech is about making his bed every morning.  This was one of his defining moments to creating change in the world.

We can use this as an easy first step to start an investment plan.  Many people believe starting a retirement plan is difficult and complicated.  The best way to start any plan is to do something easy.  My advice is to enroll in your 401k at work.  This simple task can be the start of a savings plan.  It is like making your bed every morning.  By saving a little from each paycheck your effort at work can have a positive reward. Similarly to if you accomplish nothing else, in a single day…at least you accomplished making your bed.

If you do not have access to a 401k, start investing in an IRA or other savings plan.  Make it easy by automatically deducting a contribution from your primary bank account or paycheck.  If you start an automatic plan you may be less likely to stop.   In a few months when you review your statement and realized that you can save, it is more likely you will increase your savings than lower your savings.

Finally, don’t sweat when you hear the headlines about how tough the world is today.   Our country has been through two world wars and four other wars.  A President was assassinated and another was shot.  We survived two market crashes, a depression and a financial crisis.  We have had Republican and Democratic Presidents and Congresses and each time as a country we have come through stronger.  Those investors that stay the course may change their lives for the better.

So how do you change your world?  Start by making your bed, start investing even if it is a little at a time; by doing these two things each day when you come home you may have a nice bed to fall into and a little more money in your pocket.

Link to Admiral William H Raven, ninth commander of U.S. Special Operations Command University of Texas commencement speech:  https://www.youtube.com/watch?v=pxBQLFLei70

We would love to hear what you think. Feel free to follow our blog, give us a call or email us…until next time
John H. Heil, Senior Financial Blogger

The Good News and Bad News of lower oil prices

The other day I filled up the tank of my wife’s Prius for under $25. That is over 25% less expensive than one year ago. With the holiday shopping season on its way, every penny saved is a good thing.  Yet for most every action there is an equally opposite action and this may be true with gas prices as well. 

Oil producers and their associated industries have seen their stock prices decrease in value.  Last Thursday OPEC met to discuss production levels and prices. With Saudi Arabia leading the way the cartel voted to keep production at current levels. The strategy appears to put pressure on US shale oil producers. Most analysts believe the price of oil needs to be around $70 a barrel for producers to be profitable. By keeping prices low OPEC is hoping US shale producers will lower their production and therefore help push up the price of gas in the US. In addition, without the oil production from US shale producers OPEC could take a larger share of the market. 

The big question is whether OPEC’s strategy will work. In the long term, the shale producers most likely will not shut down and walk away because too much infrastructure and money has been invested.  One analyst actually sees a silver lining for the US shale producers. Norbert Ruecker, head of commodity research at Julius Baer thinks OPEC’s new strategy may force the US shale producers to find new ways to lower production costs. In the long run this may keep oil prices low but also allow for all oil producers to make a profit. 

This leads us to the good news of filling up the wife’s Prius tank for under $25 bucks. According to the American Automobile Association gas prices have dropped below $3.00 a gallon. AAA estimates this helps consumers save about $250 million per day as compared to the last few months of summer when prices averaged $3.68 a gallon. 

This savings is like a tax cut for the average American. It’s a good time of the year for the savings to flow into our pockets.  The biggest beneficiaries may be retail companies. Holiday retail sales started mediocre over Black Friday with the physical stores sales down but internet sales up 11%. Hopefully the extra dollars in our pockets will make for a jolly season. 

Alternatively, it is possible consumers learned a lesson from the financial crisis and decided to sock away the extra money in their pockets.  If so that could keep the economy on this slow growth path we have been experiencing. Generally, we can only hold out so long until we need to buy new appliances, cars and clothes. So enjoy the low gas prices while they last. Most analysts believe when the spring comes prices will begin to rebound and over $3.00 a gallon will be back. 

We would love to hear what you think. Feel free to follow our blog, give us a call or email us…until next time

John H. Heil, Senior financial blogger