Minimizing Taxes on an $845k Roth Conversion: What Are My Options?
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There’s no way to entirely avoid paying income taxes when you convert a traditional IRA into a Roth account. However, with smart financial planning you can reduce the impact of those taxes.
By converting your portfolio in segments rather than all at once, you can keep your taxable income down and avoid entering a higher tax bracket. This, in turn, can reduce the amount that you pay on each dollar that’s converted over time.
Say that you have $845,000 in a traditional IRA that you want to convert into a Roth IRA while also reducing the tax hit on the conversion. Here’s how you could think about it.
A financial advisor can help you roll over your retirement savings into a Roth IRA and manage your investments. Connect with a fiduciary advisor today.
There are, generally speaking, two types of tax-advantaged retirement accounts: pre-tax and post-tax.
Pre-tax accounts, such as 401(k)s and traditional IRAs, offer a tax deduction at the time of investment. Each year you can invest up to the annual IRS contribution limit and pay no taxes on that money, making it cheaper to save more. Then, in retirement, you pay income taxes on all withdrawals (including the original contributions).
Post-tax accounts, such as Roth IRAs, offer a tax advantage at the time of withdrawal. Each year you can contribute up to the annual limit with money that you’ve already paid income taxes on. Then, in retirement, you pay no taxes on your withdrawals.
A Roth conversion is when you roll money over from a pre-tax portfolio into a Roth IRA, paying income taxes on the money that you convert. Once you make this conversion, your portfolio will grow and operate according to the rules of a Roth IRA.
Unlike Roth IRA contributions, which are capped at the annual IRA contribution limit ($7,000 in 2024), there is no limit to Roth conversions. You can make as many conversions as you would like each year, in any amount. For example, say you have $845,000 in a traditional IRA. You could convert up to the entire amount in one year or you convert it bit by bit over a number of years.
Anyone approaching retirement should be aware that Roth conversions are subject to a five-year rule: money that’s converted cannot be withdrawn for at least five years (unless you’re 59 ½ or older). Withdrawing any of the converted funds before the cooling off period ends will trigger a 10% early withdrawal penalty. However, a financial advisor can help you determine how and when to do a Roth conversion.
Stock rally stumbles with Nvidia earnings on tap: What to know this week
The feverish post-election stock market rally came to a screeching halt last week.
For the week, the S&P 500 (^GSPC) fell more than 2%, while the Dow Jones Industrial Average (^DJI) shed more than 500 points or nearly 1.3%. The tech-heavy Nasdaq Composite (^IXIC) sank over 3%.
Two firm inflation readings and commentary from Federal Reserve Chair Jerome Powell weighed on markets last week, with growing uncertainty over the Fed’s rate path outweighing previous investor excitement over Trump’s potential policy agenda.
In the week ahead, a few economic data releases are expected to add to that narrative, with activity in the services and manufacturing sector and a consumer sentiment reading headlining the schedule.
Earnings, however, will bring attention back to some of the biggest names in the corporate world after a few weeks of macro and political events dominating investor mindshare.
Key among these reports will be earnings from AI leader Nvidia (NVDA), which is set to report results after the bell on Wednesday. Quarterly results from Walmart (WMT), Target (TGT), BJ’s (BJ), and Deere & Company (DE) will also be in focus.
Since the Federal Reserve slashed its benchmark interest rate by half a percentage point on Sept. 18, bond yields have ripped higher. The 10-year Treasury (^TNX) yield rose by 80 basis points between that date and the days following the election to trade near 4.5%.
That move in rates hadn’t been an issue for the stock market rally until last week.
While strategists have pointed out that a move higher in rates supported by stronger-than-expected economic growth could be welcome news for stocks, recent inflation data has thrown a wrench in that thesis.
On Wednesday, the “core” Consumer Price Index (CPI), which strips out the more volatile costs of food and gas, showed prices increased 3.3% annually for the third consecutive month during October. On Thursday, the “core” Producer Price Index (PPI) revealed prices increased by 3.1% over last year in October, up from 2.8% the month prior and above economist expectations for a 3% increase.
Later on Thursday, Powell said in a speech the Fed doesn’t need to be “in a hurry” to lower interest rates given the strength of the US economy. Markets moved lower on the comments, and the selling continued on Friday, with the Nasdaq Composite sliding more than 2.2% for the session.
“Slower progress on inflation in recent months may prompt the Fed to reevaluate its pace of easing moving forward,” Wells Fargo’s economics team led by Jay Bryson wrote in a weekly note to clients on Friday.
Ask an Advisor: I'm Getting Mixed Advice. Will I Owe Taxes When I Roll Over My Roth 401(k) to a Roth IRA?
I have an after-tax 401(k) that I would like to roll over to a Roth IRA with Schwab. Experts at Schwab say it can be rolled over to a Roth IRA without paying any taxes. I think they are wrong as I will still have to pay taxes on the earnings and capital gains accumulated over the years. I have talked to two other fiduciary financial planners and they are also leaning toward Schwab thinking.
What do you advise? It will be an in-service rollover as I am 82 and still working full time. I also have a pre-tax 401(k) that I am not planning to roll over yet. Thanks in advance for your invaluable help.
– Brahma
Contributions and the earnings they generate are not taxed when you roll over a Roth 401(k) directly to a Roth IRA. However, if your employer made pre-tax matching contributions, you would need to roll those funds into a traditional IRA or pay income taxes on them as part of a Roth conversion. In addition, the five-year rules would apply to the Roth IRA account, which could result in taxes on withdrawals if they were made before then. (Planning for retirement can be complicated, but working with a financial advisor can help you take control of the process.)
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Roth 401(k)s are employer-based retirement plans funded with money you’ve already paid income tax on. Contributions to Roth 401(k) accounts are subject to annual IRS maximums. In 2024, you can contribute up to $23,000 to a 401(k), plus an extra $7,500 if you’re 50 or older. You can participate in a Roth 401(k) no matter how much money you make.
The money in your Roth 401(k) grows tax-free. You won’t pay any taxes on earnings or gains within the account. When you retire, all withdrawals will be tax-free long as they’re qualified distributions. To count as a qualified distribution:
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It has to be at least five years since you made the first contribution. Opening the account doesn’t start the five-year clock if you don’t put money in at that time.
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You have to be at least 59 ½ years old or disabled.
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If any of the conditions aren’t met, the account earnings – but not your original contributions – will be taxable on withdrawal.
(If you need help deciding between a traditional pre-tax 401(k) and a Roth 401(k), consider talking it over with a financial advisor.)
Before the SECURE Act 2.0 was passed in December 2022, employers could only make pre-tax matching contributions to their employees’ Roth 401(k) accounts. So, the employee would make after-tax contributions to their own accounts, and the employer would match those with pre-tax dollars. SECURE 2.0 allows for employers to make matching contributions directly into their employees’ Roth 401(k) accounts.
With $1.4 Million at 59, Can I Cover $5k Monthly Expenses in Retirement?
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When thinking about whether you’re financially prepared to retire or not, you’ll want to think about it in a certain way. You have a lifestyle that you would like to maintain, and a portfolio that can safely generate a specific amount of income each year. Once your costs and means overlap, you can afford to retire.
Here, we have $1.4 million in assets and $5,000 in monthly expenses. Depending on your personal situation, this type of portfolio may last through retirement with proper planning and if you can supplement it with enough Social Security income, but the bigger question is if you should you retire before 60.
Do you have specific questions about retirement? Speak with a financial advisor today.
At age 59, you’ll retire six years early and eight years early by Medicare and Social Security standards, respectively. This raises several issues, all of which will shift your retirement costs.
For the sake of this example, let’s say that on average someone in their 60s can expect to live until around age 87. This has given rise to the standard 4% rule of retirement planning. Anticipating 25 years of withdrawals lets a 67 year old retiree plan for their average life expectancy with some room for happy error.
If you retire at 59, you may want to plan, using this example, for more like 35 years-plus of withdrawals to cover the same room for error. In that case, you will probably want to plan for annual withdrawals in an amount less than 4%.
The earliest you can plan on taking Social Security is age 62, but doing so would lock in reduced benefits for life. To collect “full” Social Security benefits, you will need to wait until age 67, and to collect maximum benefits you will have to wait until 70. This will increase the amount you need to withdraw from your portfolio as you wait for benefits to kick in.
You will become eligible for Medicare at age 65. Between now and then, you will need to pay for your own health insurance. This will add to your monthly costs, meaning you should plan for more like $5,500 per month, on top of the standard gap insurance and long-term care insurance that most retirees need to anticipate.
Finally, the longer you spend in retirement, the more you will need to anticipate inflation. Ideally, you can build an investment strategy that helps your portfolio cope with rising prices, or, at least for as long as the portfolio lasts.
Gaetz Nomination In Peril Due To GOP Resistance
Matt Gaetz‘s nomination for attorney general may already be in trouble due to resistance from members of his own party.
What Happened: The Florida Republican’s nomination by President-elect Donald Trump has sparked concerns among Republican senators due to allegations of sexual misconduct and illicit drug use.
They have backed Senate Judiciary Committee Chair Dick Durbin‘s request for the House Ethics Committee to disclose the results of its investigation into Gaetz, which was terminated by Gaetz’s resignation from Congress late last week.
Senators Lisa Murkowski (R-Alaska) and Susan Collins (R-Maine) have openly expressed their apprehension about Gaetz’s nomination. If four Republican senators vote against Gaetz, it could potentially derail his nomination.
Also Read: Kevin McCarthy Says Matt Gaetz Won’t Get Confirmed By The Senate And ‘Everybody Knows That’
Former House Speaker Kevin McCarthy and Sen. Kevin Cramer (R-N.D.) both believe that Gaetz is unlikely to secure the necessary 50 votes to become attorney general.
Why It Matters: Despite the opposition, some believe that Trump’s nomination of Gaetz could be a strategic move to shift focus away from other contentious nominations.
These include Pete Hegseth for the Pentagon and former Rep. Tulsi Gabbard (D-Hawaii) for director of national intelligence.
Trump’s controversial nominations have already stirred up discord among Senate Republicans. Sen. Tommy Tuberville (R-Ala.) has cautioned his fellow Republicans to back Trump’s nominees or risk political fallout.
Read Next
Gaetz Is Trump’s Attorney General Pick: Would-Be Top Cop Is Under House Ethics Investigation
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AAII Survey Unveils Shift In Investor Sentiment: Bullish Outlook Gains Traction
Recent data from the AAII Sentiment Survey indicates a notable shift in investor sentiment, with a significant decrease in neutral outlook towards the short-term prospects for stocks.
What Happened: The AAII Sentiment Survey demonstrated a decline in neutral sentiment among individual investors concerning the short-term forecast for stocks. Interestingly, both optimism and pessimism experienced a rise.
Optimism about stock market performance over the next six months rose by 8.3 percentage points, reaching 49.8%. This level of bullish sentiment is significantly higher than the historical average of 37.5% and has exceeded the average in 53 out of the past 54 weeks.
Conversely, neutral sentiment—the expectation that stock prices will remain stable—dropped 9.1 percentage points to 21.8%.
According to the survey, this figure is well below the historical norm of 31.5%, marking the 18th instance in 19 weeks where it has fallen short of the average.
Meanwhile, bearish sentiment, which reflects expectations of a market decline, edged up by 0.8 percentage points to 28.3%, remaining below its historical average of 31.0% for the 13th time in 14 weeks.
The spread between bullish and bearish sentiment widened by 7.5 percentage points, settling at 21.5%. This spread is notably higher than the historical average of 6.5%, maintaining this elevated status for 27 of the last 28 weeks.
Also Read: Just How Bullish Is The Market On Trump’s Election Win? To Find Out, Look To The Past
In the wake of former President Donald Trump’s election win, Main Street investors are making a beeline for stocks. This trend, while potentially driving short-term market momentum, is traditionally viewed as a bearish indicator.
Last week, the AAII asked its members how the outcome of U.S. elections is influencing their short-term outlook on stocks. Responses revealed a range of perspectives: 39.8% said the elections made them more optimistic, 22.8% preferred to take a wait-and-see approach, 18.3% felt more cautious or pessimistic, 16.3% reported no impact, and 2.4% were unsure or had other opinions.
A report by J.P. Morgan revealed that individual investors have funneled over $9 billion into exchange-traded funds and individual stocks within the last week. This investment surge is 3.2 standard deviations above the 12-month average, marking the highest inflow since March 2022.
Despite the S&P 500’s recent milestone of closing above 6000 for the first time and its over 25% increase this year, experts urge caution. The S&P 500 is trading at 22.3 times the earnings expected for next year, up from 19.7 times at the start of 2024.
Why It Matters: The shift in investor sentiment is significant as it provides insight into market trends and potential future movements. The decline in neutral sentiment suggests that investors are taking a more decisive stance on the market, with an increase in both optimism and pessimism.
This could potentially indicate a more volatile market in the short-term.
Read Next
Here’s How Trump’s Policies Might Shape The Market’s Future
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Abu Dhabi Royal’s Firms, IPOs Propel UAE Bourses to $1 Trillion
(Bloomberg) — Stocks listed in the United Arab Emirates are now worth more than $1 trillion for the first time, helped by a surge in firms tied to an Abu Dhabi royal that account for more than a third of the total value, and a flurry of local listings.
Most Read from Bloomberg
That makes the combined UAE market, which includes exchanges in Dubai and Abu Dhabi, bigger than Milan or Madrid. While dwarfed by the nearly $3 trillion Saudi Arabian bourse, the UAE is larger than most emerging markets, barring a few like India and China, according to data compiled by Bloomberg.
A particularly eye-catching feature of the $1 trillion milestone is the weighting of companies linked to Sheikh Tahnoon bin Zayed Al Nahyan. The royal — one of Abu Dhabi’s two deputy rulers, the UAE’s national security adviser and brother to its president — has emerged as one of the most important names in global business and sits atop a $1.5 trillion empire.
That includes International Holding Co., which is chaired by Sheikh Tahnoon and is the UAE’s largest public company. IHC has surged over 43,000% in the past few years, giving it a market capitalization of close to $250 billion — a quarter of the combined exchanges’ value.
Locals own 88% of IHC, according to data from the Abu Dhabi bourse. Once an obscure fish-farming company, the firm is now at the forefront of a drive to diversify the UAE’s economy away from oil. The company and its units — some of them listed in Abu Dhabi — have made investments spanning everything from Rihanna’s lingerie line and Elon Musk’s SpaceX to Aldar Properties PJSC, the emirate’s largest property developer.
Sheikh Tahnoon is also chairman of First Abu Dhabi Bank PJSC, which last year considered an offer for Britain’s Standard Chartered Plc. Together, the lender and IHC have a weighting of over 50% on Abu Dhabi’s benchmark FTSE ADX General Index.
The $1 trillion milestone has long been coveted by Abu Dhabi’s ruling family, and the stock market’s growth reflects their ambitions to turn the city into a global financial center. Members of the emirate’s Al Nahyan clan expect rising values to attract international capital and encourage local investors to keep their money in the country, Bloomberg News reported in April.
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Prediction: 3 Stocks That'll Be Worth More Than Tesla 10 Years From Now
Tesla (NASDAQ: TSLA) is back. Shares of the electric vehicle (EV) maker plunged as much as 43% earlier this year. The stock has been on a roll since late April, though, soaring more than 130%.
Thanks to the strong rebound, Tesla once again boasts a market cap of over $1 trillion. I’m unsure how the stock will perform going forward. However, I predict that 10 years from now, the following three stocks will be worth more than Tesla.
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Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) is arguably the easiest pick in my prediction. The conglomerate’s market cap of $1.01 trillion is already neck and neck with Tesla’s.
How could Berkshire vault past Tesla? Its core businesses — insurance, energy, and railroads — are kind of like the tortoise in Aesop’s famous fable versus Tesla as the hare. They might not seem as exciting, but they could ultimately win the race.
I also fully expect Warren Buffett and his team to have ample opportunities to put Berkshire’s $325 billion cash stockpile to work over the next few years. Buffett isn’t buying many stocks these days because of valuation concerns. It’s just a matter of time, though, before a market downturn creates more bargains the legendary investor could like.
My prediction could fall flat on its face if Tesla’s robotaxi market is as huge as Ark Invest CEO Cathie Wood thinks. However, Tesla is a laggard in the market, trailing well behind Alphabet‘s Waymo unit. Meanwhile, competition in the EV market is also increasing. I think Buffett and Berkshire are safer, steadier bets than Elon Musk and Tesla.
Broadcom (NASDAQ: AVGO) has more ground to cover to become larger than Tesla. However, its market cap of around $810 billion puts the semiconductor maker within striking distance.
Artificial intelligence (AI) should continue to serve as a major tailwind for Broadcom. The company’s ethernet networking equipment and custom AI accelerators will likely enjoy strong, growing demand over the next decade. I look for Broadcom’s acquisition of VMware to pay off handsomely, too.
Broadcom is one of the most attractively valued AI stocks, with a price-to-earnings-to-growth (PEG) ratio of 1.22 based on five-year growth projections from analysts surveyed by LSEG. By comparison, Tesla’s PEG ratio is a sky-high 9.42.
For my prediction about Broadcom leapfrogging Tesla to come true, AI demand must increase from the current already high level. I think that’s a real possibility, though, especially if key breakthroughs are made in the use of AI agents and perhaps in artificial general intelligence (AGI).
Palantir Stock vs. Alphabet Stock: Billionaire Ken Griffin Sells One and Buys the Other
Analysts at Forrester Research recently recognized Palantir Technologies (NYSE: PLTR) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) as market leaders in artificial intelligence (AI) and machine learning platforms, which are collections of tools that support model training and application development.
However, billionaire Ken Griffin of Citadel, the most profitable hedge fund in history as measured by net gains since inception, sold Palantir’s stock and bought Alphabet’s stock during the third quarter, as detailed below:
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Sold 5.1 million shares of Palantir, reducing Citadel’s position by 91%
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Bought 244,835 shares of Alphabet, increasing Citadel’s stake by 20%.
Here’s what investors should know about these market-leading AI companies.
Palantir specializes in data analytics, but the company has become a major player in the artificial intelligence (AI) platforms market due to its Artificial Intelligence Platform (AIP). AIP is a relatively new product that adds generative AI capabilities to its core analytics platforms, Gotham and Foundry. Collectively, those products let businesses integrate and query data for insights that improve decision-making.
Palantir says the quality that differentiates its software from other data analytics products is an ontology-based architecture. Ontology refers to a software layer that links digital data to real-world objects and defines the relationships between them. Users can interact with the ontology with analytical tools for the purpose of analyzing information and automating tasks.
Palantir reported solid results in the third quarter. Its customer count jumped 39% to 629, and the average existing customer spent 18% more. In turn, revenue increased 30% to $726 million, marking the fifth straight sequential acceleration in sales, and non-GAAP (non-generally accepted accounting principles) earnings jumped 43% to $0.10 per diluted share. Suffice it to say that Palantir’s business is booming.
However, Malik Ahmed Khan at Morningstar recently drew a key distinction between the business and the stock. “If you look at the fundamental business quality, Palantir is an incredible name with a lot of opportunity in AI, and beyond AI in big data,” he told Yahoo Finance. “But when we look at valuation, it just seems like the fundamentals do not align.”
Wall Street expects Palantir’s adjusted earnings to increase 31% over the next 12 months. That makes its current valuation of 188 times adjusted earnings look absurdly expensive. Investors should avoid this stock, and current shareholders should consider trimming their positions. Unless earnings growth outstrips expectations by a wide margin, Palantir shares are likely headed for a meltdown at some point.
Should You Forget Bitcoin and Buy Dogecoin Instead?
Bitcoin‘s (CRYPTO: BTC) price has more than doubled during the past 12 months and is hovering near its all-time high. The approvals of its first spot price exchange-traded funds (ETFs) in January, its halving in April, two interest rate cuts, and Trump’s election victory brought back a stampede of bulls.
But Dogecoin (CRYPTO: DOGE) — which was originally created in 2013 as a parody of Bitcoin and named after a Shiba Inu dog — more than quadrupled during the past 12 months. In the past, Dogecoin’s price was often driven by Elon Musk’s unpredictable tweets about the cryptocurrency. He even made Dogecoin acceptable for payment at his car company, Tesla, for certain purchases in 2022.
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Dogecoin’s latest rally was mainly fueled by Trump’s election victory. The rally amped up after Trump said he would appoint Elon Musk and Vivek Ramaswamy to lead the planned Department of Government Efficiency (DOGE) to root out wasteful government spending. That news — along with Trump’s pro-crypto stance — helped Dogecoin outperform Bitcoin. So should investors buy this smaller meme coin instead of Bitcoin today?
Dogecoin was created from the open source code for Litecoin, another token that was previously forked, or split off, from Bitcoin’s blockchain. Just like Bitcoin and Litecoin, Dogecoin’s tokens were mined with the energy-intensive proof-of-work (PoW) consensus mechanism. But to differentiate itself from other PoW tokens, Dogecoin’s developers launched a new hashing algorithm called Scrypt, which consumed less power and processed transactions at a faster rate.
That upgrade attracted the attention of online supporters, who dubbed themselves the “Doge Army,” as well as high-profile investors like Musk, Mark Cuban, Snoop Dogg, Kevin Jonas, and Gene Simmons. As a result, Dogecoin’s price soared to an all-time high of $0.73 on May 8, 2021 — which represented a 47,279% gain from its earliest trading price of $0.001540753 on Jan. 23, 2014. That rally would have turned a $10,000 investment into $4.7 million.
But today, that same investment would be worth about $2.4 million. Two major challenges prevented Dogecoin from becoming the next Bitcoin or Ethereum. First, Dogecoin is an inflationary token that doesn’t have a supply cap. There are 150 billion Dogecoins in circulation as of this writing, and that supply is growing by about 10,000 tokens per minute. Bitcoin has a maximum supply of 21 million tokens, and 19.8 million of those tokens have already been mined. That scarcity makes Bitcoin more similar to gold and other physical assets than Dogecoin.