Year: 2024

The IRS offers a legal loophole for circumventing the Roth contribution and income limits, though.

Contributing directly to a Roth IRA isn’t the only way to harness an after-tax retirement account. You can also convert tax-deferred assets held in a traditional IRA or 401(k) into Roth assets by paying income taxes on the money and rolling it over into a Roth IRA. There are no income limits for this backdoor conversion process, allowing high-income households to fund Roth accounts.

For example, say that you and your spouse together earn $400,000 per year, making you ineligible to contribute directly to a Roth IRA.

However, you could each contribute $7,000 to your traditional IRAs and then roll the money over into Roth IRAs, paying taxes on the money that year. You could do this once a year (ideally on January 1 to maximize untaxed gains) or carry out a series of conversions throughout the year. You could also each contribute $23,000 to your 401(k)s and roll that money over, too, giving you a combined $60,000 in annual Roth IRA contributions regardless of income.

If you want to speak with an expert about the backdoor Roth strategy or others, this tool can match you with financial advisors.

A backdoor Roth gives high-income households access to a post-tax portfolio, but it comes at a cost. Literally.

When you convert funds into a Roth IRA, you add the total amount that’s converted to your taxable income for the year. For example, if you and your spouse each converted $30,000, together you would pay taxes on the full $60,000, eliminating the tax advantages of making pre-tax contributions. For high-earners who likely are in higher tax brackets already, this can add significant costs.

This all can make a backdoor Roth complicated, says Tim Maurer, chief advisory officer at the wealth management firm Signature FD.

“There is an argument to be made that high-earning individuals would benefit more from deductible forms of retirement savings because their income tax bracket is likely higher today than it will be when they are in retirement,” he said. “However, there are always considerations beyond the singular factor of where taxes are today and where they may be in the future.”

For one thing, Maurer added, it’s always important to remember that tax planning is heavily predictive. While we know what the brackets are today, we can’t necessarily know what rates will be in five, 10 or 20 years. Tax rates could rise between now and when you retire, making a Roth IRA more valuable with each tick upward.

And don’t forget that the rules can always change, he said. While the backdoor Roth is a well-established loophole, there have been legislative efforts to close it in the past. Since every dollar in a Roth IRA is worth more than an equivalent dollar in a pre-tax account, that argues for taking advantage of the opportunity while you have it.

So, what should you do?

“As is often the case in the uncertain world of financial planning, instead of betting wholly on one strategy or the other, the optimal course often calls for Solomonic wisdom and diversification,” Maurer said.

“For high earners, it still likely makes sense to maximize tax deductibility through 401(k)s … [T]hen, to the degree that it is palatable, consider a reasonable amount of Roth conversions during your working years to ensure tax-free dollars are accessible to you (or your heirs) in retirement,” he added.

Finally, Maurer suggested that you can consider making larger conversions in your first few years of retirement. Your income and taxes will likely have dropped, which would make it easier to convert more money at a lower rate. But if you need help figuring out when might be the optimal time for a Roth conversion, consider connecting with a financial advisor to talk about it.

For high-earning households, a backdoor Roth can give you access to tax-free withdrawals in retirement. The catch, however, is that it can come at particularly high costs now and may outweigh the potential benefits. A prudent strategy may be to convert only a portion of your retirement savings. Doing so can allow you to capitalize on the tax benefits of contributing to a traditional IRA while also preserving some of the flexibility that a Roth IRA can provide later on.

• SmartAsset’s retirement calculator can help you project how much money you’ll need to retire, as well as how much post-income your current savings and Social Security may generate. However, that number could be significantly higher if your savings are in a Roth account.

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

Photo credit: ©iStock.com/Liubomyr Vorona, ©iStock.com/designer491, ©iStock.com/dragana991

The post Our Combined Income Will Top $400k This Year. Can We Use a Backdoor Roth to Avoid Future Taxes? appeared first on SmartReads by SmartAsset.

The six months from November to April are historically the best part of the year for US equities because companies and pension plans tend to increase their stock buying starting on Nov. 1, according to the Stock Trader’s Almanac. However, those year-end rallies typically aren’t as robust when the S&P 500 has already risen at least 20%. In that case, since the 1970s the average return from now to Dec. 31 has been roughly 1%, according to data compiled by Bloomberg.

Of course, this bull-market rally has gone far beyond these levels, with the S&P 500 up almost 70% since bottoming in October 2022. That will curb gains into late December, according to Savita Subramanian, head of US equity and quantitative strategy at Bank of America Corp.

“Sentiment and positioning based on at least five indicators have grown dangerously bullish, leaving less room for positive surprises,” she wrote in a note to clients on Nov. 15.

Heavy Hedging

Already, some of the riskiest parts of the market are showing signs of weakness. Small-cap stocks, for instance, have erased most of their post-election rally as concern grows about the Fed’s rate path. And uncertainty over higher borrowing costs is prompting investors to hedge against sharp declines. Demand for far out-of-the-money put options on the S&P 500, technology-heavy Nasdaq 100 Index and small-cap Russell 2000 Index has risen to levels last seen during the heavy volatility ahead of the election, according to Kevin Brocks of 22V Research.

That said, the rally isn’t necessarily in jeopardy simply because there’s growing speculation that the market has run too far. Valuations and investor sentiment can stay frothy for weeks — even months — before stocks suffer a significant drop, said Max Kettner, chief multi-asset strategist at HSBC Bank Plc, adding that there are “very few reasons to suggest a year-end rally has already been front-loaded.”

Indeed, investors keep funneling money into stocks: They put $16.4 billion into US equities in the week through Nov. 20, marking the seventh consecutive weekly inflow, according to a Bank of America note citing EPFR Global data.

The optimism isn’t entirely surprising. Looking at history, the S&P 500’s advance over the past two years isn’t even half of the 143% average gain in the 16 prior bull runs since 1945, according to Birinyi Associates.

What investors most want to see when judging the rally’s strength is the gains broadening beyond the megacap tech that have been powering indexes higher on enthusiasm for artificial intelligence. It’s starting to happen, as the S&P 500 Equal Weight Index is outperforming the regular market-cap weighted version of the benchmark since Election Day, with financials, energy and consumer discretionary shares leading the way.

In the end, however, it may be the bond market that sends the loudest signal for stock prices. If Treasury yields stay high and the Fed stands pat, there are serious risks to betting on significant further gains in equities.

“A broadening rally is crucial but the one thing standing in the way of a strong advance for stocks the rest of the year is the bond market,” said Jamie Cox, managing partner at Harris Financial Group. “That may ultimately put a lid on a hefty year-end rally.”

–With assistance from Natalia Kniazhevich.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.

Why It’s Important: While short reports have been a regular fixture for investors for years, both from investors who are betting against the stocks themselves with their own short positions, newer reports from the likes of The Bear Cave by Edwin Dorsey come from an investor who claims to never take stakes in the companies he writes about.

Whether short reports are being done to make profit betting against the stock or to provide public information for investors to make their own decisions on investments, the big question is why the increase in reports over the last several months.

There’s likely two big reasons why.

The first big reason for the increase could be because of the narrative that short sellers and short reports will be targeted by the new White House administration.

Muddy Waters’ CEO Carson Block said Elon Musk and Donald Trump have both publicly criticized short sellers in the past.

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“We’ve already had some rhetoric, we might have some more anti-short seller rhetoric,” Block told Bloomberg.

Block said Republican-led administrations are often lighter on enforcement, but he’s not sure if Trump will roll back regulations.

“It is a question as to who is going to head the SEC,” Block added.

The comment comes as SEC Chairman Gary Gensler recently announced he will step down on Trump’s inauguration day, ahead of the assumption that Trump was going to replace him with a new leader.

Trump Media & Technology Group (NASDAQ:DJT), which was co-founded by Trump, has targeted short sellers and alleged that naked short selling is the reason the stock has fallen in price several times.

Musk, who has often publicly criticized short sellers, recently said he wanted to “obliterate” short sellers.

The other reason for the increased short report volume could be due to stock market indexes trading near all-time highs and strong year-to-date gains.

The SPDR S&P 500 ETF Trust (NYSE:SPY), which tracks the S&P 500, is up 26.0% year-to-date. This return is currently the fourth best in the last 10 years and the ETF could still pass the returns of 26.2% (2023), 28.8% (2021) and 31.2% (2019) to move up the list.

Wondering if your investments can get you to a $5,000,000 nest egg? Speak to a financial advisor today. SmartAsset’s free tool matches you up with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.

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This article Short Sellers Are Back – Flurry Of Big Calls From Muddy Waters, Citron And Others Raises Questions: Why Now? originally appeared on Benzinga.com

Excellent data from late-stage trials has already been released for potential new indications for tirzepatide. One of these is reducing the risk of worsening heart failure in adults who have heart failure with preserved ejection fraction and obesity. Tirzepatide also aced phase 3 studies in preventing diabetes in patients with pre-diabetes who are overweight or obese, and it successfully treated sleep apnea in overweight patients.

Tirzepatide is a dual agonist — it mimics the function of two hormones, GLP-1 and GIP — and its success shows the power of this approach. The sky’s the limit if we add other potential indications that haven’t passed late-stage trials yet. Analysts weren’t kidding when they said tirzepatide could hit peak sales of $25 billion.

Second, several of Eli Lilly’s newer medicines not named tirzepatide will eventually make meaningful impacts within the next five years. Kisunla looks promising, but it’s not the only one. Some projections say that ulcerative colitis treatment Omvoh, first approved last year, could generate $1.2 billion in sales by 2029.

Third, Lilly will make significant pipeline progress in the next few years. One of its promising candidates is retatrutide, a triple agonist. Remember that tirzepatide is a dual agonist. Now, Lilly is going one step further with retatrutide, which mimics GLP-1, GIP, and glucagon; the company has dubbed it “triple G.” Progress on this program could be a tailwind for the company. And it’s by no means Eli Lilly’s only exciting candidate.

Thanks to its innovative pipeline, the drugmaker’s lineup should look different in five years. That’s something else that will help drive the stock price higher.

Even with Eli Lilly’s strong prospects, you might hesitate to invest in it because of the high forward P/E, which looks prohibitive. However, its shares don’t seem as expensive once we put things in context. The forward P/E reflects the market’s expectations for the company. If it can match those expectations more often than not, its valuation won’t be too much of a problem. In the third quarter, Eli Lilly’s adjusted earnings per share (EPS) soared to $1.18, compared to just $0.10 in the year-ago period.

Next year, analysts expect EPS to grow by almost 72%. This isn’t surprising, considering tirzepatide’s pace and the fact that several of Lilly’s older medicines are also performing well. The company could keep things up with newer drugs hitting their stride, and tirzepatide earning label expansions. So, in my view, Eli Lilly is worth investing in despite its forward P/E. I’d recommend following billionaire Englander’s lead on this one.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Billionaire Israel Englander Increased His Stake In Eli Lilly During the Third Quarter: Should You? was originally published by The Motley Fool

• Age 62: $15,744 per year

• Age 67: $24,036 per year

• Age 70: $30,972 per year

In this scenario, we’re now looking at a total annual pre-tax income that ranges from $68,144 to $83,372.

To answer your question specifically, your total pre-tax income at age 62 could fall between $63,740 and $68,144 per year, depending on whether your employment income has been closer to $40,000 or $70,000.

With taxes taken out, you’re probably looking at between $57,000 and $61,000 in annual retirement income, which means you could support between $4,750 and $5,083 in monthly expenses. (Consider matching with a financial advisor if you need help planning for Social Security.)

If those Social Security estimates are reasonably close to your actual benefits, and if your monthly expenses in retirement will be $4,750 or less, then you appear to be in a good position to retire at age 62.

If your expenses are greater than that, you might want to consider working a little bit longer. Doing so would increase your Social Security benefit, increase your retirement savings and reduce the number of retirement years you have to support. Or you could find ways to reduce your monthly expenses to the point where your current assets, pension income and Social Security benefits will cover them.

Of course, I’ve made several assumptions here, and it’s also worth noting that the 4% rule is simply a good rule of thumb. Your actual situation may differ from what I’ve laid out.

My hope, though, is that seeing how I ran the numbers will help you understand how to do this kind of analysis so that you can make the best decision for yourself. (And if you need additional help with your retirement plan, this tool can help match you with potential advisors.)

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

• Get retirement planning and investing tips with the SmartMoney Minute newsletter. It’s 100% free and you can unsubscribe at any time. Sign up today.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

Matt Becker, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Matt is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset, and he has been compensated for this article.

Photo credit: ©iStock.com/ljubaphoto, ©iStock.com/Korrawin

The post Ask an Advisor: I Have $680K in a 401(k), a Monthly Pension of $1,600 and Another $150K in Cash. Can I Retire at 62? appeared first on SmartReads by SmartAsset.