The Lange Report - February 2016

The Lange Report - February 2016

Table of Contents

 

Roth IRA Conversions Early in 2016 Present Potential Advantages
Steven T. Kohman, CPA, February, 2016



Let's face it. The stock market has declined a lot in the past few months. Many people wonder if they should move to cash and do nothing with their investments. While we do not recommend trying to time the future moves in the stock market, the reality is that it is better to buy low and let it grow more in the future. This is especially true for Roth IRA conversions which result in long-term advantages when the account grows after the conversion. So maybe the time to convert is now.

But what if the market continues to decline after you convert? One good thing about the current tax law is that you can undo a 2016 conversion as late as April 15, 2017 and perhaps even to October 15, 2017. This gives you a long time, over a year, to see if it grows. If it really dives after you convert, you can even do another conversion at a lower price and undo the first conversion later. The technical term for the undoing of a conversion is a "recharacterization" because the Roth IRA is recharacterized as a traditional IRA by moving it back to the original or a different traditional IRA account. Converting early in the year is often recommended as it gives the account more time to grow before a decision must be made on a potential recharacterization.

We have written many articles about Roth IRAs and Roth conversions and included discussions of the extensive advantages they provide. We discuss conversions in our book Retire Secure! and we have written an entire book on  Roth IRAs called The Roth Revolution. Both of these books can be purchased on Amazon. These articles and discussions go into much deeper detail on the many strategic ways to do Roth conversions to your advantage, depending on your current situation.
The Roth conversion amount will add to your taxable income, so there are many tax traps to consider when deciding how much to convert, such as...

  • Higher tax rates and related tax surcharges and phase-outs of deductions first implemented for 2013 could result in extra tax if you convert too much.
  • For people who are covered by Medicare parts B and/or D, and pay Medicare premiums, converting too much in 2016 can raise the Medicare premiums in 2018.
  • Also, for medium or lower income people who get social security income, a conversion can make more of the social security subject to tax and also can turn tax-free long-term capital gains and qualified dividends into taxable amounts.

However, paying extra tax can sometimes be worth it in the long-run if the Roth IRA account grows a lot after the conversion. These are just some of the things that should be considered in determining the best conversion amount. Other considerations include the current and future financial and income tax situations of you and your beneficiaries. As we move further into an election year, the possibility of tax law changes looms ahead. Since future tax laws can affect the long-term success of a conversion early in 2016, they should also be considered.

I usually find many people hesitant to make any changes in their investments when they decline in value. However, you should not pass up the opportunity to do a Roth conversion in a troubled market as it could provide you and your family more financial security in the long-run. Because of the many things to be considered when doing a Roth conversion, we suggest you discuss with your qualified advisor how much to convert in 2016.

If you are interested about learning about whether a Roth IRA conversion is right for you, please go online and fill out our pre-qualification form. If you qualify, we will contact you to schedule an appointment with either James Lange or one of his tax experts. Unfortunately this Free Second Opinion is for qualified Western Pennsylvania residents only.


Another Lesson From Toronto Time Management

In my last newsletter, I wrote about the power of delegating or dropping activities that do not inspire you or that you find onerous — focus your energy on work and leisure activities that you love. For this month, I want to share another bit of wisdom I picked up at the Strategic Coach Program® I attended in Toronto.
The Strategic Coach® has some unique ideas about time management. As far as I can tell, these strategies are well-tested over a period of 20 years with a large audience of business people and entrepreneurs.

I think they can be helpful to people who are still working and those who are retired. Retirement these days rarely means doing nothing. More likely, many retirees are busy doing meaningful work, if not for the same pay scale!

The following recommendations are not complicated, but they do require devising a strategy that works for you, and some willpower. Your time-management objective is to identify three types of days: Free Days®, Focus Days®, and Buffer Days®.

Focus Days® are when you tackle your peak activities in terms of value to yourself and/or your organization or family. For me, my focus days are days when I am giving a workshop, or am meeting with clients or prospects. One area I do best in is focusing all my attention on the person or group. That’s what makes me most effective in these situations. I also enjoy the workshops and meetings the most. They want us to do more of what we love. Buffer Days® are when you are preparing for your focus days and doing the necessary things in your business or life that are less intense than focus day activities, but still important. For example, writing this newsletter is a buffer day activity and should be done on a buffer day.

Then, there are Free Days® when you don’t do any work. This, as it turns out, can be the most challenging time-management objective to achieve. I can’t remember more than a handful of true free days that I have taken in over 30 years. Even on weekends or vacation, I usually do something related to work. Most of my reading is work-oriented. When I drive, I am usually listening to business CDs or educational programs. I almost always work on the weekends, even if I spend most of the day hiking or biking. According to the Strategic Coach, I have to schedule my free time and hold it inviolable — do absolutely nothing related to business. No checking email. No business tapes. No work. No business books. When one Strategic Coach participant goes on vacation and arrives at her hotel, she puts her cell phone in the vault. Free days are “recharging” days. The idea is that when you are really low on energy, it is very hard to be creative and productive. It is hard to believe that working a little less can translate into getting more done, but that seems to be the very strong message of successful participants in the program.

They want to get you out of “the gray zone” which is where I live right now. That is when you combine many different activities into your day. For example, I often start my day by working out, either with a trainer three times a week or on my own. On my own, I am either on a stationary bicycle or elliptical, watching business tapes. That is fine, except one day a week, no more business tapes. Then, I will meet with a client, work on an article or some other Buffer activity, check emails several times a day, and also deal with the affairs of the office. I often eat lunch alone, sitting at my desk, half working/half eating. The afternoon is often like the morning, but my attention span for buffer activities is reduced. Then, I will eat dinner by myself either at my desk or at a restaurant near the office, and then go back to the office for a few more hours before heading home. I sometimes find myself playing Internet chess or bridge when I should be working. No division of time or activities. The previous newsletter also talked about the myth of effective multi-tasking and how important it is to pick something to do and do it from beginning to end and then do something else. So, the workshops have challenged me to rethink my work days and how I structure my most productive time and my leisure time. What changes can you imagine in your life if you took some of these recommendations to heart?
I will let you know how I am doing in a subsequent newsletter.

-Jim Lange



2016: Ten Predictions to Count On

The new year is a customary time to speculate. In a digital age, when past forecasts are available online, market and media professionals find it harder to hide their blushes when their financial predictions go awry. But there are ways around that.

The ignominy that goes with making bold forecasts was highlighted in a recent newspaper article, which listed many bad calls U.S. economists had made about 2015. These included getting the timing of the Federal Reserve’s interest rate increase wrong, incorrectly calling for a rise in long-term bond yields, and assuming an end to the commodity rout.1

For the broad U.S. equity market, 22 strategists polled by the Wall Street Journal2estimated an average increase for the S&P 500 of 8.2 percent for 2015. The most optimistic individual forecast was for a rise of 14 percent. The least optimistic was 2 percent. No one picked a fall. As it turned out, the benchmark ended marginally lower for the year.

In the UK, a poll of 49 fund managers, traders, and strategists published in early January 2015 forecast that the FTSE 100 index would be at 6,800 by midyear and 7,000 points by year-end. As it turned out, the FTSE surpassed that year-end target by late April to hit a record high of 7,103 before retracing to 6,242 by year-end.3

Australian economists were little better. The consensus view, according to a January 2015 Fairfax Media poll, was that local official interest rates would stay on hold all year. The Reserve Bank of Australia proved that wrong a month later, before cutting rates again in May.

It shouldn’t be a surprise that if economists can’t get the broad variables right, it must be tough for stock analysts to pick winners. Even a stock like Apple, which for so many years surprised on the upside, disappointed some forecasters last year with a 4.6 percent decline.4

In Australia, the “Top Picks for 2015” published by one media outlet a year ago included such names as Woodside Petroleum, BHP Billiton, Origin Energy, and Slater & Gordon, all of which suffered double-digit losses in the past year.5

It should be evident by now that setting your investment course based on someone’s stock picks or expectations for interest rates, the economy, or currencies is not a viable way of building wealth in the long term. Markets have a way of confounding your expectations. So a better option is to stay broadly diversified and, with the help of an advisor, set an asset allocation that matches your own risk appetite, goals, and circumstances.

Of course, this approach doesn’t stop you or anyone else from having or expressing an opinion about the future. We are all free to speculate about what might happen in the economy and markets. The danger comes when you base your investment strategy on such opinions. In the meantime, if you insist on following forecasts, here is a list of 10 predictions you can count on coming true in 2016:

  1. Markets will go up some of the time and down some of the time.
  2. There will be unexpected news. Some of this will move prices.
  3. Acres of newsprint will be devoted to the likely path of interest rates.
  4. Acres more will speculate on China’s growth outlook.
  5. TV pundits will frequently and loudly debate short-term market direction.
  6. Some economies will strengthen. Others will weaken. These change year to year.
  7. Some companies will prosper. Others will falter. These change year to year.
  8. Parts of your portfolio will do better than other parts. We don’t know which.
  9. A new book will say the rules no longer work and everything has changed.
  10. Another new book will say nothing has really changed and the old rules still apply.

You can see from that list that if forecasts are so hard to get right, you are better off keeping them as generic as possible. Like a weather forecaster predicting wind, hail, heat, and cold over a single day, your audience should prepare themselves for all climates.

The future is always uncertain. There are always unexpected events. Some will turn out worse than you expect; others will turn out better. The only sustainable approach to that uncertainty is to focus on what you can control.

In the meantime, let me wish a happy New Year to you all.


1 . Malcolm Maiden, “The Year Market Economists Failed to See Coming,” SMH, December 30, 2015.
2 . “Strategists Expect Stocks to Keep Climbing in 2015,” Wall Street Journal, January 2, 2015.
3 . “Five Fund Strategies to Ride Rising Markets,” The Times, January 3, 2015.
4 . “Seven Stocks to Buy for 2015,” CNN Money, December 31, 2014.
5 . “Top Stock Picks for 2015,” Motley Fool.



A Special Timely Offer for a Mini-Book or E-book on the new Social Security law
Critical for married couples between 62 and 70!

We wrote a timely book that has important information about Social Security and we want to this important information to be widely disseminated.  We would be delighted to send a hard copy to you,  or give you a link to the e-book.  If you wish, you can send the link to your contacts/friends who may have a need for it themselves, or an audience that is concerned about married couples between 62 and 70.  When it is completed, you can access the e-book on at www.paytaxeslater.com/ss.php, or call Alice and ask a hard copy for yourself, a friend or colleague, or preferably both.

There is some hope for a numberof taxpayers, as the law allowed a 6 month window to take advantage of the strategies before they were eliminated on May 1st, 2016.

Time is running out, but you still have a few weeks left to act and protect your Social Security benefits.  This small book is jam-packed with information on Social Security maximization rules, with particular focus on what to do after the 2015 reform.  And it is almost done!  The information contained in this book could mean the difference of hundreds of thousands of dollars of income over the course of your retirement.
I want to see my clients and friends get ahead of this problem, and get the most they can from Social Security while these strategies are still available.  So I am offering a FREE copy of this book to anyone who wants one.

If you would like to receive a copy of our mini Social Security book, free of charge, please email us at admin@paytaxeslater.com or call us at 412-521-2732 and tell us where to send it.

Again, we would also be glad to send one to a friend or family member who could benefit from this information.

James Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

Free Bonus!

As a gift, you'll receive a summary of Jim's bestseller, Retire Secure! - acclaimed by Charles Schwab, Ed Slott, Jane Bryant Quinn and 50 other financial professionals! Enter your e-mail address to receive our FREE e-newsletter!


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