Thread: Bear Cave 2 (Bull Allowed)

Part (4 of 6)

Today's first main topic is Roth, part four.


In part one of my extended Roth discussion I summarized the pros and cons of Roth accounts. In part two I discussed personal Roth IRA contributions; in part three I cited Roth retirement accounts with an employer. In this section I will discuss making Roth contributions to a 401(k) where you are a full or part owner.


If you own your own company then you can contribute 19.5 or 26 thousand dollars into a Roth 401(k) before the end of 2020 and the same amount next year.


For the tax years 2020 and 2021 you can contribute 19,500 U.S. dollars, or 26,000 if you are 50 or older, into a Roth 401(k) which has been established for your own company. This allows you to put more of your money into accounts which will grow tax-free for life and for ten years following your death. There is no maximum income or other restrictions; if you total Schedule C income is less than the amounts listed above then you can contribute 100% of your actual income instead of these amounts. Below is a relevant article on this topic:

How Much Can You Contribute to a Solo 401(k)?

You must complete a lengthy form to open a Roth 401(k) for your business but you only have to do this once (okay, maybe twice).


For E*Trade I had to complete a 21-page application with numerous tiny details. I also had to complete a second 21-page application for a regular (non-Roth) 401(k) even though I may not put any money into it. If you are age 50 or over then in addition to contributing 26 thousand dollars annually into a Roth 401(k) you can contribute an additional 37,500 into a non-Roth 401(k). Usually this is not advantageous because contributing to a non-Roth 401(k) means reducing your QBI deduction which is usually more worthwhile unless your net business income exceeds 400 thousand dollars, in which case your QBI deduction will be phased out and contributing to a non-Roth 401(k) could be exactly what you need to bring your income down below 400K. Otherwise you will usually benefit more from the QBI deduction than from a non-Roth 401(k) deduction. The examples in the following link highlight the complexity of this trade-off:

QBI Deductions vs. 401(k) Savings: What Makes the Most Sense for Small Business Owners?

Unlike a Roth IRA you generally only have until the end of the calendar year to make a Roth 401(k) contribution for that year.


With a Roth IRA you usually have until April 15 of the following year to make your contribution; in 2020 this was extended until July 15. With a Roth 401(k) you usually only have until December 31 of the year in which the income is earned, or sometimes until January 31 of the following year. I therefore usually contribute the maximum relatively early in the year.


If you and your spouse both work for the same family company then you can both contribute the Roth 401(k) maximum.


Many people know about sole proprietorships, partnerships, and corporations. Some people are familiar with LLCs. Very few people know about qualified joint ventures which were affirmed by the IRS in 2007 and are usually the ideal ownership structure for two spouses who work for the same home-grown business. With a qualified joint venture both spouses fill out a Schedule C for the same business, dividing the earnings and expenditures amongst each other. If you use this method of company organization, as I do, then both you and your spouse can establish Roth 401(k) accounts in your own names for the same company and you can each contribute the maximum each year. This means 52 thousand dollars combined if you are both age 50 or older, or 39 thousand altogether if you are both under age 50 as of the end of the calendar year.

Part (5 of 6)

Today's main topic is Roth, part five.


This is part 5 of a six-part series about Roth accounts. Part 1 was a summary; part 2 explored Roth IRAs; part 3 described Roth 401(k)s as an employee; and part 4 explained details regarding 401(k)s for self-employed individuals and their spouses. In part 5 I will discuss Roth conversions which can be done with all of the above Roth retirement accounts as a part of a long-term strategy to minimize your lifetime tax obligations. In part 6, which will be the final installment, I will discuss Roth equivalents in Canada, Australia, and elsewhere.


Roth conversions are frequently misunderstood and generally underutilized.


If you have money in any non-Roth retirement account then it really isn't all your money. You might pretend that it is, but eventually the U.S. government, your state, and or your locality will eventually ask for a percentage upon withdrawal which in some cases could total more than half of the total value of the account. As a rule of thumb, if you have money in these kinds of accounts, you should assume that you really only own about 2/3 and that the other third will eventually go to government entities. Sadly, even your death won't change this fact, since your heirs will be required to pay the government its cut and usually at a faster rate and a higher tax obligation than if you were to pay it yourself on your own schedule.


Roth conversions are about making your own decisions about when to pay taxes rather than leaving it up to the government and the whims of future tax regulations.


All the money you have in a traditional IRA or SEP-IRA, regular 401(k)/403(b)/457, and all other non-Roth retirement accounts will eventually be subject to taxes. The question is whether you want to do as most people do and simply let things happen for better or for worse, or whether you want to take charge of your destiny. Most people drift through life and let things happen to them, whether it involves taxes, personal relationships, or anything else. Others recognize that by making plans they can usually achieve more meaningful goals. If you organize your taxes with a long-term perspective then your first objective will usually be to make your income as steady as possible, because if you have any given total tax obligation over one or two decades then you will generally pay the lowest total amount in taxes if your income is constant. Some people who get mostly regular salaries and/or pensions may already have a nearly identical income each year, but if you are self-employed then your income may vary dramatically as mine does. To balance out your income you can make large or small Roth conversions each year so your total income is almost the same from one year to the next--and, more importantly, so that you use up as much as possible of the lower tax brackets and ensure that you never climb into a high bracket where you would pay a higher rate and lose some of your deductions or other benefits.


There are no limitations to Roth conversions regardless of your income or the amounts you wish to convert.


When I help prepare taxes for people who have previously used other accountants, it is almost always the case that their previous accountants did zero Roth conversions. Partly this is because they are unfamiliar to most accountants, and partly since accountants hate to have you pay more taxes in any given year even if it saves you several times as much money in the long run. The most common statement I hear from new tax clients is "our income is too high to do a Roth conversion." Many people confuse the income limits with new Roth contributions, although even those can be overcome with a back-door Roth contribution as I explained in part 2. With Roth conversions there are no limitations, period, regardless of your income or the total amount you wish to convert. One subscriber who may be reading this update had a lengthy discussion with me about Roth conversions and recharacterizations and has since done Roth conversions involving millions of dollars. If you want to convert your entire non-Roth holdings to Roth accounts then you can do so in a single year or even in a single day. Usually that would be foolish since you would be putting yourself in an unnecessarily high tax bracket but it is completely legal. Not surprisingly a more sensible approach involves planning to do these conversions over a lengthy period of time. I have been doing Roth conversions for my Dad for a very long time and they were finally completed when he was 92.


You may be underestimating your future marginal tax rates.


Some people don't do Roth conversions because their accountants have told them that they should minimize their current income while it is high in order to make withdrawals later when they are retired and in presumably lower tax brackets. However, this assumes that future tax rates will be similar or lower than they are now, which I believe is highly unlikely, and also that future marginal tax rates will be lower than current marginal rates. If you are not yet collecting Social Security then the amount of tax you pay on Social Security income is not constant; it is a function of the total of your other income. If your other income is higher because you are making taxable withdrawals from non-Roth retirement accounts then you will pay more tax on your Social Security income and on all of your other income including not only earned income but also capital gains, dividends, and interest. While it is true that some people may experience sudden declines in their marginal tax brackets when they stop working, many others will find themselves in similar tax brackets because they are wealthier so their investment income combined with Social Security and perhaps other pension income will partially or entirely offset the loss of employment income. Even if you income is modestly lower after you stop working, tax rates could be proportionately higher. In most cases you are better off paying taxes knowing how much you will owe rather than taking a chance on whatever might occur in the future.


One huge advantage of Roth conversions is that you can do them whenever the assets in your non-Roth retirement accounts are depressed.


In March 2020 nearly all securities dropped substantially in value for a short period of time. This was an ideal opportunity to do Roth conversions by moving oversold shares (not cash) from your non-Roth retirement account into a Roth account. For example, let's assume that you had one thousand shares of GDXJ and you decided to convert those from a non-Roth IRA or 401(k) into a Roth IRA or 401(k) when its price was below 30 (or even below 20). If you did the conversion at a price of 25 then you would owe tax on April 15, 2021 on 25 thousand dollars, which would be 6 thousand dollars if you are in the 24% federal tax bracket. If you sold GDXJ at 62.50 on July 27, 2020 or in early August at the same price then your entire gain of (62.50 - 25.00) * 1000 or 37,500 would be completely tax free. If you had kept these shares in a non-Roth retirement account and still sold them at 62.50 then 37,500 of this gain would be subject to tax eventually whenever you withdraw the money--and possibly much more if you grow your non-Roth retirement account before you finally make any withdrawals. Assuming the same 24% future tax rate, you have saved yourself 37,500 * .24 or nine thousand dollars. Psychologically you might feel poorer because you have to pay six thousand dollars more next April, but if you realize that you would have owed fifteen thousand dollars plus all future gains on that fifteen thousand dollars then you can see that this is an enormous savings from a single transaction.


By consistently doing Roth conversions when share prices are depressed you can often reduce your total tax obligation on your retirement accounts by about 50%-75%, even after adjusting for inflation, compared with a "que será, será" approach.

Part (5 of 6 continued)

Don't freak out when tax time arrives.


The following is a sad but true story of one person for whom I was doing tax planning. When various shares were depressed in value during the first several weeks of 2016, including RING (similar to GDXJ) which was a large holding in this account along with EWZ, this person gave me permission to do a series of Roth conversions. Just as I use a ladder of orders to increase risk when accumulating any position, I did very small daily conversions often for several hundred or slightly more than one thousand dollars apiece on any given day. Most of these shares had been previously converted during the final months of 2015 but I undid those conversions using recharacterizations and reconverted them again in early 2016. I would report to this person that I had just done another 750 dollars in conversions and this fellow said "fine, great, good job."


This person has reasonably good investing instincts, but his day of reckoning arrived when his accountant told him the following March--over a year after most of the conversions had been completed--that the conversions would require him to pay an additional 25,500 in federal taxes and some state taxes. His response was to first call me on the telephone and yell, then to contact his broker to completely undo all of the conversions via recharacterizations (which are no longer allowed for conversions done on January 1, 2018 or later). Even though he knew that the conversions were being done incrementally, he never emotionally absorbed the fact that their combined effect meant that total tax bill would be meaningfully higher. To this day he thinks he "saved" 25,500, but if he wanted to convert the identical account today or to otherwise withdraw the funds it would cost between 60 and 70 thousand dollars; when he eventually withdraws the funds in a few years or so it will likely exceed 100 thousand in federal taxes alone and much higher state taxes than he would have paid if he had kept the conversion intact.


To avoid this tragic fate be sure to keep close track of the total amount of your conversions so you aren't in for a rude shock the following February or March when you compute your income taxes.


You may get an extra savings if your broker uses the previous day's closing price to determine your tax obligation.


More than half of all brokers, when you do a conversion, use the previous day's closing prices to compute the taxes which you owe. Therefore, if you have been considering converting certain shares and they are up several percent on a given day, be sure to do those. This is almost as good as being able to buy them at the previous day's closing price when they are sharply higher the following day.


Recharacterizations were not allowed for conversions beginning on October 1, 2018 but may be permitted again someday.


In the "good old days" when you did a conversion it was heads you win and tails you win. If the depressed shares you converted to a Roth account ended up rebounding sharply in value then all of your subsequent gains were tax-free. If the shares fell further in price then you were permitted to do a recharacterization; this is a fancy word for undoing the conversion. You could then do the conversion again at a lower price than your original conversion. There was no limit to how often you could repeat this process; sometimes I would keep converting shares over and over again until they finally bottomed as they had done in early 2016 when the fellow I mentioned could have benefited from the same process but didn't want to "pay extra to the government." The only limitation is that you had do a recharacterization by October 15 of the year following a conversion.


Currently recharacterizations aren't permitted. I hope they will become legal again in the future.


Roth conversions will remain highly unpopular because they involve paying now instead of later.


One thing you can be certain about is that almost everyone would rather pay a lot more later even if it only saves a little now. If that weren't true then mortgages and especially refinancing would be a lot less popular: people concentrate almost entirely on their monthly payments without calculating how much they're paying on interest for the lifetimes of their mortgages or whether they should even get a mortgage in the first place. In a future update I will talk about other ways of buying expensive items using collateralized loans. Salespeople are well aware of this tendency, while accountants aren't quite as conscious about it but instinctively will never recommend any tax strategy which involves paying more in the current tax year no matter how much it saves overall. If you don't do your own taxes then be sure to find an accountant who not only knows the rules regarding Roth conversions but won't try to talk you out of doing them.


Some people pretend they can avoid paying by procrastinating indefinitely. If you die with non-Roth retirement accounts your heirs will have to pay your taxes probably at much higher rates than you could have done. If someone inherits your Roth accounts they can continue to grow with zero required withdrawals for exactly ten years, after which the shares and cash can be transferred tax-free to a regular non-retirement account.


Around this time of year compute your estimated income for the calendar year and plan to do Roth conversions to "use up" your tax bracket.


Assume that you are usually in the 24% tax bracket but your income varies from year to year. You should usually do enough Roth conversions to use up almost your entire 24% tax bracket without pushing yourself into the next-higher tax bracket which is 32%. Therefore, look at the income tax tables at this time of year and see where you will end up. If you can do 120 thousand dollars in Roth conversions before you would be in the 32% federal bracket then do around 100 to 110 thousand dollars in Roth conversions in case you underestimated by several thousand dollars or you get more in year-end dividends than you had anticipated. If you find the following year that you only need 45 thousand dollars to move into the 32% bracket then only do 30 or 35 thousand in Roth conversions. If you have a year with an unexpectedly low income then perhaps you can do 200 thousand dollars that year. A lot depends upon the total amount you have in non-Roth retirement accounts which you want to be converted; the greater it is, the more aggressive you should usually be each year. If you only have 100 or 200 thousand dollars in non-Roth accounts then you can leisurely do conversions only in years where you are in a low tax bracket and otherwise do no conversions. If you have a year with a high income then probably you don't want to do any Roth conversions that year. If federal taxes are suddenly raised then you may wish to reduce or postpone some of your conversions; if you move from a low-tax state to a high-tax one then you could similarly benefit from adjusting your schedule accordingly.


The bottom line: Roth conversions are usually overlooked by those investors who would benefit the most from doing them.


No one wants to pay now if they can procrastinate into the future. If you plan ahead you will save huge sums throughout your lifetime by paying much smaller amounts to the government up front. More importantly, you will control when you pay and how much instead of relying on the fates.


Question: Do you have a long-term Roth conversion plan?

Thanks for the info, robo. Are you sure it's OK to post that entire article here?

If not we may have to just put the link.

Many traders continue to watch this pattern.

https://stockcharts.com/h-sc/ui?s=SP...63&a=836482752

Tom,

It's a paid service, but I asked permission. Here is the email I sent Steve.

Robo Man
8:56 AM (4 hours ago)
to Steven

Steve,
I would like your permission to post your Roth series (1-6) at the TSPtalk web site. I sometimes post at that site.
https://www.tsptalk.com/index.php

It's some very good information in my opinion. I will provide credit to you, and a link to your web site if you give me permission.

Thanks,
Robin

Steven Jon Kaplan
9:29 AM (4 hours ago)
to me

Robin-- Certainly. That is an interesting idea and I would be interested in hearing from others about it. Make sure to include only the Roth topics and not my other ideas.

Thank you also for providing a link to my web site. You can also include my telephone number which is (917) 697-4765.

Have a good weekend. --Steve

Steve still hasn't finished part 6. I will post it when it's completed. I thought this information might be useful to some of the TSPtalk members. I'm making money these days and most of it is Tax Free! LOL.... Well, for now anyway.

Take Care!

SPX - Closed below the $358.11 marker again....

https://stockcharts.com/h-sc/ui?s=%2...02&a=837083215

The insider sell list also continues to be way above average.

This is a free site.

J3SG - Activity Summaries

I don't recommend buying a stock if the insiders are selling that stock. Why are they selling? They are required to hold for 6 months once they buy....

You might not know who many of these companies are, but the amount of selling remains above average by the insiders is the point.... Something I have been doing and tracking for years now. I picked this up from Steve Kaplan.

IT's a pleasure to see you posting again Robo. I'll keep an eye open for your posts!!eye5.gif

The trend remains up for short term traders. (Trending above the 3 ema and the 10 dma) Day 10 since the buy signal, but a few warning indicators are showing up. Anytime we move above upper BB (SPY/SPX) I reduce my position size on my trade and wait to see what happens. Usually a very overbought condition. This is for Risk Management since I mainly like to trade extremes. The SPY/SPX is trying to hold above the all time high marker on the chart. We shall see how it plays out. (The marker is 3588.11 for the SPX)

https://stockcharts.com/h-sc/ui?s=%2...04&a=839763575



Pulling The Trigger

...the BUY or SELL signal has been issued. All you need to do is call your fund company or broker, or log into your online trading account and click on the "Trade" button.

But right at that moment, all the doubt and second-guessing comes to a head, and the buy or sell signal is never executed.

Sound familiar? It's probably the most common heartache faced by market timers and all market traders, and is only compounded when it turns out that it would have been a profitable trade.

Decisions, Decisions, Decisions

Do any of these sentences sound familiar? Have you said these same words?

https://www.fibtimer.com/subscribers...commentary.asp




There’s More Upside Ahead
Jeff Clark | Nov 9, 2020

The Volatility Index (VIX) triggered a buy signal on October 30, when the index closed back inside its Bollinger Bands (BB). And, even though the market has moved sharply higher, and the VIX has moved lower, there’s still plenty of room for that trend to continue.

Remember – VIX buy signals in the month of October tend to lead to strong, multi-week rallies. And, we’re just one week into this one.

Look at this updated VIX chart…

https://www.jeffclarktrader.com/mark...-upside-ahead/

Despite Monday’s bearish reversal, stocks remain in a daily uptrend.

Stocks did have a false breakout in early September. Monday’s bearish reversal looked like stocks once again formed a false breakout. However, stocks printed a bullish reversal on Tuesday at the neckline support. Stocks backtested the neckline support on Thursday then formed a swing low on Friday. A break above Monday’s high of 3645.99 would mean that a bubble scenario is back on the table.

https://likesmoneycycletrading.wordp...eport-preview/

GLD continues to make lower highs..... I have no position after this huge move it. Waiting to see what the dollar's next move is before buying again....

https://stockcharts.com/h-sc/ui?s=GL...03&a=824490306

https://stockcharts.com/h-sc/ui?s=GL...91&a=815473882

https://stockcharts.com/h-sc/ui?s=%2...11&a=779470284

https://stockcharts.com/h-sc/ui?s=%2...27&a=779471071