In order to make the best decision when it comes to saving for retirement, you need to understand the differences between a traditional IRA or 401(k) and a Roth IRA. Here is an overview of each option, including the pros and cons of converting your investment into a Roth.
These are the famous words on the front cover of the “Hitchhiker’s Guide to the Galaxy,” and they stand us all in very good stead on days like today when the stock market plunges.
Our IRAs and 401(k) balances are going to be down sharply the next time we check them. I have no idea how low this will go or how long this will last. Nor does anyone else. But if you are a regular retirement saver there are three things you can usefully do in a big plunge like today.
Convert your traditional IRA to Roth
1. If you were thinking about converting your traditional IRA to a Roth, this is probably a better time to do it than a few months ago. You’ll be taxed on the value at conversion, so if your IRA is down (say) 10% you will save that money on the taxes. The risk: You could do the conversion today and then kick yourself 6 months from now if the market keeps falling. The only sane way of dealing with this risk is to do it in stages. If you do half your planned rollover now and another half later, you’ll feel OK either way. If the market keeps falling you can congratulate yourself on only converting half at the higher price. If the market recovers you can congratulate yourself on converting at least half at the lows.
2. A full-sale liquidation panic, like we seem to be seeing right now, is an excellent time for a portfolio do-over. That’s because everything goes down: U.S. stocks, international stocks, bonds, gold miners. The works. They won’t go down all at the same rate, but the discounts are good enough to give you some good opportunities to move money around, especially if you think you had the wrong asset allocation. I remember in the 2008 crash long-term TIPS bonds plunged — something that made absolutely no sense until you realized that some of the owners were forced sellers. They needed ready cash for client redemptions or balance sheet issues. So if you had items on your “buy” list, or you were thinking about rearranging your portfolio, this is the time to log in to your account and check the opportunities.
Let Warren Buffet manage your money
3. I wrote this in the fall of 2008 and I will write it again now: If you are really panicked by this sell off, you can always let Warren Buffett manage your money. The media sometimes talks about the great investor as if he runs an exclusive private fund accessible only to the rich. On the contrary, his Berkshire Hathaway investment fund is a publicly traded company like Apple or Coca-Cola and the stock is down almost 3% today (see point 2, above). You can buy into it for $320 a share. Buffett is 91 years old, and his vice chairman Charlie Munger is 98, but they have built a high-quality conglomerate that constitutes a diversified portfolio pretty much on its own.
Bottom line? Never let a crisis go to waste.
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