Every crisis is an opportunity. The massive turbulence on the financial markets this year is no exception. Here are three things every middle-class American with their 401(k), IRA, or other retirement plan can do now to take advantage of what’s going on.
Read: Don’t panic about your 401(k)
- Perform a Roth conversion.
Individual retirement accounts, simple tax-protected retirement accounts approved by the IRS, come in two types: Traditional IRAs, where you get a tax break up front at the time you deposit, and Roth IRAs, where you get the tax break at the end when you make the payment. You can convert a traditional IRA to a Roth at any time by submitting a simple form to your finance firm. You owe income taxes on the converted amount until April 15 of the next year. There is a long, acrimonious, and controversial debate about which is better and when. I won’t go into that here. However, if you have wanted to convert a traditional IRA into a Roth, now is a good time to do so. That’s because if you convert, you owe income taxes on the value at the time of conversion. The lower the current value, the lower your tax burden.
Hidden in this broad sell-off is some good news: Pretty much everything went under. For example, if at the beginning of the year you own too many US stocks of large companies like the S&P 500 and too few stocks of smaller companies, foreign stocks, real estate mutual funds and bonds, this is your lucky moment. They can revise for free, or at least relatively cheaply: pretty much everything (except commodities and energy stocks) is down.
It’s not perfect, of course, because things have fallen differently. Nonetheless, among the major stock indices is the S&P 500 SPY,
fell 21% while international developed markets VEA,
are 19% cheaper and emerging markets VWO,
fifteen%. US small caps as measured by the S&P 600 IJR,
are down 19%. International and emerging small caps VSS,
by 22%. regular bonds AGG,
fell 13% in price, inflation-linked bonds TIP,
12% And while very long-dated government bonds ZROZ,
are down 33%, Long Term Inflation Linked Bonds LTPZ,
are down 27%. real estate fund VNQ,
are down 24%. Even boring utilities FUTY,
are 9% cheaper.
Read: Retirees nervous about inflation and stock volatility can take these 5 steps
3. Make an investment for your children or grandchildren.
The easiest way to exploit this meltdown? Go to a broker or bank, open an investment account for their teenage kids or grandkids, and put just $1,000 into some low-cost index funds on their behalf. Just iShares Equal Weight USA EUSA,
and Vanguard FTSE All World ex-US VEU,
cover the universe for less than 0.1% per year. Long-term returns on stocks average 5% per year on top of inflation. Based on these numbers, a gift of $1,000 today will be worth about $11,000 50 years from now and $18,000 in 60 years, based on today’s purchasing power.