Roth IRAs: To convert or not to convert

As a financial advisor and CPA, I often receive tax questions from my clients.  One that has been coming up a lot in the past year is: “Should I convert my non-Roth retirement plan (401(k), traditional IRA, 403(b) or 457(b)) to a Roth IRA?”  The question isn’t surprising, given the new rules that took effect January 1 for Roth IRA conversions.

The short answer, which should not surprise you, is: “It depends.”

The issue is complex, and the answer for one person can be radically different from the answer for someone else. Converting might be a boon, a mixed bag or a mistake, all depending on your circumstances.

It’s worse than that, because the only way to make sure you’re making the right choice is to know some variables of the future which simply cannot be known.

My bottom-line advice is to seek professional advice from your tax advisor, your financial advisor or your tax attorney before you take the plunge.

A word of caution

The difficulty with Roth conversions, like the difficulty for many tax strategies, is that the right answers cannot be known in advance. You usually cannot know your future income for sure. You cannot know what Congress will do to the tax code. And you cannot know future tax rates. In each case, the best you can do is guess. (more…)

Fixed index annuities: Perfect product or a ripoff?

Much of the financial industry is hurting these days, and you can bet that Wall Street is working overtime to hook investors in one way or another. Insurance companies are promoting a product that looks (at least to them) like a winner, especially during tough times.

You can barely pick up a financial publication lately without seeing ads for fixed indexed annuities, often called equity index annuities. The ads promise a lot. But does the product deliver the goods?

Many investors seem to think so. An estimated $26.7 billion went into equity index annuities in 2008, according to’s Advantage Index Sales & Market Report. I think there are three main reasons. First, they offer downside capital protection at a time when nothing seems to be working for investors. Second, they seem to offer market-like returns. Third, sales representatives are being paid high commissions to push them.

If you haven’t seen or heard the pitches for equity index annuities, you probably will before long. Wall Street has identified this as a profitable product – profitable, that is, for Wall Street.

The Claims

Here’s what you may be told: With a fixed indexed annuity you get a guaranteed minimum rate of return or the return based on an underlying stock index, whichever is higher. What could be nicer? Upside potential and no downside risk. Wall Street would like you to believe that finally somebody has devised a product that’s on your side all the way.

Technically, the claims are accurate. If you wait long enough (think about up to 16 years), you can get all your money back plus some return. However ……. (more…)

Why we still don’t favor commodities

Do commodities have a rightful place in a broadly diversified portfolio? The obvious answer seems to be yes, they do. However, after a lot of careful study and thought we have concluded that the right answer is still no, they don’t.

Commodity prices across the board are at all time highs. Experts say the world is running out of natural resources and that production will not keep up with the rising demand from fast growing emerging economies.

From a portfolio point of view, commodities also have attractive characteristics. While commodity prices are quite volatile, they tend to zig and zag independently of stock and bond prices. Due to the uncorrelated price movements, adding a small amount of commodity exposure can actually lower overall portfolio risk for a given expected return.

There is also a small measure of portfolio insurance gained from commodity exposure. During a rare commodity-related crisis, such as the Arab oil embargo in 1973, a dramatic rise in commodity prices will help buffer the decline in both stocks and bonds. Commodity exposure can also provide some insurance against political risk, since many of the nations currently rich in natural resources also tend to be somewhat politically unstable.

For all of the reasons briefly described, we were keenly interested in adding commodities to our model portfolios. This was a hard problem with many subtleties and conflicting expert opinions to work  through. Contrary to our expectations, after careful study, we recommend leaving commodities out of a diversified investment portfolio. (more…)