What is a Backdoor Roth IRA?

If you're a high earner, you might have come across the term "Backdoor Roth" - it's often hailed as a strategy to outmaneuver heavy tax burdens imposed by Uncle Sam. Yet, despite its popularity in conversation, it remains largely misunderstood. Let's delve into a clear explanation, one that's easy to digest.

So, what exactly is a backdoor Roth?

It's a tactic used by high earners to contribute to a Roth IRA, even when their income surpasses the limits set by the IRS for direct contributions.

Here's how it typically works:

1. Make a Nondeductible Traditional IRA Contribution.

2. Convert to a Roth IRA: After contributing to the traditional IRA, you convert it to a Roth IRA. This conversion, crucially, is allowed regardless of your income level.

3. Tax Implications: Because the original IRA contribution was made post-tax, there are generally no tax implications from the conversion.

4. Things to Consider: Before proceeding with a backdoor Roth IRA, it's important to understand the pro-rata rule. This rule can impact the tax treatment of the conversion if you have other traditional IRAs with pre-tax contributions.

For years, there have been discussions in Congress and the presidency about closing this perceived tax loophole. Therefore, a backdoor Roth may not always be an option. It's wise to determine sooner rather than later whether you can participate in this strategy and how to do so effectively.

 Fiduciary Financial Advisors is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

Am I Doing Enough With My 401K?

Is Your 401K Doing Enough For You?

Is your 401k your biggest investment asset?

Have you ever had a financial professional look at your 401k?

Do you take advantage of the tax benefits of your 401k?

Are you upset with the return of your 401k?

How much do you really know about your 401k? Click here to listen about some of the most important points on employer sponsored retirement plans. If you have not had your 401k analyzed by a professional now is your chance to do so.

How Would You Like To Lose Money In 2022

How would you like to lose money in 2022? (Market Update)

Can the Fed Lower Interest Rates without causing a recession? 2022 has been filled with INFLATION, RISING INTEREST RATES and FEARS OF RECESSION. Within the last five months the S&P500 has declined by more than 15%, the Dow Jones over 10%, the NASDAQ tech-based growth index down over 25%.

Now let’s discuss why I worded this first paragraph in the way that I did. It enticed you to click on it and read more… This is not a new concept; the media makes money off of clicks and attention-grabbing headlines than ever before. Their goal is to scare, light a fire or entice you like never before. Now before we discuss the economics and actual statistical significance of the current market, I wanted to make one thing abundantly clear; IT PAYS TO BE A BEAR.  How do I know this? Because I am willing to bet my first line caught your attention, and it wasn’t even mine, it was taken from the headline of a Wall Street Journal article:

“Sadness and anger, for example, are negative emotions, but anger is much more potent. "It drives us, fires us up, and compels us to take action," Harvey Berger [Founder and CEO of ARIAD Pharmaceuticals] says. If you've ever found yourself falling for outrage clickbait or spent time hate-reading and hate-watching something, you know what Berger is talking about. "Anger, anxiety, humor, excitement, inspiration, surprise—all of these are punchy emotions that clickbait headlines rely on," he says.”

Within the graph above we can see the majority of news coming from four of the major mainstream media news sources are overwhelmingly negative.

Now since we have discussed why the world wants you to think a crash is coming lets analytically look at what actually causes a market crash? By observing the history of the markets and highlight what causes markets to decline, we know, markets move (in the short term) most commonly because of buying and selling. Below I have taken a screenshot of the S&P500 from 2007 to 2013 to highlight the 2008 market crash. If you look to the bottom of the chart, you can see a handful of green and red columns. These are called candlesticks, and they represent the volume at which people are buying and selling stocks. Red candlesticks represent selling and green candlesticks represent buying. As you can see on the decline of the 2008 crash the majority of the candlesticks are red, this forces markets to a bottom before someone steps in and says “This is now so cheap enough where I am willing to buy.” That is what we see right at the very bottom of the 2008 trough. On a very simple scale this is an explanation to how the markets tend to move.

The upside to the current conditions we are in is the fact that quite literally... There is currently no alternative to equities. Or as we say, TINA (There is no alternative). Let’s look at what that means, the chart below depicts the amount of interest a consumer would earn with $100,000 in the bank throughout the last few decades. As you can see in the years prior to the 2008 financial crisis you could sell your stocks, put your money in the bank and still make 2-5%. (If you are under the age of 30 this is where you laugh audibly). At this moment the average bank account yields .04%. This Is not a very attractive when compared to stock investing. Not to mention we have an extreme surplus of cash in the system. The average American has more money in the bank than ever before in history.  So, mix this all together, we have limited opportunities outside of stock investing (stopping a major selloff) as well as a surplus of cash to potentially fuel the market with buyers. 

What we have experienced thus far in 2022 is not a rare occurrence, we actually have seen this dozens of times throughout history. At some point in the year the market has pulled back negatively and still ended the year positive. In the illustration below the lowest point the market hit during a specific year is denoted by a red dot and the grey bar denotes where the market finished in that given year. There are 16 examples just in this illustration where we see a double-digit decline and by the end of the year the market is positive.

Now what you may be thinking is “This time is different.” That phrase has been uttered for hundreds of years through hundreds of economic cycles.  The fact of the matter should be, it does not totally matter if it is or isn’t. The market has proven one thing time and time again, the most patient investors are the ones who are rewarded with the greatest success. Tune out the noise, and let the beauty of “time in the market” not “timing the market” do what it does best.

The four most dangerous words in investing are

“This time is different”

-        Sir John Templeton (1933)

Should We Pay Off the House Early?

Is paying off your mortgage early the smart thing to do? It sounds great having that extra cash flow in your pocket each month by not having that monthly mortgage payment. That being said it is not quite that simple, lets see if paying off the house early makes sense for you.

Consider these factors:

• Once your mortgage is gone you will be missing out on your mortgage interest tax deduction.

• Dependent on your interest rate you may be earning more on investments rather than paying off the bill.

Lets look at an example, say your mortgage is $400,000 and you are in year 5 of your 30 year loan with a 3.5% interest rate. In this example that makes your monthly payment roughly $1,800. If you decided to pay $3,600 a month instead of your $1,800 you would shorten the loan term all while spending less money on the house. This sounds greatly appealing I understand. My goal here is to simply bring math and facts to the table.

As you can see with the increase payment schedule your mortgage will cost you 532k rather than 646k. At the same time you saved more than 100k on interest. The downside to this is the fact that all of this interest can be deducted and create tax savings in the tens of thousands of dollars.

The largest point I would like to address here is the fact that I believe there is a better use for that additional $1800 a month.

Rather than cut down the mortgage what if we took that extra cash and invested it into an index fund? If we took the $1,800 a month and did just that, given a 10% rate of return you would accumulate $368,720.96 in just a 10 year span. Now what if we did it for the remainder of the loan? Investing that extra $1,800 a month for the 25 remaining years on the loan will accumulate a value of $2,388,300.13! That’s one expensive house…

Now this math has changed somewhat in the current marketplace we reside in. With mortgage rates anywhere from 5 to 7 percent the math becomes less appealing and there is definitely a stronger argument to pay down that mortgage. The rule of thumb should be, can I use this money to out earn the 6% I am paying the bank to borrow for my home? If not then consider paying down that mortgage.

One final thought, I am fully aware that owning a home is an emotional decision and not just one to be solved by math. There is something to be said about you owning your home and the dirt under it, not the bank. With that in mind I am not directly telling you to keep the mortgage payment we often find a healthy balance of investing and early payment being the most logical answer for our clients. As I said before, I wanted to present to you the math and logic around the process.

I would love to help you analyze your own situation. Please reach out!

Boring Is Better

With holiday season in full swing and many more festive gatherings to come you may find yourself having conversations around the state of our economy, the cost of living, possibly even how your portfolios may be preforming, or more likely, how they are not preforming.

As we have watched the market react through this cycle of underperformance one thing has remained true, there is beauty and pride in proven investments. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best).

Let’s create some context, In the 19th century it was common for surgeons to reject the concept of micro bacteria, also known as germs. There was no process of sterilization when preforming surgery, which led to many infections and later a general knowledge of germs. This seems unfathomable to you or I reading this now but, like many things in life, it took countless mistakes to create a form of “Cumulative Knowledge” in the field.

For some reason this form of knowledge seems to pass over a large majority of the investment community. Although we have vast knowledge, an abundance of research and thousands of examples of different investment philosophies and strategies over time. Time and time again human behavior has not drastically varied through market cycles. The majority of investors participate in this form of “Cyclical Knowledge” mentioned by investor Jim Grant.

Let’s look at this mathematically -

 We have spent the last decade in a flourishing economy where nearly anyone from anywhere could create wealth in the equites market, in the last 12 months this entire concept has drastically changed. The majority of stocks are down year to date and all of the main indices listed above have suffered losses, although not in equal proportions.

Those boring old blue-chip stocks that pay a nice dividend and have strong cash flows are looking as bright as ever. Rather than the trendy investments in crypto currencies, blockchain, robotics, cyber security, and many more innovative concepts. It is time to be more methodical and rational in our investment philosophies.

Success in the stock market should look boring! You will not be sitting at the dinner table talking about your hot stock tip that doubled this year. Or how someone you work with got rich overnight on a hot investment.

This is not a proven way to create wealth. Diligence and patience are the greatest tools you possess in order to create lasting wealth. This sort of thing takes decades not weeks.

Invest continually over long periods of time, keep fees to a minimum, and wait patiently over years and decades to effectively build wealth.

This is not a declaration that index funds are the only answer to success in the realm of investing. I too enjoy variations of asset allocation; yet, this is a reminder of the importance of these strategies when considering the portions of your financial plan that are crucial to your retirement. As well as a reminder to be diligent in where your money is and who is in charge of it.  

My encouragement to you, as you hear those stories of large gains and news articles of the next big thing, find a way to stay true to the fundamentals. Understand although someone may be holding a hot stock up 80% odds are the rest of their holdings are suffering, they just failed to mention it. Exciting investments may have had their time in the spotlight but one thing will remain true over centuries. Boring investments do not have an ego, boring investments always have been and always will be sexy. 

Wealth is Built Over Time.

 Fiduciary Financial Advisors is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.