Should I convert my Traditional IRA to a Roth IRA?

Tax Diversification

Picture Courtesy of U.S. News

This is a common question we face as financial planners. Popularity doesn’t necessarily make something a good financial decision for your personal situation. There are a few important factors to consider when determining if a Roth Conversion is for you.
1) What is your current tax bracket?
A big consideration of whether or not to convert your Traditional IRA to a Roth Ira should be dependent on your current tax circumstances. With clients having widely varying effective tax rates, it’s important to know your current tax rate and your potential tax rate should you decide to convert your IRA. All conversion proceeds from your IRA will be considered taxable dollars. When you contributed to your 401k, IRA or other qualified plan, you were given a tax deduction for your contribution. So, you never paid taxes on the money you invested. Now as you move funds out of your traditional IRA you will begin to pay taxes. If you have a tax rate of 15%, then maybe the conversion could be beneficial to you. If you have a tax rate of 25%, then maybe it won’t be. The best advice is for you to gain an understanding of the tax consequences pertinent to you.
2) What is your future tax bracket going to be?
This is much more difficult to determine. However, most people will find themselves in a lower tax bracket when they retire than their current tax bracket. This is the primary reason a person would consider not converting the Traditional IRA to a Roth IRA. If you have to pay more money today than you would pay in the future, why would you want to pay the extra tax? In the words of one of my clients, “Who said, yes I’d like to pay more taxes please? Nobody Ever!” Her words, not mine.
3) What is the growth difference between my traditional IRA and potential Roth IRA after taxes?
Now that we know your current tax bracket and your potential future tax bracket, we can begin to make calculations that will determine the potential value of both decisions for the future and for today. Here is a sample scenario for you:
Kate (65) has $300,000 in her Traditional IRA which she rolled over from her former employer’s 401K plan. Kate lives a fairly simple life, has no debt and she anticipates being able to live off her social security and supplement income from her IRA as she needs it. We’ll assume she needs $20,000 of extra income every year from her IRA. This extra income is to ensure Kate can do the special things she like to do like traveling, attending trade shows, and spoiling her grandchildren.
In our current scenario, Kate is mostly in the 15% tax bracket. She is earning a return of about 6.5% on her investments and has already begun withdrawing the $20,000 from her IRA.
The results:
If Kate were to convert her entire IRA today, then she would find herself in the 33% tax bracket paying almost $90,000 in taxes to the IRS. Since Kate is only withdrawing $20,000 per year from her Traditional IRA, it probably doesn’t make sense for Kate to convert this IRA at this time. The future compounding growth of her Traditional IRA is worth more than taking the tax hit today for the potential tax savings tomorrow. Maybe the conversion makes sense if Kate had 30 years to allow her money to grow, but for today’s illustration, she’s better off leaving the money in her account.
Is the Roth Conversion a financial strategy you’ve been considering? If so, let’s talk.

Jose Cuevas
Wisdom Investments
jose@wisdominvestments.com

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“The Market is at an All Time High, What Should I Do”?

"In the event of a sudden drop in the market, oxygen..."

In varying forms we’ve repeatedly heard this question asked over the last several months.  When I hear the question, I tell clients, “well, it’s a good idea to ensure you are properly diversified, you review your financial plan and consider your current risk tolerance”.  If you find yourself asking this question, contact me so I can give you a complimentary risk assessment.  In this blog I wanted to share a perspective of diversification and continued perseverance that you might not have considered. When I analyze the markets and all of the available information to me, I have absolutely no idea what’s going to happen tomorrow, a week from now or a year from now.

When I look at what the Bible has to say about this question, I find my answer in the book of Ecclesiastes.  Ecclesiastes 11 starts off saying:

“Cast your bread upon the waters, for you will find it after many days. Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.  If the clouds are full of rain, they empty themselves on the earth, and if a tree falls to the south or to the north, in the place where the tree falls, there it will lie. He who observes the wind will not sow, and he who regards the clouds will not reap.”

Most of the commentaries I come across indicate Solomon is trying to teach about giving. And, maybe that’s true. When I read these texts I see a practical lesson about working hard and diversification. The first verse starts by saying “cast your bread upon the waters, for you will find it after many days”.  I think of a fisherman using bread to catch fish.  If the fisherman doesn’t cast his bread out into the water, he’s not going to catch any fish.  The second half of the verse shares that you will find your bread again after many days. If you invest in the supplies necessary to earn, then your return will come back to you in time.

The next line says “Give a portion to seven, or even to eight, for you know not what disaster may happen on earth”.  Continuing with the analogy of our fisherman, maybe he should have 7 or 8 lines in the water or fish at different lakes… In the world of investments, I see how this applies to asset allocation. An investor shouldn’t just invest in stocks or gold.  An investor should have her money properly diversified amongst stocks, bonds, cash, real estate and commodities.  Then within these five different asset classes, there are subsets of investments that an investor should consider. Maybe if investors and asset managers were utilizing this ancient advice during the dot-com crash, they wouldn’t have lost so much money. In 1999 diversification meant Large Cap stocks and bonds… That was it.

The verse clearly says a disaster is going to come, it’s just a matter of when.  I think the next verse gives us an indication of what kinds of disasters could come. “If clouds are full of rain, they empty themselves on the earth and if a tree falls to the south or to the north, in the place where the tree falls, there it will lie”. I think Solomon is saying, you never know when a flood will come. When it’s time for the clouds to empty, they will empty. I’m not so sure about the tree falling, but I imagine the tree is an impediment for you to continue traveling down a path. I imagine a tree blocking your route and you needing to exert more work to move the tree to continue in your regular work. I may be entirely wrong, but just a thought. In the investment world, floods and forest fires are absolutely disrupting people’s lives at this very moment. The wild fires in California have destroyed wine crops and flooding in Puerto Rico has eliminated the ability for the tourism industry to earn money right now.  We know these disasters are going to come. We must diversify our risk and be prepared for them.

The last verse shares that in spite of these natural disasters, we must keep working. “He who observes the wind will not sow, and he who regards the clouds will not reap.”  If you stand outside staring at the wind all day instead of making a move, working hard, and diversifying your work, you will not earn.  You will not reap your reward if you haven’t done the work necessary to win. So, if we think the market is at a high, the stock market that is, you can’t just sit idly by on the sideline and watch the wind. You need to review your portfolio, assess your risk tolerance and keep steady on your plan to accomplish the goal you’ve set forth.  

I hope this short post is helpful to your thought process about the current market high.

Disclosure: I am not a Bible Scholar.  The views expressed in this blog are my own.

Call me to schedule an appointment.

Jose Cuevas
Vice President
Wisdom Investments
847-290-0753
jose@wisdominvestments.com

 

I’m Trying, But My Spouse Isn’t

 

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Picture Courtesy of P.C. Vey Readers Digest

 

I can’t tell you how many times I’ve heard a variation of the phrases “I’m trying, but he isn’t”,  “I’m sticking to my budget but she’s not”, and “I’m ready to retire, but he’s not”.  There are many things my spouse and I don’t agree on. As an example, I am a risk-taker and my wife is not.  My wife doesn’t like to look at the budget but I do. She is perfectly fine shopping cheap and I’m not.  The list can go on and on.  But, one thing we do as we navigate through some of life’s most difficult challenges, is talk and come up with a plan.  Marital unity is absolutely critical when making important financial decisions and also dealing with the day to day minutiae of budgeting, shopping & other daily spending decisions.

 

For many of us, we weren’t modeled how to manage money well as children. Worse yet, we weren’t modeled how to talk about money with our significant others. Some of us may even have searing images implanted in our brains of our parents screaming and fighting in the kitchen over money.  So, it’s no surprise that many of us don’t know how to talk with our spouses about money.  For that matter, some of us don’t really know how to talk to our spouses at all. If this is true, how do we begin to have dialogue with our husbands and wives that will be beneficial for the whole family.

It’s no secret to some of you reading this article that I’m going to quote the Bible. And, for some of you who don’t know that I do that…YES!!! The Bible!. 🙂 I think the first thing I will share is that if your spouse “doesn’t want to listen to you”, you should probably consider what you’ve been saying and how you’ve been saying it. Sometimes your spouse just feels too much pressure from you when it comes to accomplishing the goals you’ve set forth. Maybe you come across as a dictator.  Maybe you’re an Ephesians 22-24 guy and you love these verses:

“Wives, submit yourselves to your own husbands as you do to the Lord. 23 For the husband is the head of the wife as Christ is the head of the church, his body, of which he is the Savior. 24 Now as the church submits to Christ, so also wives should submit to their husbands in everything”. 

But, if you’re forgetting Ephesians 5:25 that goes along with these verses, then maybe you should consider re-reading this passage.

25 Husbands, love your wives, just as Christ loved the church and gave himself up for her. 

Last time I checked, Christ’s love is the most absolutely sacrificial kind of love ever demonstrated to mankind. Are you showing your wife this kind of love when “she’s not submitting” to what you say? Just a thought…

Now, maybe your the wife saying “My husband just won’t lead. He should be taking charge of this.”  I find no scripture verse that says your husband has to be perfect at everything and take the lead on every single matter that comes up in your house. As a partner in your marriage you are capable to take the lead in many areas and help manage the finances.  I say finances as that is what I’m writing about today.  What’s the point of all this?  Using the title of a new tv drama…., THIS IS US.  This is how we sometimes relate to each other. This is how we sometimes speak to each other. When it comes to goal planning, I’m quite certain God’s intention wasn’t for one person to handle everything and the other person to be completely in the dark or complacent about matters.

So, what can you do? What can you say? The answer is I have absolutely no idea! I don’t know you. I don’t know your financial situation and I don’t know exactly why “you’re trying, but your spouse isn’t”. But, I could recommend a few ideas that you might find helpful. First, we must speak kindly to each other and not blame one another when things don’t go right. When it comes to making good money decisions and being on the same page as your spouse, it’s important to have clear and peace filled dialogue.  Ask your spouse questions like “what’s important to you right now about our finances?”, “where do you see us in 5 years and how do we get there together?”, “how does this purchase help us with our goal of funding education for our children?” “what do you think about talking to a financial planner?”. I had to throw that one in….;-) Kidding aside, you must find a way to communicate with your spouse about money in a way he or she understands. A couple of resources I could recommend… Find a “Financial Peace University” class in your area. Find a good counselor who can help you process some of the issues you need to address with marriage and finances.  I’m partial to good Christian counseling and I can recommend a few good counselors if you’d like.  Go have a talk with your Pastor.  Read Randy Alcorn’s book “Money, Possessions, and Eternity”.  There is so much you can do.

Most importantly, you aren’t alone. I’m writing about this topic today because it’s been a recurring theme in my practice lately.  I’ve sat with couples as tears have overflowed because one spouse has plan A while the other spouse is focused on plan B. I’ve sat and heard stories of marriages on the brink of divorce because the two couldn’t agree on a financial direction. It doesn’t have to be that way. There are things you can do to make your marriage and your financial situation better!  If you need help, please don’t hesitate to reach out and ask.  Please share with us a story of how your marriage and finances have improved! We’d love to hear it.

Jose Cuevas
Vice President
Wisdom Investments
847-290-0753
jose@wisdominvestments.com
www.wisdominvestments.com

What Do You Mean I Need To Give More?

Giving

As a financial advisor who claims to operate a Christian Financial Planning practice, I feel I have the duty to my Christian clients and to God to have conversations with them about giving. In my own life, I’ve had ups and downs when it came to my giving. Opening my own practice dramatically affected my giving, but I know as the company grows, my giving will be far greater than it was in the past. But, during my times of radical giving and obedience to the “Tithe Principle”, I found that my life was becoming more and more blessed beyond anything I could have imagined. The “Tithe Principle” says this from Malachi 3:10: “Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this,” says the LORD Almighty, “and see if I will not throw open the floodgates of heaven and pour out so much blessing that there will not be room enough to store it”. I have seen the promise attached to this Scripture verse come to fruition in my own life.  As my giving increased, I started to receive promotions at work. As my obedience increased, I saw unexpected family blessings happen that I never would have anticipated.

When my wife and I first decided we were going to try to live the Christian walk, someone we don’t know and still don’t know to this day sent us a card with a letter inside. The letter said many wonderful things, but what I will remember most is the card had the scripture verse from 2 Corinthians 9:6-15 which says, Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously.  Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver. And God is able to bless you abundantly, so that in all things at all times, having all that you need, you will abound in every good work.  As it is written: “They have freely scattered their gifts to the poor; their righteousness endures forever.” Now he who supplies seed to the sower and bread for food will also supply and increase your store of seed and will enlarge the harvest of your righteousness. You will be enriched in every way so that you can be generous on every occasion, and through us your generosity will result in thanksgiving to God. This service that you perform is not only supplying the needs of the Lord’s people but is also overflowing in many expressions of thanks to God. Because of the service by which you have proved yourselves, others will praise God for the obedience that accompanies your confession of the gospel of Christ, and for your generosity in sharing with them and with everyone else. And in their prayers for you their hearts will go out to you, because of the surpassing grace God has given you. Thanks be to God for his indescribable gift! Again, I have seen the promises of these verses come to fruition in my life. This is my experience with having a giving heart.

Even though my personal experience is my experience, I believe these promises are for EVERYONE. I believe that when we are more giving, natural reciprocal giving just happens in return. This does not mean that we give to receive. We just understand that giving allows us to be more blessed than we already are. How is this related to financial planning? Good question. Since I practice what I call “Biblical Finance”, I need to follow what the Bible prescribes when working with Christian clients. The Bible is a great roadmap for many of life’s decisions, including your finances. In addition to giving, the Bible talks about diversification, debt, lending, taxes & more. By following the money principles outlined in the Bible, we have an opportunity to partner with God to accomplish incredible feats. We have the opportunity to see and hear stories of redemption, overcoming, & change. As an example, immediately following Hurricane Harvey, my church, Willow Creek, had such radical giving from the people of the Church, that we sent 5 semi-trucks filled with relief items for the victims of Hurricane Harvey. That is something to be proud of! When I think about the Bible saying to “Store up treasures in Heaven”, I believe this is a great example of storing a treasure for Heaven. People’s lives will be changed because of the generosity of those who have decided to give.

As a Christian, you should examine your giving. You should pray about what God has asked you to give and follow through. I have no doubt your life will be abundantly blessed because of it. If you are a Christian and when it comes to your giving, you are solely focused on how much you are saving for retirement or for your child’s education, you are completely missing the point of the life we have been called to live. If you were one of my clients, I would be obligated to have a conversation with you about your giving. In fact, I’ve done so on a number of occasions. If you are a Christian and you are seeking Christian advice, you might not like what you hear from time to time. I know I will lose clients because I talk about giving, but I believe we all have a bigger calling in our lives than just saving and earning money. As I’ve given advice to the clients who have followed through, the success stories happening will be a great testimony to the proof of the truth of God’s Word.

What’s more important to you, saving as much money as you can? Or, being part of something that is much bigger than you? Do you want to see the “floodgates of Heaven” opened up for you? Do you want to see others thanking God for the good works you have done? As for me, I’m going with the being part of something bigger than anything I can ask or imagine. There is great power within our Church, our Community and our Calling when we decide we are going to give sacrificially and according to how God has asked us to give.

Have a great day.

Jose Cuevas

Wisdom Investments

847-290-0753

Jose@wisdominvestments.com

2nd Quarter Market Review – Should stock investors worry about changes in interest rates?

Should stock investors worry about changes in interest rates?

Research shows that, like stock prices, changes in interest rates and bond prices are largely unpredictable.1 It follows that an investment strategy based upon attempting to exploit these sorts of changes isn’t likely to be a fruitful endeavor. Despite the unpredictable nature of interest rate changes, investors may still be curious about what might happen to stocks if interest rates go up.

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Thank you,

Jose Cuevas
Vice President
Wisdom Investments
847-290-0753

 

1st Quarter Report – Investment Shock Absorbers

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Ever ridden in a car with worn-out shock absorbers? Every bump is jarring, every corner stomach-churning, and every red light an excuse to assume the brace position. Owning an undiversified portfolio can trigger similar reactions.

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Many Blessings,

Jose Cuevas

jose@wisdominvestments.com

847-290-0753

www.wisdominvestments.com

10 Books to Help You Make Smart Choices With Your Money

The Christian Financial Planner

money book Books are valuable, expecially books about money.

When you think about successful money management, what comes to mind? Where do you receive good information? How do you know what books to read to help guide you down the right path?  Most people don’t just obtain wealth out of the blue sky.  If you were to ask most successful people how they obtained their money, they would tell you they worked hard, had some luck/blessing, and they read voraciously. When I first entered the financial planning business, my mentors assigned me a list of books to read to help me understand more about money and how it works.  Since that time 15 years ago, I’ve come across many great financial books and I’d like to share ten books to help you make smart choices with your money. I’m sure 15 years from now, I’ll have a different list of…

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