RETIREMENT
pecting taxpayers , especially those who conduct a so-called “ backdoor Roth ” by making a non-deductible contribution to a traditional IRA and subsequently converting the account to a Roth . They often don ’ t realize that the tax calculation on a Roth conversion takes into account the year-end balances of all their traditional individual retirement accounts , including SEP-IRAs and SIMPLE IRAs , not just the account being converted .
The end result ? Clients will have to cough up more tax on the conversion than they bargained for .
Sometimes clients who complete Roth conversions simply forget about a small traditional IRA they have , even if their advisor has pressed them to show the entirety of their retirement accounts . Or perhaps they carry out a backdoor Roth conversion early in the year , switch jobs later in the year , and in the process roll a traditional 401 ( k ) at the old employer to an IRA .
In both of these situations the client will have a traditional IRA end-ofyear balance , triggering the pro rata rule , says Matt Saneholtz , president and senior wealth advisor at Tobias Financial Advisors in Plantation , Fla .
To remedy such cases , before the year ends advisors should consider rolling the traditional IRA to the client ’ s employer plan , assuming its fees are reasonable , the investment choices meet the client ’ s objectives , and the plan allows incoming IRA rollovers , Saneholtz advises .
“ Now we can start the backdoor Roth and the pro rata rule doesn ’ t come into play ,” he tells clients as he presents a diagram of all the steps , from rolling the traditional IRA to the employer plan through the conversion of the current-year IRA contribution to a Roth .
Befuddled By Withholding
Not everyone realizes that the income tax withheld from a Roth conversion counts as a taxable distribution — and that if they ’ re under age 59½ , the 10 % early withdrawal penalty applies .
Another problem will arise if a client converts an IRA and decides not to have tax withheld , then fails to make the necessary estimated tax payment . “ They forget about it or figure , ‘ This will all work out in the end ,’ and they wind up with an estimated tax penalty ,” says planner Jeremy Keil , at Keil Financial Partners in New Berlin , Wis .
To him , the most costly blunder is made by those who know they should make an estimated tax payment if they convert but conclude that the conversion ’ s tax cost would exceed the cash they have handy . So they abandon the conversion .
“ There ’ s this false belief that if you don ’ t have the money to make an estimated tax payment , you shouldn ’ t bother with a Roth conversion ,” Keil observes . “ But if you ’ re over 59½ and it makes sense to convert , you ’ re better off converting and having tax withheld as opposed to not doing it at all .”
ERIC REINER is a freelance writer who also teaches finance and risk management at the University of Colorado Denver Business School .
Portfolio Spotlight continued from page 44
he says . “ We don ’ t use leverage , so we shouldn ’ t be compared to funds that do . So we ’ d probably be less risky than a global macro hedge fund .”
Ultimately , Cuggino says , investors shouldn ’ t get too wrapped up in labels . “ For investors , rankings are just one of many factors to consider . At the end of the day , the numbers are what the numbers are regardless of how a fund is categorized .”
He adds that his fund will always underperform in a bull market because its equity exposure is limited . “ In a bull market , comparing our fund to the overall equity market is like comparing apples to oranges .”
He points to a 10-year chart ( ended January 31 , 2024 ) in the fund ’ s annual report that showed it outperforming the FTSE 3-Month U . S . Treasury Bill Index ( a proxy for the Consumer Price Index that measures inflation ) and underperforming the S & P 500 . “ If you look at our chart , for every conceivable period it ’ s above the FTSE graph line but is below the S & P 500 graph line ,” he says . “ To me , that ’ s very illustrative of the return and risk expectations of our fund .”
Uncertain Times
Cuggino says the fund ’ s multi-assetclass , all-weather approach lends itself to different uses within investment portfolios . Some people put it into investment sleeves related to absolute returns or alternative investments , either alone or combined with other strategies that might not correlate to what the Permanent Portfolio does , he says .
Other investors have different ideas about how they use the fund .
“ Because we throw off income , we ’ re sometimes used as a complement in fixedincome strategies because we aren ’ t correlated to bonds ,” he says . “ Our correlation to bonds is probably about 50 %. Our correlation to the S & P 500 is probably about a third . We act as a non-correlative offset to typical stock and bond strategies .”
In a macro sense , the world never provides a smooth ride . And while today ’ s scene differs from that of the late-1970s / early-1980s in some of the specifics , a general sense of unease and uncertainty remains . Cuggino rattles off potential risks such as concerns about the U . S . and global economies , interest rates , inflation , geopolitical risks , the growing U . S . budget deficit , and the challenge to the dollar as the world ’ s primary payment system .
“ We run a conservative fund , but we ’ re not Chicken Littles . We want growth as well as conservative investing ,” he says . “ Our portfolio tries to encompass a balance of all of these risks and rewards to produce [ results ] that will be somewhere in the middle that will beat inflation over time .”
52 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2024 WWW . FA-MAG . COM