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November 2, 2009

THE MARKETS

The good news is the Dow Jones Industrial Average rose above 10,000 last month. The bad news is it first rose above 10,000 more than 10 years ago – March 1999 to be specific.

A lot has changed in those 10 years! Let’s look at a few differences between 1999 and today, according to Peter Boockvar, equity strategist at Miller Tabak as reported in a Yahoo! Finance article.

• Total U.S. public debt was about $5.6 trillion back in March 1999 versus about $12.0 trillion today, according to the Treasury Department. By contrast, U.S. gross domestic product has only grown from $11 trillion in 1999 to about $13 trillion today.
• In fiscal 1999, the U.S. had a budget surplus of $125 billion. In fiscal 2009, we had a budget deficit of $1.4 trillion, according to the Congressional Budget Office.
• Unemployment was 4.2% in March 1999. Last month it was 9.8%, according to the Bureau of Labor Statistics.
• The value of the U.S. dollar has dropped about 25% since 1999 against a basket of currencies. This means that it costs us about 25% more to buy foreign denominated goods and services than it would have had the dollar maintained its value.
• The DJ-UBS Commodity index was in the upper 70s in March 1999. Last week it closed at 134, which indicates prices for commodities have risen significantly, according to Dow Jones.
• Gold was about $280 per ounce in early 1999. Today it is over $1,000.
• Oil was selling for about $16.50 a barrel in early 1999. Today it is over $75 a barrel.

The numbers above show that as our country has gone deeper into debt over the past 10 years, the stock market has flat lined and the value of the dollar has declined significantly, while hard assets such as gold and oil have more than tripled in value and commodities in general have risen in the high double digits. Unlike in the “rock, paper, scissors” game of our childhood, the financial markets are telling us rock (hard assets) beats paper (currency and IOUs).

CHART OF THE MONTH

The Dow Jones Industrial Average, which bottomed intra-day at 6,440 on March 9, 2009 has risen above the mystical 10,000 level. The 57% advance in more than seven months is one of the largest on record. For some perspective on the current stock market rally and how it compares the 1929-1932 bear market (which also included bank failures, bankruptcies, severe stock market declines, etc.), the chart on the right illustrates the duration (calendar days) and magnitude (percent gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots).

For example, the bear market rally that began in November 1929 lasted 155 calendar days and resulted in a gain of 48%. As today's chart illustrates, the duration and magnitude of the current Dow rally (hollow blue dot labeled you are here) is greater than any that occurred during the 1929-1932 bear market.

The Time is Right to Consider Roth IRA Conversion

Since its creation more than a decade ago, the Roth Individual Retirement Account (IRA) has been among the best tax breaks available. You get tax-free withdrawals of your earnings after your taxed dollars have been contributed, and once the five-year and age 59½ (whichever is later) (or death, disability, or first-time home buyer) requirements are met.

And, now, you have a unique opportunity to keep more of your eligible retirement assets protected from any increase in federal and state taxes by moving those monies into a Roth IRA while taxes are still relatively low. The planning you do now can have major long-term impact for you and your family.

Is a Roth IRA conversion right for you? Now is the time to decide.

Here are some other benefits:

• No required distributions (i.e., withdrawals) for Roth IRA owners.
• Roth IRA beneficiaries can stretch tax-free distributions over their lifetimes.
• Since distributions are tax free, Roth IRAs remove the uncertainty over future income tax rates.
• Roth IRA conversions can be undone up to October 15th of the year following the conversion.

Anyone considering a Roth IRA conversion in 2009 must meet the $100,000 modified adjusted gross income (MAGI) limit. That $100,000 ceiling applies to joint or single returns.

However, a new Roth era begins in January 2010. Anyone will be able to convert to a Roth IRA.

The $100,000 MAGI ceiling for Roth IRA conversions will be permanently repealed. As a bonus, for the tax year 2010 you will be able to spread the tax impact (remember – money contributed to a Roth IRA is taxed upfront) over the next two years on your 2011 and 2012 tax returns. In all other years, income must be included on the current year return.

Many individuals will want to implement conversions as soon as possible, while tax rates are low and account values are still depressed. But, before you decide, there are a few things to consider:

• First, the tax should be paid from other monies. Taking cash from the IRA to pay the tax bill would diminish the benefit of the Roth IRA conversion.
• Second, determine how much of your traditional IRAs you might want to convert. Consult with your tax advisor to figure out what deductions and credits might be lost. For example, parents of students might find that increasing adjusted gross income will reduce your eligibility for college aid and scholarships.
• Third, determine the best timing for a conversion. “For individuals who are currently eligible in 2009, more information is known. They know their IRA balances are depressed after last year's stock market decline, income taxes are at the lowest historical levels in years, and converting now will start the five-year clock for withdrawals as of January 1, 2009," says Ed Slott, CPA and author of Parlay Your IRA into a Family Fortune. That five-year period is important because a converted amount that is withdrawn from the Roth IRA before the period ends is subject to the 10% premature distribution penalty tax.

Slott adds, “However, if you wait until 2010, you will delay the reporting of income to your 2011 and 2012 tax returns.”

The big Roth IRA question is, “Can you trust the government to keep its word about tax-free withdrawals?” There are no guarantees as to what might happen in the future if budget deficits keep expanding. However, Slott believes there are some reasons why Roth IRAs won't be taxed.

• First, such a reversal would be politically risky. Most of the legislators in office today voted for this provision and could be seen as reneging on their promises of a tax-free retirement savings account.
• Second, the federal government would lose the tax revenue that is collected upfront.

And, even if the government does change the rules on Roth IRAs to make them less appealing, existing accounts may well be grandfathered, based on how Congress has acted in the past. Therefore, the sooner you act, the greater the chance you would qualify for any potential grandfathering.

Of course, you can determine on your own what makes sense for your situation, taking into account the whole picture including cash flow planning both now and in retirement, as well as tax, investment, and estate planning. Also, be aware that not all Roth IRA conversion calculators are created equal. Depending on the size of the conversion, you might want to seek advice from a professional who specializes in this subject.

Is a conversion right for you? Now is the time to decide. Please call us at 201-798-7992 if you have any questions or would like to discuss your Roth IRA.

Thanks for your trust & confidence,

ken@fordwealth.com | 201-798-7992

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Consult your financial professional before making any investment decision.
* You cannot invest directly in an index.
* Past performance does not guarantee future results.