My wife doesn’t know it, but I gave her the most romantic Valentines Day gift.
I put time aside to contribute the annual maximum into each of our non-deductible Traditional IRA’s and converted them into our Roth IRA’s using the backdoor method. I re-balanced our asset allocation across all of our retirement investment accounts, re-calculated and set new percentages for our future contribution allocations in our employer sponsored retirement accounts, and contributed Lunar New Years gift money into our daughter’s 529 Plan.
Yeah that’s right, I’m a romantic. I’m a sexy beast when it comes to financial security.
Backdoor Roth IRA
If you make too much money to contribute directly to a Roth IRA, you can do so indirectly. It’s called the Backdoor Roth IRA method. The easiest, and tax-free, way to do so is when you do not have any money in an existing Traditional IRA. I keep my IRA’s at Vanguard and my Traditional IRA has as a zero balance, but for once a year.
The maximum you can contribute to an IRA this year is $5,500 (those over age 50 qualify for additional catch-up contributions). To get started, you deposit the money into a Traditional IRA. Make sure you buy into a money market fund or use a cash account. You don’t want to earn any interest, dividends, or create any capital gains (if you end up making a few cents, it’s not a big deal). When the money clears, immediately transfer it to the Roth IRA. During the conversion process, the brokerage will ask if you want to withhold taxes. Make sure you choose No.
That’s pretty much it. It’s not complicated at all. In fact, if you have a Vanguard account, they have a selection in the contribution area called “Convert to Roth IRA.” They make it so simple.
Here’s the important part, when tax time comes around, you will get a Form 1099-R showing that you took a distribution. Don’t get scared when you see the box that shows “Taxable Amount $5,500.” I got a little freaked the first time I did a conversion and saw that. When you do your taxes, make sure you do not take a deduction on the Traditional IRA. Most likely, if you’re using the Backdoor Roth IRA method, you can’t take a deduction anyway, but you want to select the option that says you made a Non-Deductible Traditional IRA contribution. If you (or your tax preparer) filled out the forms correctly, you will have no tax liability on the conversion.
Re-Balancing Your Asset Allocation
Although trading in retirement investment accounts (with mutual funds) usually doesn’t incur commissions or trading fees, I try to only re-balance once a year. Studies have actually shown that re-balancing often diminishes returns slightly anyway.
Like I have said before, I think the best decision most investors could make is to invest in an all in one retirement mutual fund. That said, sometimes having employer sponsored retirement accounts can make asset allocation a little tricky. For myself, I have a custom allocation because of the fund choices available in the employer sponsored retirement accounts. My allocation is similar to the Vanguard Target Date Retirement Funds, but includes a small REIT allocation and a slightly lower international fund component.
Asset allocation is a tricky topic, because of the account and fund availability component, so the only advice I’ll give here is to make sure you take the entire situation into account when coming up with your asset allocation. You have to include all of your accounts, and include your spouses accounts as well. If you don’t do that, you risk having duplicate or overweight investments.
Employer Sponsored Retirement Accounts & Future Allocations
Most of us will make most of our investment contributions to an employer sponsored retirement account, like a 401k. It’s a natural effect because of taxes and the benefits of matching programs. If you have a target date fund in your 401k, you’re on easy street. Just set it and forget it. But if you don’t have access to an all in one fund, you have to do a little extra math.
Again, I’m not going to say much in this category because it’s a little complicated. Just keep in mind how much you’re contributing into this kind of account over the course of the year and do the math to keep the allocation in line with the rest of your investments.
I live in California. I keep my daughter’s 529 Plan in Utah. Why? Because it’s the best plan, and far better than the California plan. Remember, with 529 plans, you can use the money and go to school anywhere you want.
Anyways, while she is still too young to spend any of her own money, all of her gift money goes into the 529 account. On her birthday, I give her a gift of money and invest it into the account. I plan on doing so every year until she is 18. However, I do not intend on making regular contributions into the 529 Plan because my retirement is more important and a bigger priority than her education.
Remember, there is no such thing as financial aid for retirement. There are so many ways kids can pay for school. There is no need to struggle to pay for a child’s education, unless you’re fabulously rich, and then become a financial burden on them later. I think it’s quite better to let your children figure out how to pay for school (or just go to an affordable one), as there are so many life lessons to be learned doing things independently (with occasional guidance).
So do you see the romance so far? You don’t?
First of all, I believe there is nothing more romantic than planning for a long, and financially secure, life together. I think it’s much more romantic to ensure a life without welfare and food stamps than to worry about giving a card that will eventually end up being recycled and flowers that will die in a few days. Second of all, all trades and transactions took place on Valentines Day.
Take notice. The ultimate romantic gesture you can do is to give your significant other financial security for the rest of their lives. It takes year-round planning, not just one Hallmark day of the year.
Posted by Long