By Brett Arends
Every crisis is an opportunity. The massive turmoil on financial markets so far this year is no exception. Here are three things that every middle-class American can do with their 401(k), IRA or other retirement plans, right now, to take advantage of what’s going on.
Do a Roth conversion.
Individual retirement accounts, simple tax-sheltered retirement accounts approved by the IRS, come in two types: Traditional IRAs, where you get a tax break up front, at the time you make the contribution, and Roth IRAs, where you get the tax break at the end, when you make the withdrawal. You can convert a traditional IRA to a Roth at any time by filing a simple form at your financial firm. You will owe income taxes on the amount converted by April 15 of next year. There is a long, vexed and contentious debate about which one is better and when. I’m not getting into that here. However, if you have wanted to convert a traditional IRA to a Roth, this is a great time to do it. That’s because when you do a conversion you will owe income taxes on the value at the time of conversion. The lower the current value, the lower your tax bill.
There’s some good news hidden in this broad-based selloff: Pretty much everything has gone down. So if you came into the year owning, say, too much in large company U.S. stocks like the S&P 500, and too little in smaller company stocks, foreign stocks, real-estate investment trusts, and bonds, this is your lucky moment. You can do a do-over for free or at least reasonably cheap: Pretty much everything (except commodities and energy stocks) is down.
It’s not perfect, of course, because things have fallen different amounts. Nonetheless, among major stock indexes the S&P 500 /zigman2/quotes/209901640/composite SPY +0.32% has fallen 21%, while international developed markets /zigman2/quotes/202394679/composite VEA -0.86% are off 19% and emerging markets /zigman2/quotes/204649024/composite VWO -0.47% 15%. U.S. small-caps as measured by the S&P 600 /zigman2/quotes/208653303/composite IJR -0.04% are down 19%. International and emerging small-caps /zigman2/quotes/203826666/composite VSS -1.04% by 22%. Regular bonds /zigman2/quotes/200660887/composite AGG +0.16% have fallen 13% in price, inflation—protected bonds /zigman2/quotes/200600110/composite TIP +0.01% 12%. And while very long term Treasury bonds /zigman2/quotes/208971340/composite ZROZ +0.35% are down 33%, long-term inflation-protected bonds /zigman2/quotes/208968406/composite LTPZ -0.32% are down 27%. Real-estate investment trusts /zigman2/quotes/202931846/composite VNQ +0.32% are down 24%. Even boring utilities /zigman2/quotes/208243544/composite FUTY +0.63% are off by 9%.
3. Make an investment for your children or grandchildren.
The simplest way to take advantage of this meltdown? Go to a brokerage or bank, open an investment account for any minor children or grandchildren, and deposit as little as $1,000 on their behalf into some low-cost index funds. Just iShares Equal Weight U.S.A. /zigman2/quotes/207161740/composite EUSA +0.06% and Vanguard FTSE All World ex-US /zigman2/quotes/203057966/composite VEU -0.78% cover the universe, for less than 0.1% a year. The long-term returns from stocks have averaged 5% a year on top of inflation. Based on those numbers, a $1,000 gift today will be worth about $11,000 in 50 years’ time and $18,000 in 60 years’ time, measured in today’s purchasing power terms.