There Are Many Independent Events in Investing. Do Not Mix Them Together.
Market ups and downs and Roth IRA conversions are separate matters. Investors need to look ten, twenty, thirty, or even fifty years ahead.
CLEC Investment Club / Written date: Dec. 18, 2018
Market rises and falls are not something we can predict.
Converting a traditional retirement account IRA to a ROTH IRA means paying taxes now and saving taxes in the future.
If you accept that the two things above are independent events, then converting a traditional retirement account to ROTH this year and paying taxes on it actually has nothing to do with whether the market is up or down. If the market rises, you still have to pay taxes. So whether it rises or falls, your taxes must be paid. But the market's rise or fall is not something you can know in advance.
Usually I convert a traditional IRA to a ROTH IRA every January at the beginning of the year. From a probability perspective, there are more rising years than falling years, and stock prices at the beginning of the year are lower than at the end of the year. So from a probability perspective, there is no other choice: do the conversion every January.
The purpose of converting a traditional retirement account IRA to a ROTH IRA retirement account is to avoid tax on the capital gains ten or twenty years in the future.
You cannot consider whether the market for the current year will rise or fall, because you do not know whether the market over the next six months or year will rise or fall. These are two independent events.
The point is that if you convert 100,000 now, you need to pay 20,000 in taxes. Even if that 100,000 falls to 70,000 within the year, it would have fallen even if you had not converted. But if it becomes 250,000 twenty years later, you have saved tax rather than paid extra tax.
Investors need to understand that investing is an infinite game. It is not settled after one year or within one year to decide victory or defeat. When you invest correctly, you will ultimately win in the infinite game of investing.
So everyone needs to look ten, twenty, thirty, or even fifty years ahead in order to decide whether what you are doing now is right. If you worry about short-term declines, then you cannot make any investment at all.
Only optimists can succeed in the market.
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