Bear Market Roth Conversion Strategies – Episode 336

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the current bear market, and how a Roth conversion may be a good option since many assets are depressed this year.

Hey everyone, and welcome to another episode of Adam Talks. I’m Adam Bergman, tax attorney and founder, IRA Financial, and on today’s episode, Bear Market – maybe some Roth conversion strategies.

So, this is a podcast that I’ve been holding on for a while because it’s just getting ugly out there. Here’s some numbers to kind of chew on. Kind of depressing stuff. S&P 500 year-to-date down 12%, Dow down around 9%, Apple down around 10%, Tesla down around 15%. This is year-to-date, January 1 til approximately May 1. Amazon down 13%, JPMorgan down 23%, Bitcoin down 14%, Ethereum down 22%, silver down about 1.3%. Gold. Gold is the only thing that’s been up; up about 5% year-to-date. So ugly, ugly stuff.

I actually have been resisting looking at some of my 401(k) and financial statements that are invested in equities. My real estate holdings are doing well. My Self-Directed IRA real estate holdings are doing pretty well. Not so much my cryptos and private placement, private equity/hedge fund stuff. Those don’t really mark the market, but I just kind of know the strategies and they haven’t been very fruitful, or at least I don’t think the short term prognosis is pretty good.

But, hey, we’re in this for the long term, right? So that’s what kind of got me focused on this theme on this podcast is what can we do? Maybe there’s certainly, inflation. I’ve talked about this on the pod several times in the last few months. We know what’s going on, about 8-9% inflation, we know interest rates are going to go up. Will real estate market prices go down? Probably! Stock markets – I’m not saying a free fall, but it’s been a tough year. Almost all asset classes are down. So, what can we do? We always got to look to take a bad situation to make it positive.

So, this is something that I’ve done in the past, and I’m probably going to do it at some point in the next month or so. I’m just going to kind of wait out the market a little bit. But Roth conversions.

What’s a Roth conversion? That means you take a pretax IRA and you convert it to Roth. And yeah, there is tax. When you convert a pretax IRA to Roth, you pay tax on the value of that IRA, but the value is depressed. If it’s Apple stock, it’s down 10%, or Amazon down 13%. Or Ethereum, that’s down 22%; you can save potentially 22% on the tax, assuming you expect the asset to go up. Right?

I assume if you own Apple or Tesla or JPMorgan or Bitcoin, Ethereum, silver, you should expect the assets to go up, right? S&P 500 over the last 100 years has averaged close to 10%. So, this is just kind of a blip. And it’s only May, so we got a lot of the year left, more than half the year left over. Hey, there’s a chance there’s a big uptick; let’s say the situation in Ukraine gets settled. There’s a supply chain issue with China works its way through, which again, I’m not super hopeful. Zero COVID policy. I don’t know about you. We’ve lived through COVID for the last two years plus; you can’t just wish it away. COVID’s gonna COVID. China, their policy is just not going to fly, so they can hide their numbers but locking down 100 million people, it’s not good for the economy. It’s definitely not going to help supply chain issues. And they have to keep the charade going til at least their Communist Party elects, she’s running again, so that’s, I think, in the fall. So, the charade has got to run for another four or five months and then he can maybe pivot and change from the zero-code policy. But it’s going to have a big impact on supply chain. That’s why I think, I think numbers are going to be down. I think looking at ’21, ’21 with such a crazy year that there’s no way we can duplicate that. So, company earnings are going to drop.

I haven’t even mentioned Netflix. Right? Netflix year-to-date. I don’t want to really put people in a state of depression, but it’s ugly. Okay. Most of us have Netflix or similar types of companies in our portfolio. So there are opportunities, right? If you are a long term believer in Netflix, Netflix is down 67% year-to-date, 67%. I have Netflix. I don’t think we’re just going to be moving off from Netflix, canceling our subscriptions. Yeah, they’re going to have some challenges and maybe the stock stays flat for a little bit. But, if you can convert Netflix shares, you own a pretax IRA to Roth, lock in the reduced price, pay tax on April 15, especially if you have losses, some other deductions, credits to absorb some of the tax. Hey, it could be a really beneficial time.

I remember back in 2010 what happened the last financial crisis of the ’08-’09, the Bernie Madoff, the bank issues, Bear Stearns, Lehman; we all remember that. What happened is the IRS changed the conversion rules, basically said, okay, everyone can do it now. There’s no income limitations. And I have colleagues, clients, friends that did conversions, real estate did conversions of stocks in 2010, were able to pay the tax over two years; that no longer applies. But, they’re still able to lock in the Roth gains and they are quite happy they did that twelve years later. A lot of them are over 59 and a half now. And the conversion prices they paid ten years ago was like cents on the dollar compared to what it is now. So now all that is tax free.

So, look at the situation. If you believe in the long-term potential, that asset; we all know Apple, Tesla, Amazon, JPMorgan are not going anywhere, right? That’s not something to be concerned about. So, if you’re able to lock it in now, if you feel like this is kind of a bottom, think about doing a conversion. You don’t pay tax today. There’s no withholding; you just convert it, and then you pay tax on April 15. Same if you own a private business. Maybe you can have the business provide you a discounted valuation; or maybe not discounted, maybe the fact that the valuation is much lower today than what you paid for it. Same with venture capital, private equity, real estate funds. There are opportunities. So, take a bad situation or temporarily bad situation it’s going to get better, right, markets rebound, but take advantage of a dip of a bear market. And if you, have it in an IRA, consider Roth. Obviously, gold is up 5%, so that’s probably not a good asset. But silver is down 1.3%, Bitcoin’s down 14%, Ethereum 22%. If you own other small cryptos, they may be down even more. If you believe in that asset, take advantage of it, lock in the gains, pay tax at a lower value, and then keep that Roth until you’re 59 and a half. The Roth has been open five years, and it’s all tax free. Anything you pull out of that Roth IRA will be tax free.

So, I’m probably going to do something in the next couple of weeks, if not months. There’s a couple of stocks I’m looking at, Netflix included, that I’m just going to wait a week. Netflix. I’m not going to wait long. But I own Apple. I own Tesla and JPMorgan. I’m going to wait a little bit on those, see what happens. I think there’s potentially some room for it to drop even further. I know we can’t time the markets, but hey, I’m going to wait it out. Same with Bitcoin and Ethereum. I think they’re going to keep dropping, too, over the short term, not the long term. Long term, they have obviously huge, huge potential. That’s why this is just a really good opportunity, especially for IRA investors where we don’t need the money now, right? Especially if you’re under 59 and a half; can’t even touch the money. So let’s take advantage of this opportunity. If we can afford to pay the tax at the depressed value, let’s do it. Lock it in, and then keep it in a Roth until at least you’re 59 and a half, the Roth’s been open at least five years. It’s all tax free.

So looking back, this bear market could end up being a very positive outcome for your IRA, especially if you’re able to do a conversion to Roth. And this applies to any asset it owns, whether it’s real estate or private business investments. Maybe some loans have gone bad. Whatever it is, this could be a pretty good opportunity to take a crappy market and turn it into a positive for your IRA. Things will get better, right? This is just temporary, but it’s been tough. What I try to do is, I don’t look at my statements, especially my equities, what’s the point, right? It’s in an IRA or 401(k). I’m not going to use it. I’m not living on it. So what do I care?

Same goes for the good times when you’re up 10, 15. 20%, don’t look that much, right? Look here and there, right? Look at the statements. Look every month but don’t get into a state of depression if you’re down 10% or, same time, don’t think you’re Jeff Bezos if you’re up 20%. Take it slow, to process, many, many years it will grow. It will go down, it will go up, but in the long run you will be up and it’s the right way to save to retirement account. And if you can do it in a Roth IRA, even better because you can pull those funds out tax free.

So, just a little bit of positive spin on a crappy bear market for, not just stocks, right? For cryptos, for not yet real estate, but that’s coming, I think that’s around the corner. Real estate still seems to be quite strong but I think as interest rates go up, there’ll be pressure. The only thing keeping it up is there’s no inventory. So, if the buyers are still in the arena, if inventory doesn’t keep up, prices could stay relatively strong. I just don’t think they’re going to accelerate the way they did over the last twelve months because of interest rates.

There you go. Just a little bit of my take on this. So again, don’t get depressed, look at a bear market and do something good potentially with your IRA. So thanks for watching. If you’re doing on YouTube, thanks for listening; if you are listening wherever you catch your podcast, I appreciate it. Give me a good rating if you don’t mind. Really appreciate it. I also thank you for your support and the weekly podcast obviously drops every Wednesday so don’t forget to catch me again next Wednesday. If you miss it, you’re busy, doing other stuff, don’t worry! You could catch me anytime wherever you catch your podcast, whether it’s Apple Spotify, Soundcloud, just give me a listen and have a great day and talk to everyone again soon. Be well.

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