A Roth IRA Conversion Strategy for Your Retirement | Retirement Strategies at 67

 

We feel now is the best time you’re going to have for the rest of the year to do your Roth conversion. If you’re a client that is on a Roth conversion schedule, meaning we’ve done conversions for you in the past years, and that’s continuing on right now, this video is absolutely for you. If you’re a client that’s not on a Roth conversion plan, this may be because your income is too high, and it doesn’t make sense for you, or you don’t have as much money inside retirement accounts as some of our other clients, and we’re going to strategically distribute from your IRAs to keep taxes down in the upcoming years. And you may not even be a client, you may just be seeing this video on YouTube. If you’re seeing this video on YouTube, and you’re not a client, you are receiving this video about three weeks after we’ve sent it to clients.

Why is this the time to do the Roth conversions? Well, if you are a client, hopefully, you’ve been listening to the podcast that Chris Paris, our Chief Investment Officer sends out every Friday. If you’re not a client, go to the Oak Harvest Financial Group website, click on the investment management tab, go to the stock talk podcast button here. We’ve been putting these out here, our Chief Investment Officer, for the past few years, and you can go back and listen to all of them, but particularly the past six or seven months, we’ve been talking about the economic acceleration, the stock market recovery that we were anticipating, and more recently, over the past three months or so we’ve been talking about the expected first quarter pullback, and then from that point forward, we expect the markets to go pretty smooth and hit new all-time highs into the third and fourth quarter of 2021.

If you are a client, you already know all this because we’ve been communicating with you. So why do we think it’s the time to do the Roth conversion now? It’s because the first quarter pullback that we’ve been talking about, we think we’re near the end. So there are two big events going on right now at the same time which is causing the market to pull back. And we don’t want you to panic, this is not a long term thing we believe, it’s something short term and it’s something, one of the elements is something we haven’t seen in many, many years.

So one of the things that’s happening is called a convexity hedging event. Long story short, as interest rates start to rise, less people refinance their homes. So the people, the investment world, the large institutions who hold these mortgage bonds, they don’t get their money back as soon as they had anticipated. So other parts of their portfolio that have longer what we call duration periods to hedge their portfolio to make sure not everything is long dated, they have to go into the market and sell those bonds, those treasury bonds, that causes the prices to come down.

The second thing going on is hedge funds are really getting blown out right now because all the risk that they take, and other institutions are in this boat as well, the large investment banks, all the risk that they take with their risky assets, they hedge or protect their bets with government treasuries. So when rates start to rise, because people are selling bonds, that’s the portion of their portfolio they use for collateral to get more money to borrow to buy more risky assets.

So when the Treasury market starts to decrease in value, because interest rates are rising, these hedge funds are getting blown out, they have to sell their treasury bonds, which they’re using to protect and hedge their risky investments, in order to meet those margin calls. Essentially, they need more collateral, because those investments are losing value, treasury bonds are losing value.

So as I said, this is pretty complex, but go back and watch that a couple of times if you have to. If not, don’t worry about it, just understand that we’re looking out for your best interest and it is important that you understand some of these events that are going on for those of you who are concerned. You can Google convexity hedging, and that’ll probably confuse you a bit more than you’d like, but it’s a place to start.

So here’s what’s going on. This is the past six months, and this is the Treasury, the United States government bond 10 year note. As interest rates have risen from about 0.6% interest per year to about 1.49% interest per year, the price of treasury bonds has come down. So this is the traditional, we’ve talked about this, you know this, as interest rates rise, bond values go down. This is why bonds aren’t a safe asset. They’re a lower risk asset, but they’re not safe.

Typically, if we get a 1% increase in interest rates, your 10 year bonds are going to lose about five to 10% of their value. If we get a 2, 3, 4 percent increase in interest rates, your 10 year bonds could lose 15, 20 30% of their value, and that’s saying a lot.

So, again, interest rates over the past six months have gone from about 0.6% interest paying per year, to about 1.5% interest paying per year. So interest rates are up about 90 basis points or 0.9% and bonds have went down. When the bonds go down the hedge funds get blown out because these are the assets they’re using to collateralize, to borrow more money to invest in more risky things. When they have to sell these assets, it causes prices to go down further, which exacerbates the problem. And when interest rates rise too quickly, the stock market drops.

So to recap, we have two events going on here. We have the convexity hedging event, which has to do with interest rates rising, which forces more bonds to be sold, those bonds being sold drives prices down, causes hedge funds to have to sell more of those bonds. That drives bond prices down further, which accelerates the increase in interest rates. When interest rates go up the stock market doesn’t like that, certain stocks in particular, tech stocks, essentially get revalued. This means that at higher tax free, or not tax free, but at higher risk free interest rates, treasuries are considered to be risk free assets. At higher risk free interest rates, it’s tough to justify valuations of high flying stocks that have grown so much in value over the past couple of years, really 10 years for tech stocks.

So long story short, the convexity hedging event we’re going through hasn’t happened since 2003, before that, 1994. We should be about through this, it’s going to start to calm down, markets should stabilize and start to move back up on the equity side. Also, that means interest rates will start to normalize as hedge funds begin to buy these bonds back when things are a bit more stable.

So what does this mean for you? The market is now. Some of the best growth opportunities we have inside your portfolio are trading at lower prices. So we want to take those positions and it’s time to move them over to the Roth IRA. When we do that when the price is down, we’re going to pay less tax, because the value’s down and then when the market rebounds like we expect it to, they’re going to grow back in that tax free Roth environment.

If you’re a client, you’re receiving this video before we’re sending it out to the whole wide world. We’re going to be in contact with you, but I urge you not to wait for us to call you because we have many, many people who are on this schedule, please reach out to us. Let’s go ahead and get those conversions done and move it over and take advantage of this.

We do expect the rest of this year to be pretty stable as far as increasing equity values as we’ve been talking about for the past several months with many of you, one on one over the phone and through communications like this.

If you have any questions, please don’t call me. I’m kidding, if you do have some questions, I’d be glad to talk to you about this if you’re a client. But for the most part, know we’re looking out for your best interest, and it is complex, a lot of what goes on in the financial markets is complex, but this is why we’re here to guide you. This is why we’re here to help you understand what’s going on and make better decisions,  because these decisions compound on top of each other over many, many years in retirement, which I believe is going to create more wealth for you, help you pay less taxes in retirement and overall create more financial security for you and your family.

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