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Should My Asset Allocation Change As I Get Older?
Regardless of your age, asset allocation should be based on when the funds will be needed. Funds that will need to be accessed within two years should reside in assets such as cash or short-term debt securities such as money market mutual funds or Treasury Bills. Funds needed within 5-7 years can be mixed, based on the individual investor’s tolerance for market swings.
Higher-risk debt securities like corporate bonds and lower risk equities with high dividends like utilities might be a good fit for this time frame. If funds aren’t needed for at least 5 years, investors can take more risk, up to their individual and unique capacity to stomach market volatility.
Converting IRA to Roth IRA
Because Roth IRAs provide tax-free withdrawals, the higher the tax future, the more valuable a Roth IRA will be. Also, while a Traditional IRA has Required Minimum Distributions starting (for now) at age 72, Roth IRA funds have no required withdrawals. This makes them exceptionally valuable for long range retirement planning. Funds won’t be taxable to your beneficiaries either, which makes them ideal instruments for legacy planning.
Many investors have retirement savings exclusively in 401k accounts or Traditional IRAs. Traditional IRA funds and some employer plan funds can be converted into a Roth IRA account. You’ll pay taxes on the conversion that same year. It is strongly recommended to pay the taxes out of cash assets to preserve the tax-advantaged status of the funds within the IRA. If you can’t pay for the conversion in cash without hurting your liquidity needs, don’t do it.
Conversions can be done at any age and can be any amount, but be sure to consider the increased tax rate and “shadow taxes” such as IRMAA for Medicare premiums, Net Investment Income surtax, increased capital gains taxes, and state taxes. To access your Roth IRA funds tax and penalty-free, you must be over the age of 59 ½, and the account must be at least five years old.
