May 2014 ACap ReCap
1. Can I convert a portion of my IRA to a Roth IRA?
Most people assume that if you convert a Traditional IRA to a Roth IRA, you must convert the entire Traditional IRA balance. However, you can decide how much of your Traditional IRA you want to convert to a Roth IRA rather than converting the entire amount all at once. There are benefits to converting gradually because when you convert a Traditional IRA to a Roth IRA, you must report the converted value as income and pay tax. The option to gradually convert can be especially helpful if you have a large traditional IRA balance and you don’t want to report the entire amount as income in one year, but would instead prefer to spread your tax liability over a few years. Just remember to complete IRS form 8606 when doing the conversion to accurately capture cost basis.
2. Can I withdraw money from my 401k to purchase a house?
If you are still employed, there are two ways you can take money from your 401k before retirement: a 401k loan (if your company allows it) or a hardship withdrawal. You can usually borrow the lesser of 50 percent of your account value or $50,000 from your 401k. 401k loans are usually for five years, but some employers allow for longer terms if the funds are used to purchase your primary residence. I deliberately used the word usually because employers can impose their own restrictions on 401k loans since they are not required by law to offer 401k loans. A hardship withdrawal is when you withdraw money from your 401k while you are still working. This should be your last resort because not only will you have to pay tax on the withdrawal, but you will also incur a 10 percent early withdrawal penalty. The mechanics and taxation of 401k loans is complicated; stay tuned for a more in-depth article on 401k loans.
3. What if I buy a stock just before it pays a dividend and then sell it?
In an ultra low yielding environment, investors are looking to capture income in any way they can. It sounds tempting and easy to buy a stock just before its dividend payment, collect the dividend, and then sell the stock. However, such a strategy will not work and will cause you to incur excess trading costs. When a company declares a dividend, it also announces who is entitled to the dividend based on a specific date (date of record) – shareholders who own shares before the date of record are entitled to the dividend and shareholders after that date are not. Most importantly, the price of the stock will decline by the value of the dividend four days before the date of record, therefore trying to game the market by buying the stock just before the dividend would be fruitless. For more on the timing of dividends, refer to the following article.
Have a financial question? Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com