I concur with John Markese’s rules and would add the following for your review.
Rule #1 addition: The fund manager and his term as fund manager is usually the only period that one should use to evaluate the fund’s past performance, risk, etc. (If the fund manager has only three years running a fund, do not look at five years or more of data on performance, risk, etc.)
Rule #2 addition: In my view, much more should be evaluated in the risk section than ‘variation risk.’ There is also ‘bear market risk’—how much did the fund fall in the last bear market compared to its peers, its benchmark, and other funds you may be considering to replace it? (This one measure drops out 90%-plus of the funds I consider! Nothing like a bear market to separate the ‘men from the boys.’)
Rebalance once a year so you sell high and buy low.
Gary From New York
A consideration not mentioned in Christine Fahlund’s very useful article [“Retirement Plans: Evaluating the New Roth IRA Conversion Opportunity,” November 2009 AAII Journal] that might be significant for anyone any who will be on Medicare the second calendar year after the Roth conversion is that converting may affect their Medicare cost for that year.
For example, using figures for 2009 Medicare costs, any couple that converted enough in 2007 to move their modified adjusted gross income over $170,000 would have paid $2,311.20 more for Medicare in 2009 (an additional $96.30 per month × 12 months × two people) than if they had not made the Roth conversion. At the least, anyone 63 years old or older and anticipating being on Medicare within two years, should consider the Medicare “income related monthly adjustment” when deciding how much to convert and especially should avoid pushing themselves into a new bracket.
Stated differently, in deciding how much to convert in 2009, consider the impact, if any, on your 2011 Medicare cost as well as all the variables and considerations stated in the article.
To the Editors:
Christine Fahlund’s article in the November 2009 issue [“Retirement Plans: Evaluating the New Roth IRA Conversion Opportunity”] leaves the impression that the Roth conversion is always the best option; that it is only a matter of how favorable it will be under different circumstances. This is not the case, and in fact, for most it’s best not to convert.
All the examples and tables in the article deal only with the case where the tax brackets before and after retirement are the same. Granted, the Roth conversion will be favorable since income tax must be paid on income from aftertax accounts, and also when withdrawals are made from traditional IRAs or aftertax accounts. Another case where the Roth conversion will be even more favorable is if the investor’s tax bracket increases in retirement, since higher taxes would be paid.
Unfortunately, most investors will be in lower federal and state tax brackets upon retirement since they will lose their primary sources of income (wages, salaries, commissions, bonuses, tips, etc.). Unless Congress legislates significantly higher tax brackets in the future, few will be in the favorable same or higher tax brackets upon retirement.
Gerald J. O’Brien
See the article on New Rules for Converting to a Roth IRA of this issue for discussion of how varying tax rates affect the decision to convert to a Roth IRA, as well as other factors to consider such as Medicare Part B premiums.