April 21, 2012 - 4 Misconceptions About Backdoor Roth IRA Conversions - by Morningstar Investment Research
The backdoor Roth IRA is only of interest to a fairly small, rarefied subset of the population--those who earn too much to contribute to a Roth IRA directly. For such individuals, their only method of getting new assets into a Roth IRA is to go in through the backdoor, opening traditional nondeductible IRAs, then converting those accounts to Roths. Whereas income limits curtail higher-income earners' ability to contribute to a Roth outright, anyone can do a conversion, regardless of income. The backdoor conversion is a way for higher-income folks to pay tax now in exchange for tax-fr ee withdrawals of at least some of their assets during retirement. But the maneuver carries some important caveats and could trigger tax costs in certain situations, so it pays to stay attuned to them before opening an account. Morningstar director of personal finance Christine Benz offered four of the biggest misconceptions about backdoor Roth IRAs.
Watch Your Weightings When Investing in Index Funds
I invest in an S&P 500 index fund, which I know weights companies by their market value. What are some other weighting methods used by index funds?
Morningstar assistant site editor Adam Zoll recently addressed this question, stating index funds have become an increasingly popular choice for investors, representing nearly 15% of all mutual fund assets today. The core belief behi nd index investing is that beating the market consistently over the long term through actively picking stocks that will outperform is, to put it mildly, extremely difficult. Instead, the most basic index funds seek to capture the market's performance itself in the belief that the investors who participate in it are fundamentally rational and also value stocks at or near their fair values. But even though index funds seem to track anything and everything, there are a few primary ways of constructing them, from conventional market-cap weighting to alternative methods such as equal, fundamental, or price weighting. Zoll took a closer look at these structures, along with the pros and cons of each.
Among the other topics we addressed this week:
What Investors Can Learn From Their Tax Returns. Your 1040 and its supporting documents can reveal a lot about your investments--and your investment habits.
The Bill Miller Era: A Look Back at a 30-Year Record. Plus, AMG buys stake in Yacktman and more.
12 Intriguing Insights on Mutual Funds. Below the radar, some funds got burned by American Airlines, while another fund is dumping Hong Kong real estate, and other fund managers are limited in the number of times they can go home.
There's Less Than Meets the Eye for These Funds. Four funds whose Morningstar Analyst Ratings are worse than their star ratings.
How to Assess Strategy ETFs. Be skeptical and scientific when looking at newfangled funds.
Focus on These High-Concentration Funds. With the right manager picking the right stocks, funds with fewer holdings can be winners.
JOBS Act Good for Startups, Bad for Investors. We think the new, less stringent disclosure requirements will make it even more difficult for investors to make informed decisions.
A Lesser-Known Emerging-Markets Gem Run by Templeton's Hasenstab. Fans of Gold-rated Templeton Global Bond Fund and its Morningstar 2010 Fixed-Income Fund Manager of the Year, Michael Hasenstab, should consider its better-performing closed-end fund cousin.
Dig Deeper to Find the Meaning of Cash. After a strong six months for stocks, have those who can raise cash done it?
Fallen Angels: New Van Eck ETF Offers Unique Exposure. United States Commodity debuts a multicommodity agricultural ETF. Plus, the week's best- and worst-performing ETFs.
Retirees: Don't Be Blinded by Income. Gaining a true understanding of a fund's distribution will help you avoid funds that treat investors poorly through an ill-thought distribution policy.
5 Things to Watch Out for in First-Quarter Earnings. Corporate earnings look poised to stay strong in t he first quarter, but watch these five indicators to gauge how rosy the picture will be in the coming quarters.
3 Big Tech Income Opportunities. Turn future returns into cash by selling bullish options on these three undervalued big tech names.