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4 Misconceptions About Backdoor Roth IRA Conversions

Morningstar Investment Research

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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.

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