As we wait for stocks and exchange traded funds (ETFs) to rebound, it’s a great time to help yourself and those that you care about. I have no clue about the short-term direction of the stock market, but I’d bet my new Taylor Made driver that it will be higher five years from now. With that in mind, here are a few things you can do to take advantage of the lower stock prices:
1. Teach Your Kids or Grandkids About Investing
This week I opened up brokerage accounts for my three kids (13, 10 and 7) and got their feet wet.
A few years ago, I took them to Washington Mutual and helped them set up savings accounts in their names. It’s been fun going to the bank with them and watching them make deposits when they get birthday money or save up from their allowances.
At home, they see me on the computer, looking at stocks and charts. The joking at dinner time is centered around ETFs, as my kids groan “Dad…everything is ETFs.” With this being a great long-term buying opportunity, we closed the savings accounts and opened brokerage accounts at Charles Schwab.
I asked them each to think about companies that they like. One of them loves Apple (AAPL); another bought some Dell (DELL) and Microsoft (MSFT). Another figured that with the high gas prices, perhaps Chevron (CVX) would be a good bet. My daughter likes Roxy clothing so she bought some Quicksilver (ZQK).
Yesterday, my 13-year-old was thrilled at the money he made. We’re not talking about big bucks here. That’s why if you’re thinking about getting a child educated about the stock market and investing, what better time than now? Stocks have been punished, making this a low-cost lesson. On the other hand, too, there’s the possibility that they’ll go back up and you’ll be off the hook for paying them an allowance.
I couldn’t help but convince my daughter that she needed an ETF, so she bought iShares MSCI Emerging Markets Index (EEM). This way I can tease her at the dinner table. I’ll report back later on the benefits and fallout of this enterprise.
2. Convert Your IRA to a Roth
That brings me to the adults reading and a recent article that appeared in the New York Times. Converting a traditional IRA to a Roth IRA might be a tax strategy that could save you in the future, especially if you do it now, while stocks are essentially on sale.
Doing this conversion will mean that you pay taxes now, but once it’s in a Roth, you don’t have to pay taxes on future withdrawals. The more you manage to pay in there, the greater your benefit will be down the road.
Considering that we’re in one of the most beat-up markets in decades, there’s very good potential there.
3. Pump Up Your 401(k) and IRAs
If you’re not already, think about maximizing your 401(k) contributions. Times are tight, but every little bit you manage to contribute could go a long way down the road. Valuations are low, and the potential for a recovery at some point is high. It’s in your best interest to continue saving for your Golden Years now more than ever.
Be aware that there are annual contribution limits for whatever type of retirement account you choose. Because of the tax advantages IRAs offer, it’s often best to make the maximum annual contribution.
In 2008, the limit for those age 49 and under is $5,000, while those 50 and above are $6,000. After this year, the contribution limit will rise in $500 increments, depending on the level of inflation. If you’re contributing to both types of IRAs, your total contributions between the funds can’t exceed the limit.
For 401(k)s, the contribution limit is $15,500 for those 49 and younger. For those 50 and older, the limit is $15,500, plus an additional $5,000 catch-up contribution. You plan administrator should have written information about your specific plan explaining any other limitations and regulations.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.