IRA Conversion Strategies and Reading Economic Signals During a Shutdown

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Speaker 1 The list of choices for retirement savings is like a menu. And sometimes it's hard to decide what's going to work best for you.

Speaker 1 So today we're going to look at Roth IRAs versus traditional IRAs as savings vehicles.

Speaker 1 Welcome to NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Elizabeth Ayola.

Speaker 1 Later this episode, we'll be discussing traditional IRAs versus Roth IRAs and how to know what's best for your situation.

Speaker 1 But first up, we have our our weekly money news roundup where we break down the latest in the world of finance to help you be smarter with your money.

Speaker 1 Now, since the government shut down on October the 1st, we've had almost no federal economic data, which means we have to rely on private sector data to get a picture of how the economy is actually doing.

Speaker 1 Today, as the shutdown may be ending, NerdWallet economist Elizabeth Renter is here, and she's going to talk about what some of that data, including some non-traditional indicators, signal about where the economy is today.

Speaker 1 Hey, Elizabeth, fellow Elizabeth, welcome back to Smart Money.

Speaker 4 Hey, thanks, Elizabeth. It's great to be back.

Speaker 1 Let's start with recent labor data. Last week, there was a report from ADP, a management services company, and I want you to tell us about some of the findings of that report.

Speaker 4 The ADP employment report showed a gain of 42,000 jobs in October, which is good, but I'd stop short of calling it strong.

Speaker 4 The reason being these gains were pretty narrow, meaning they were concentrated across just just a few industries, primarily healthcare, education, and trade and transportation.

Speaker 4 It's important when we talk about any economic data set, including this alternate labor market data, that we understand the context or nuance.

Speaker 4 So, what makes this data unique and what is it truly measuring? The unique thing about ADP is it measures only the private industry.

Speaker 4 So, we're missing out on government jobs, and government jobs are a pretty important element in 2025, including right now, this month.

Speaker 4 So, this this data source also tends to be most reliable for larger companies, and it may underrepresent smaller businesses and the gig economy.

Speaker 4 All of this can impact the numbers they release, and it also impacts how these numbers compare to other data sources.

Speaker 1 But then, Challenger Gray and Christmas, an executive outplacement firm, reported that October had the highest number of layoffs in one month since 2003.

Speaker 1 And that's in the aftermath of the dot-com bubble burst and decreased demand for travel and hospitality lingering from the September 11th attacks. We're in a very different situation today.

Speaker 1 So Liz, what are some of the factors contributing to layoffs now? And is it hitting certain sectors worse than others?

Speaker 4 Well, this release from Challenger Gray and Christmas made really big headlines last week. Big numbers often do.

Speaker 4 But again, we need to take a step back and better understand what they're measuring and what makes this data unique. Challenger, Gray, and Christmas measure announced job cuts in hiring.

Speaker 4 So they look at press releases and other public information where companies are coming out and saying, you know, we plan to cut our workforce.

Speaker 4 But oftentimes what they plan to do and what happens are two different things.

Speaker 4 The magnitude of these announcements can differ from what you would see in actual counts taken from the official BLS reports, for example.

Speaker 4 The timing might not align if layoffs are done across a series of days or weeks, and something might change between the time that they announce it and the time they start executing.

Speaker 4 But companies may also just remove open job listings and call that a reduced headcount rather than laying people off. So figures from this firm tend to overstate job cuts.

Speaker 4 That doesn't mean layoffs aren't happening right now. They are.

Speaker 4 We've heard about Amazon most recently and some other tech firms, but there isn't enough evidence to say definitively that layoffs are happening at a rate and across the economy in a way that should cause alarm.

Speaker 1 Those are important details not to leave out that I wouldn't have thought of off the top of my head.

Speaker 1 Now, last month, after the Fed made its decision to cut rates, Fed chair Jerome Powell said that the labor market is experiencing a quote, very gradual cooling.

Speaker 1 Would you say this latest data reflects that?

Speaker 4 So I think these two data sources that we were just talking about, them alone aren't enough to make that determination.

Speaker 4 But I think if you pair them with some other data sources and sort of the trajectory or the direction of the official BLS data before the shutdown, all of this does point to a gradual cooling.

Speaker 4 So Revellio Labs is another private data source that came out last week. They measure changes in professional online profiles.
So think about LinkedIn when you change your status to open to work.

Speaker 4 And they estimated employment fell by 9,000 in October. But unlike ADP, they include government workers.
So they're capturing some people that ADP doesn't.

Speaker 4 And then the Chicago Fed's now cast data suggests that layoffs and unemployment were relatively unchanged last month.

Speaker 4 So all of these alternate sources and a few others paired with what we're hearing from workers and employers suggests that the labor market is indeed cooling, but not at a dramatic pace.

Speaker 1 All this data is important, but I think it's also important to factor in how people are feeling. So let's turn to that.
Two reports came out in the last week.

Speaker 1 The University of Michigan Survey of Consumers and the New York Fed Survey of Consumer Expectations came out. Now, what did those reports indicate about where consumers are right now?

Speaker 4 Well, the University of Michigan's consumer sentiment data is really a staple in evaluating how people are feeling about the economy.

Speaker 4 It's a reliable source that's been around for a long time, decades.

Speaker 4 And their initial November data showed economic sentiment is really in the tank, particularly when it comes to how people are feeling about their personal finances.

Speaker 4 So how money is looking in their household and also the future of the economy. This was true across demographics, political affiliation, age, income, with one exception.

Speaker 4 People who hold stocks had a notable improvement. in sentiment.
As for the New York Feds data, it was a bit more of a mixed bag.

Speaker 4 People's feelings about their credit improved, but several questions about the labor market worsened. One call out for the New York Fed, this was an October data set.

Speaker 4 So while the government was shut down, it was far earlier in the stalemate than the Michigan survey.

Speaker 1 All right, let's move on to some other indicators that are kind of quirky. First up, we have corrugated boxes.

Speaker 1 In September, Virginia Tech Economists found that there's been weaker demand for corrugated boxes. What does the cardboard box indicator signal, Elizabeth?

Speaker 4 Well, domestic cardboard box manufacturers aren't having a great year, and several of them have actually announced reduced production, including some closing down manufacturing facilities.

Speaker 4 This is notable because demand for boxes can be a proxy or a stand-in for the demand for goods.

Speaker 4 You know, when you order something, it comes in one of those boxes, and that's true for all consumers, not to mention businesses and retailers buying supplies and inventory.

Speaker 4 So this so-called indicator suggests that waning demand for boxes points to waning demand for goods overall.

Speaker 4 This certainly could be the case, and tariffs could also be impacting this as well, as many boxes are used to send goods overseas.

Speaker 1 Next, we have another one that is pretty quirky, the champagne indicator.

Speaker 1 The theory here is that people cut back on more expensive alcohol like champagne, and I'm talking real champagne from the champagne region in France. What does the data show this year, Elizabeth?

Speaker 4 So I think this one is a little less useful as a broader indicator. The theory here is that reduced spending on luxury items like champagne could indicate a broader pullback in spending.

Speaker 4 And, you know, I suppose it could, but it could also indicate better domestic alternatives or reduced spending on alcohol overall.

Speaker 4 We've all seen the reporting around Americans and particularly younger Americans that are drinking less now. So there are many potential variables at play in reduced champagne sales.

Speaker 4 Also, there's some seasonality issues. Champagne sales generally spike in the fourth quarter.

Speaker 4 So the industry could still undo some of the weakness of the past few quarters as we enter the holiday season.

Speaker 1 Okay, I have a few more. The economist Alan Greenspan popularized the men's underwear index.
Can you explain what this is?

Speaker 4 I can, Elizabeth, but I never thought I'd be on a podcast talking about men's underwear.

Speaker 4 So if people are pulling back on necessities like replacing their underwear, the economy is in bad shape, or so they say, right?

Speaker 4 You can look at price growth of underwear as a proxy or a stand-in for demand.

Speaker 4 You kind of need to do that because because underwear sales data is something that's not really easy to pin down on a frequent basis.

Speaker 4 So if underwear prices are rising rapidly, it could be because demand for underwear is high. A lot of people are replacing their underwear.

Speaker 4 On the other hand, if price growth is stagnant or not growing, maybe people aren't replacing their underwear like they normally are. And that apparently is a sign of household financial constraint.

Speaker 4 The problem here, like the problem with the champagne discussion, is that there are a lot of other potential explanations.

Speaker 4 And like the champagne discussion, I wouldn't lean too hard on this as an indicator.

Speaker 1 Well, I will say it does make for a pretty funny discussion, champagne or underwear. So all fun conversations to have during a tough economy.

Speaker 4 Indeed.

Speaker 1 We don't have time to talk about every weird indicator in depth, but I'm going to run down a few of them quickly. We also have the lipstick indicator.

Speaker 1 During economic downturns, sales of relatively inexpensive cosmetics like lipstick tend to rise. We have the mini bottle alcohol indicator.

Speaker 1 When times are tough, people buy smaller bottles to save money. The snack indicator, snacks are cheap, so sales hold steady or they rise.
We have the used clothing sales rise.

Speaker 1 Law school applications because more people go back to school. We also have spending at strip clubs going down.

Speaker 1 Another good conversation to have. Dry cleaning sales fall.
Diaper sales go down and rash ointment increases.

Speaker 1 Now there are more unconventional indicators, but Elizabeth, what are some of the caveats to consider when looking at these types of trends?

Speaker 4 So the list of caveats is probably longer than the list you just read off. First off, these are just correlations, right?

Speaker 4 And most of us have heard the statistical warning that correlation does not equal causation.

Speaker 4 If we wanted to say for certain that any one of these things were surely an economic indicator, we'd really need to rule out any other potential causes.

Speaker 4 Are people drinking less champagne because they can't afford it or because consumer tastes are changing?

Speaker 4 Or are there measurement or seasonality issues like a weak third quarter that will be undone with a strong fourth i think some of these indicators can be useful and fun to talk about but maybe don't hang your hat on them in other words don't make financial decisions based on what's going on with underwear demand

Speaker 1 i think that's a good note to end on so maybe don't make financial decisions based on unmentionables yep Elizabeth Renter, always so great to have you on the show. And thanks for being with us today.

Speaker 4 Thanks, Elizabeth.

Speaker 1 Up next, we answer a listener's question about whether it's best to save retirement money in a Roth IRA or a traditional IRA. But before we get into that, a reminder to send us your money questions.

Speaker 1 Whether you need help planning for next year's financial goals or you want to know strategies to grow your money, leave us a voicemail or text us on the nerd hotline at 901-730-6373.

Speaker 1 That's 901-730-NERD. Send us an email too at podcast at nerdwallet.com.
In a moment, this episode's money question.

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Speaker 6 We're back and answering your money questions to help you make smarter financial decisions. This episode's question comes from Daniel who sent us an email.

Speaker 6 I'm an older listener of your podcast and I absolutely love it.

Speaker 6 I understand why you target more of your content toward young'ins, but what about content on preparing and saving for retirement in Roth IRAs versus traditional IRAs mixed in with 401ks?

Speaker 6 As I get closer to retirement, I'm now faced with converting regular IRAs to Roths, when there might have been times when I was younger to focus more on Roths. Keep up the great work.

Speaker 6 To help us answer Daniel's question on this episode of the podcast, we're joined by investing nerd June Sham. June, welcome back to Smart Money.

Speaker 7 Thanks, Sean.

Speaker 6 We'll start by quickly laying out the retirement options that Daniel mentioned in their question. 401ks are, as most folks know, workplace retirement plans.

Speaker 6 And IRAs or individual retirement accounts can be opened by just about anyone regardless of where you work. 401ks and IRAs generally come in two flavors.
They're Roth or traditional.

Speaker 6 Traditional is pre-taxed, meaning it can reduce your taxable income, but you'll pay taxes on what you withdraw in retirement, while Roth is just the opposite.

Speaker 6 You contribute with after-tax dollars and your withdrawals are tax-free in retirement. The catch with Roth IRAs is that you can't contribute the full amount to them if you earn over a certain amount.

Speaker 6 In 2025, that amount is $150,000 for single-tax filers and around $240,000 for married couples filing jointly.

Speaker 6 Now, with that quick refresher out of the way, June, I can see how deciding which to invest in and in what order can be pretty confusing.

Speaker 6 So can you lay out some general rules of thumb or guidelines that folks should be aware of?

Speaker 7 That's actually a really great summary, Sean, because it can get pretty complicated very quickly. A simple rule of thumb is to start with workplace retirement plans.

Speaker 7 That's especially true if your employer matches contributions.

Speaker 7 After contributing enough to earn the match, you can prioritize an IRA, which can have more investment options compared to your 401k provider. IRAs do have lower annual contribution limits, though.

Speaker 7 So once you've contributed the max, but you still have more and want to keep saving for retirement, you can go back to your workplace retirement account.

Speaker 7 If you're self-employed, a freelancer, or run your own business, you can follow the same general framework.

Speaker 7 In place of a workplace retirement plan, there are specific retirement accounts, such as a solo 401k or a simple IRA that you can look into.

Speaker 6 A big question in the retirement contribution space, which our listener touched on, is when to make Roth contributions or traditional contributions. What are your thoughts here, June?

Speaker 7 If you're deciding between which of the two to prioritize right now, a simple way to decide between Roth and traditional contributions right now is to think about where your tax bracket is now and consider where it may be in the future.

Speaker 7 If you think it might be higher, a Roth contribution could make sense.

Speaker 7 That's because right now your contributions are taxed at your current ordinary income rate, but you'll withdraw earnings tax-free in retirement.

Speaker 7 If you think you'll be in a lower tax bracket, you might want to make traditional contributions since withdrawals in retirement will be taxed at that lower rate.

Speaker 7 This can get a little little complicated because we can't fully predict our future earnings or even tax bracket changes.

Speaker 7 There are also rules around traditional IRA deductions and Roth IRA contributions, which means that your choice every year could change.

Speaker 6 The good news for the indecisive out there is that you don't have to contribute everything to a traditional account or everything to a Roth account. You can split it between the two types of accounts.

Speaker 6 So, June, I'd like to hear how you as an investing writer approach this with your own retirement contributions.

Speaker 7 I choose to do all Roth because I really like the flexibility that this account offers. I like that I can take my contributions out at any time and not get taxed on it or not get penalized.

Speaker 6 At the current moment, I am all pre-taxed because I like the benefit of the immediate tax deduction.

Speaker 6 In the past, I have kind of split it between Roth and traditional, but I actually am in this kind of tough spot right now financially where I'm saving a lot from my wedding.

Speaker 6 I have this big expense coming up. So I actually reduced the amount that I'm putting into my retirement account.
And I decided to pull that from my Roth.

Speaker 6 So that's a long-winded way of me saying, like, you can have some flexibility, but I personally want the tax benefit of the pre-tax deductions.

Speaker 6 And I'm wondering why you are entirely Roth, given that you can get such a nice immediate tax deduction if you were to go more traditional.

Speaker 7 I think I'm someone who likes delayed gratification. And so I'm kind of hoping that in the future, I can save on those taxes then.

Speaker 7 But I think you bring up a really good point, Sean, where you don't have to go all in on a specific type of contribution and in your accounts too.

Speaker 7 So you can kind of split the difference each year, depending on your goals, like it's not completely set forever.

Speaker 6 Our listener seems to regret some of their past retirement contributions, the strategy that they had in the past. They said that they're now left converting their traditional IRAs to Roth.

Speaker 6 So can you talk about why converting from a traditional to a Roth can be beneficial? What's kind of the thinking behind that?

Speaker 7 We touched on it a little bit earlier. Converting a traditional IRA to a Roth is beneficial because your money is now in a Roth account and the withdrawals are tax-free.

Speaker 7 Another benefit is that Roth IRAs don't have required minimum distribution. So you're not forced to make withdrawals after a certain age.

Speaker 7 Your money can stay invested for much longer and also pass down to your heirs tax-free.

Speaker 6 And what about trade-offs of making this move? Because it's not free to do.

Speaker 7 Yeah, it's not free. They are considered taxable events.
And that's because you might have received a tax deduction for those traditional IRA contributions. So you'll need to pay taxes on it now.

Speaker 7 Some people factor this into their conversion amount, but it can leave them with less money in their Roth IRA overall if they can't cover the bill without it.

Speaker 7 You'll also have to factor in if this conversion bumps you into a higher tax bracket for the year or raises Medicare premiums.

Speaker 7 And while it's true that you can take out Roth IRA contributions at any time, these conversions can only be withdrawn after five years and are withdrawn on a first and first out basis.

Speaker 7 So for example, for our listener, if they start converting this year, they're not able to withdraw their conversion until 2030.

Speaker 6 And there are multiple strategies for how to do Roth conversions. Can you talk us through some of them?

Speaker 7 These strategies really hinge on timing.

Speaker 7 Roth conversions are ideal during low-income years to reduce the cost of conversion, during periods of high inflation to help recoup more of your investment once the market stabilizes, and early in the tax year so you have more time to pay your tax bill.

Speaker 7 Though this last one may not apply if you have paid estimated taxes.

Speaker 7 If our listener has a lot of money to convert, they may want to spread that conversion over multiple years through something that's called a Roth conversion ladder.

Speaker 6 Your point about timing is really, really important to emphasize.

Speaker 6 For many folks who are just entering retirement, they might want to consider doing Roth conversions now since their income may well be lower than in the years right before retirement.

Speaker 6 Our listeners said that they're currently doing Roth conversions and it seems like they're nearing retirement. So it could be a good idea for them.

Speaker 6 But again, we are not their investment or financial advisor. So they should be talking to their own professional for guidance on that.

Speaker 6 But this also raises the question of why people would even want to do a conversion in the first place rather than just contribute to a Roth account earlier earlier in their lives.

Speaker 6 For some, contributing to a Roth account actually isn't possible due to their income being too high.

Speaker 6 Or maybe a conversion is a better tax planning strategy now than contributing to a Roth was when they were in their earlier earning years.

Speaker 6 So this can be the case if they're in retirement and maybe want to convert some of their retirement funds to Roth dollars to avoid those RMDs, the required minimum distributions that you mentioned earlier, June.

Speaker 6 So clearly a lot of factors go into which type of account you might want to contribute to, when you would want to convert it, if you want to at all.

Speaker 7 Yeah, there's so much that goes into it.

Speaker 6 All right. Well, this was a short and sweet money question, June.
Any other thoughts you'd like to leave our listeners with?

Speaker 7 As we've covered, things can get fairly complicated very quickly with Roth conversions. If you're in the early stages of thinking about this, definitely talk to a tax preparer or financial advisor.

Speaker 7 They can help you look at the bigger picture of your financial situation and goals, create a roadmap for you, and just help you understand what's waiting for you when you get started.

Speaker 6 All right. Well, thanks so much for coming on.
And since I'm flying solo hosting this segment, I'm going to have you join me and do the wrap-up. So I'll let you kick it off.

Speaker 7 Thanks, Sean.

Speaker 7 And that's all we have for this episode. Remember, listener, that we are here to answer your money questions.
So turn to the nerds and call or text us your questions at 901-730-6373.

Speaker 7 That's 901-730-NERD. You can also email us at podcast at nerdwallet.com.

Speaker 6 Join us next time to hear about how to beef up your emergency savings.

Speaker 6 Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

Speaker 7 And here's our brief disclaimer. We are not your financial advisors or investment advisors.
This nerdy info is provided for general educational and entertainment purposes.

Speaker 7 It may not apply to your specific circumstances.

Speaker 6 This episode was produced by Tess Viglund and Ana Helhoski. Hilary George, he helped with editing.
Nick Charismy, Mixer Audio, and a big thank you to NerdWallet's editors for all their help.

Speaker 7 And with that said, until next time, turn to the the nerds.