3 things that can do with retirement plans

There has been a lot of turmoil on the financial markets this year. Here are three things that middle-class Americans can do with their 401 k IRA or other retirement plans to take advantage of what is going on.

Traditional IRAs, where you get a tax break up front, and Roth IRAs, where you get the tax break at the end of the withdrawal, are two types of retirement accounts approved by the IRS. You can convert a traditional IRA to a Roth at any time by filing a simple form at your financial firm. You will be liable for income taxes on the amount converted by April 15 of next year. There is a long, vexed and contentious debate about which one is better and when. If you want to convert a traditional IRA to a Roth, this is a great time to do it. If you do a conversion, you will have income taxes on the value at the time of the conversion. The lower the current value, the lower your tax bill.

There is some good news hidden in this broad-based selloff: Pretty much everything has gone down. If you came into the year owning too much in large company U.S. stocks like the S&P 500, and too little in smaller company stocks, foreign stocks, real-estate investment trusts, and bonds, this is your lucky moment. You can do a do-over for free or at least reasonably cheap: pretty much everything except commodities and energy stocks is down.

It is not perfect, because things have fallen different amounts. While international developed markets VEA are off 19% and emerging markets VWO, 15%, the S&P 500 SPY has fallen 21% among major stock indexes. The S&P 600 IJR, a measure of U.S. small-caps, has dropped 19%. 22% of the international and emerging small-caps VSS were created. AGG, regular bonds, have fallen 13% in price, inflation-protected bonds TIP, 12%. Long-term Treasury bond ZROZ are down 33%, while long term inflation-protected bonds LTPZ are down 27%. The real-estate investment trusts, VNQ, are down 24%. Even the boring utilities FUTY are off by 9%.

You can take 5 steps if you are on edge over inflation and stock volatility.

Make an investment for your children or grandchildren.

If you want to invest in a low-cost index fund, open a brokerage or bank, open an investment account for minor children or grandchildren, and deposit as little as $1,000 on their behalf. Just iShares Equal Weight U.S. A. EUSA, and Vanguard FTSE All World ex-US VEU cover the universe for less than 0.1% a year. The long-term returns from stocks have averaged 5% a year on top of inflation. A $1,000 gift today will be worth about $11,000 in 50 years time and $18,000 in 60 years time, as measured in today s purchasing power terms.