During periods of market volatility, it is very normal to pay close attention to your portfolio while putting other aspects of your financial life on hold. However, there are many important planning items that should not be overlooked during these times. Here are a four planning ideas that can be implemented during market downturns that will help add to your after-tax return over time.
-
Roth Conversions
When markets turn south, it can be a particularly good time to perform a Roth Conversion. You can convert tax-deferred assets, like assets in an Individual Retirement Account (IRA), to Roth IRA when the investments in the account are depressed in value – this is taxable at ordinary income rates. When the market ultimately recovers, that growth is captured, tax-free, inside of the Roth IRA. Many advisors perform this conversion later in the year, but you might want to think about doing that conversion in the near term during this period of market volatility. This strategy is not for everyone so please contact us before making any decisions.
-
Gifting
Whether it is to charity or family members, gifting is an important part of many financial plans:
- Charity – If you are thinking of giving marketable securities to charity, you might consider waiting to donate until later in the year. With the recent market downturn, delaying the gift could allow time for stocks to recover and then be donated at a higher value, resulting in a larger tax deduction for you. If you prefer to give now, ensure that the stocks you plan to donate are long-term appreciated securities. Or, if you previously funded a Donor Advised Fund, you could consider gifting from that account.
- Family – In addition to charity, gifting to family members can be an important part of your plan. Gifting to others can be particularly valuable when markets are down, as the value of gifted securities is lower for gift tax purposes, and all subsequent appreciation will be excluded from your estate – a win for both you and the donee!
-
Tax Loss Harvesting
We know that investments can go down in value. When they do, there is an opportunity to sell that investment, take the capital loss, and swap into a different security that provides similar market exposure. The end result is you have a tax loss to use to offset capital gains and you remain invested in the market. These capital losses, while tough to look at, result in real dollars saved in the form of a lower tax bill.
-
Stick to Your Plan and Investment Strategy
Last, but most importantly, trust your plan! The retirement and investment planning we do accounts for stressful market environments like we are currently experiencing. What’s important is to stay focused on your long-term goals and control what you can control – saving, keep spending in line with your plan, rebalancing, and capitalizing on strategies to reduce taxes. Remember, rebalancing is the process of revisiting your target asset allocation — the mix of stocks and bonds that comprise your portfolio — and making sure the assets you hold are in line with those targets. Rebalancing is the mechanical process of selling from investments that are over the target and using those proceeds to purchase the investments that have dropped in value — sell high, buy low. A market dip can be a good opportunity to rebalance your portfolio. It is the patient, disciplined investor that will ultimately win in the end.
Luckily, periods of significant market volatility are generally few and far between. However, when these downturns show up, they come with opportunity. If you can execute on one or more of the above items during this tough time, they should add value to your financial situation in the long run. Talk with a Vertex advisor to learn more about how these strategies could help you!
The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Please note that rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
