In this post, we’ll take a look at some strategies investors may want to consider during market downturns.
Roth Conversion
A Roth conversion is a great way to transfer money from a traditional taxable IRA to a tax-free Roth IRA.
When the market is at all-time highs, converting would mean that you’re likely on the hook for a large amount of taxes. However, you can save money on a Roth conversion by completing it during a market downturn. Therefore, since the value of your investments are lower, you’ll pay less in taxes.
It’s even more beneficial if your income is lower than it would normally be. For example, if you are retired, your income would be much lower than it was during your working years. Since the converted amount is added to your taxable income, having a lower income means you’ll be in a lower tax bracket.
Tax-Loss Harvesting
If you have some losses in a taxable account, you can take advantage of tax loss harvesting. This is when you sell investments at a loss to write them off on your taxes.
You can deduct up to $3,000 in ordinary income taxes each year and any amount over can be carried forward into future years.
It’s important to note you must wait 30 days before buying back an identical investment. The IRS doesn’t allow you to sell a security at a loss and buy it again a few days later.
For a more in-depth breakdown of this, check out my previous post: “Benefits of Tax Loss Harvesting”.
Increase Your Contributions
As frustrating as they might be, market downturns are an inevitable part of investing. In hindsight, every bear market in history was a buying opportunity. By increasing your contributions, you are taking advantage of the lower prices.
While there’s no guarantee how long it may take for your investments to rise, it’s still a good bet based on market history. As you can see below, investors with a long-term investment horizon have been rewarded.
Bottom Line
It’s important to note that these strategies might not make sense for everyone. If you would like to see how these money moves would impact your financial plan, please reach out to schedule a meeting.
George Maroudas
847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor
Sources and Disclaimers
Odds the Stock Market is Positive data from Dimensional Funds
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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.
and this:
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.
