It’s normal to panic during a pandemic and not just because of the risk to your health – your finances matter too. If you are like many Americans, all you see is the market going down and the visions of your financial goals you have worked hard for take a hit.
I have some news for you, it does not have to be that way. There is a silver lining and if you play your cards right, you may be able to take advantage of it.
Now is a Great Time to Buy
You have heard the lingo ‘buy low, sell high.’ Well now is the time to buy low. Markets are in bear market territory, meaning stock prices have fallen 20% or more and everything is essentially on “sale.”
Whether you bowed out of the market for fear of a loss or you just never took the plunge yet, now is the perfect time.
Better yet – now is a great time to buy QUALITY stocks. You know, the stocks you’d never be able to purchase during ‘normal’ times? Many are available at affordable prices right now – think Amazon, Netflix, Facebook.
You can Take Advantage of Tax-Loss Harvesting
If you are already invested in the market and staring at your incredible losses, let’s look at how we can use this to our advantage. You now have the flexibility to sell off some of your loss positions to offset capital gains distributions that usually occur at the end of the year. If they occur this year, we all remember 2018 – markets were down but mutual funds still distributed large capital gains distributions at the end of the year. Triggering large tax bills for individuals when their portfolios were down.
You may also have a holding in your portfolio that has a large embedded capital gain but selling it would cause an unfavorable tax hit. By selling off one of your loss positions now along with a holding that has an unrealized long-term capital gain, you’re producing a much lower net capital gain, which will ultimately reduce your tax impact. Hello lower tax bill!
If you don’t have any capital gains, capital losses can offset regular income up to $3,000. The remainder will be carried forward into future tax years. So even if you don’t have the ability to offset gains right now, you can still trigger that capital loss and save it for future years.
This strategy only works in non-retirement accounts. Since retirement accounts are already tax efficient, it is counterintuitive to conduct tax-loss harvesting inside of them.
Consider Roth Conversions
If you have money in a tax-deferred retirement account (think Traditional IRA or 401(k)) and you’re feeling the hit from the sudden market decline, now is a great time to convert those accounts to Roth IRAs or Roth 401Ks. Yes, you will owe the taxes now since your original contributions were pre-tax, but there’s a benefit to this. This topic is a bit more complicated but stay with me.
Roth accounts provide tax-free growth and distributions. That means, assuming you take a qualified distribution from the account, it should be a tax-free event. Meaning no taxes paid on any of the gains. Roth’s are great to shield your investment gains from taxes. The caveat, we pay taxes on the contributions when they are made (present day). Versus a Traditional IRA or 401(k), you receive an upfront tax deduction and pay taxes upon all distributions in the future.
By taking advantage of a down market, you are converting investments at a much lower value than they were when you contributed OR in the future when you take these distributions. By converting the funds at a market low, this means you will owe fewer taxes.
I know what you’re thinking ‘Carolyn, you literally just said buy low, sell high. This is the opposite of that.’ Yes, but you are simply converting your funds not selling and using them. They will continue to grow and bounce back until you are ready to draw upon these funds in retirement.
The bottom line is that there are ways to make the most of this situation. Yes, it can be disheartening to look at your portfolio’s balance compared to where it was at the beginning of this year, but there are ways around it. Grab stocks at a great price if you have the funds, use the losses to your advantage by paying fewer taxes or convert your IRA/401K.
You won’t see an immediate improvement in your portfolio overnight – there isn’t a magic wand in existence, but with these simple steps, you take a step in the right direction. Not sure how to proceed? I’m here to help – let’s chat!
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”CC
Carolyn Rowland is in the Milwaukee WI, area.