Roth Conversions Given the recent market decline, it may be a great time to convert portions of your traditional IRA in-kind to a Roth IRA as you may be able to pay less income tax than you would otherwise pay for future conversions assuming a market recovery. Roth IRAs grow tax-deferred similarly to traditional IRAs, but qualified distributions from Roth IRAs are income tax-free – even to heirs. Roth conversions can also be a great estate planning move as the income tax paid on conversion does not count as a gift from a gift tax perspective yet paying the tax in advance serves to reduce the size of your estate by the amount of taxes paid. Roth conversions generally make sense if (1) you expect your income tax rate in the year you pay tax on the conversion to be lower than the rate you expect to apply when you would otherwise take distributions from your retirement accounts and (2) you have cash outside of the retirement account itself to cover the income tax due on the Roth conversion.
Increase Defined Benefit Plan Contributions If you are a business owner and have a defined benefit plan, you may use this time to maximize contributions to your plan as the decline in plan asset value may allow you to make additional contributions. If your business has strong cash flows, you may be able to use the decline in market values to increase your contribution this year. Work with your third-party administrator to calculate whether and how much you may need to increase your contribution to compensate for the loss in market value. This increased contribution also increases your tax deduction this year.
Gift and Estate Planning With the current market volatility, the value of your assets – whether marketable securities or business interests – may be depressed and the gift amount for tax purposes is the market value today rather than what it could be soon or was recently. For example, if you have a stock position that recently decreased in value by 25%, you could gift a position that was $21,000 a month ago for $15,750. In 2022, an individual may gift up to $16,000 ($32,000 per couple) to any person free of gift tax (the annual exclusion gift). An individual can also transfer during life and/or upon death, an additional $12.06 million per individual ($24.12 million per married couple) free of federal gift and estate tax. However, the lifetime gift and estate tax exemption are set to decrease by approximately 50% on December 31, 2025. Gifts over the annual exclusion amounts will require an informational gift tax return. Consider making in-kind gifts to family members to lock in the high exemption and depressed valuations, as well as to remove future appreciation and income from your estate. Be sure to work with your estate planning attorney to determine the best ways to give assets to help keep those assets protected from creditors for beneficiaries and that coordinates with your overall legacy plan. Always confirm with your financial advisor that you are on track with your own retirement planning prior to making any significant gifts.
Accelerate Dollar Cost Averaging Strategies Given the recent market decline, stock prices and even some bond prices are less than they were several months ago. For investors with long time horizons, it might be a great time to get fully invested while the securities are “on sale.”
Rebalance and Realize Capital Losses Talk with your advisor to review your portfolio to determine if any asset classes are over or underweighted as compared to your investment policy statement and/or risk profile. As markets shift, either over time or given the recent volatility, the portfolio allocation may change. Rebalancing the portfolio simply buys and sells certain asset classes, as appropriate, to bring your portfolio in line with your criteria. One of the benefits of rebalancing is you end up buying more of the asset class that declined which generally results in buying low. Or it may make sense as part of the greater picture to sell a few positions that have recently lost value to generate capital losses. Capital losses offset capital gains, offset up to $3,000 of ordinary taxable income, and any unused capital losses are carried forward and can be used against future capital gains. While we are not recommending an across-the-board sale of assets, your advisor may determine it makes sense to realize a few losses.
Consider Using Cash or a Line of Credit Rather Than Taking Significant Pulls from Your Portfolio Since withdrawals from a portfolio that has declined in value compound the losses and require a longer time frame to recover in value, if you do not have cash on the sidelines to meet your expenses, you may choose to use your emergency fund, your home equity line of credit, a pledged asset line of credit or margin. Borrowing on margin will loan up to perhaps 50% of the value of your securities and has variable interest rates, but be aware, market volatility could give you a margin call. You could also speak with your advisor about setting up a pledged asset line of credit which pledges your portfolio and loans of up to 70% of the value which might be preferred over margin at this time given market volatility. If you are considering borrowing, it is worth speaking with your CPA to determine when interest is deductible and the differences of deductibility between a loan on your home and your portfolio.
Consider Deferring Large Expenditures Since withdrawals from a portfolio that has declined in value compound the losses and require a longer time frame to recover, if you do not have cash on the sidelines to meet larger expenses, you might choose to delay large expenditures such as a home remodel, travel expenses, or other significant expenses. No matter how you limit your spending, now is a great time to do so until the market recovers.
Revisit Your Financial Plan The reality is that many portfolio values have recently decreased due to the recent market volatility, and most people are wondering if they are still on track to be able to retire or continue living the lifestyle to which they have become accustomed. Our team of advisors at Beacon Pointe is here to help – we have the ability to update your financial plan based on current values, as well as run hypothetical scenarios showing higher values. Know that often after a market correction, forward-looking return assumptions are projected to be higher than previously expected and often minor tweaks can make all the difference over the long run.
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Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.