When it comes to down-market “lemons,” the year 2022 at its midpoint has already served up a whole grove of them. From 40-year high inflation to war in Ukraine to yet another COVID variant, all these events and more have negatively impacted global markets, and in turn, investment portfolios.
First and foremost, making an overall plan and sticking with that plan is what really matters. But smart investors will also revisit their plans and look for ways to turn those financial lemons into tax lemonade. And here are three strategies to get you and your advisors started.
1. Converting Regular IRA Funds to Roth IRAs at Market Lows
Roth IRAs consist of after-tax dollars you contribute. When those dollars appreciate in value, the gain realized is nontaxable. Now, if you move funds from a traditional IRA to a Roth IRA, thereafter all appreciation on those funds is also tax-free. However, because the funds in a traditional IRA are pretax dollars, when you move them, you will be required to pay tax on them. But remember this: if the value of your traditional IRA account has declined this year, the amount of tax you owe on them will decline also.
2. Tax Loss Harvesting
“Tax loss harvesting” means: 1. Selling securities that have dropped below their purchase price; 2. Taking that “loss” in value, or “harvesting” it, and using it to offset rising taxes on successful investments. This reduces your tax bill. In a perfect world, the “loss” you harvest would equal or exceed your tax liability on gains. And if 2022 sees significant losses in bonds and bond funds, you may have even more opportunities to turn an investment lemon into tax lemonade.
3. Accelerating Gifting as Part of Your Estate Plan
Currently, the IRS allows parents to annually “gift” each of their children, grandchildren, siblings, and nieces/nephews $16,000 per spouse, or $32,000 per married couple, all of which is tax-free to the recipient. But gifting stocks that have declined in value in a down market also allows more shares to be gifted within IRS limits. Meaning: 1. Those gifts, now at a low, will have a higher expected future return. 2. Accelerating gifting at these lower valuations may ease taxes by removing their future growth from the estate.
Of course, other options exist for downside protections such as alternative investments and structured notes. A savvy advisor will make the most of all these options and ensure that you turn financial lemons into tax lemonade.
Read more from Signature Estate & Investment Advisors, LLC
