1. Consider Roth Conversions
Roth Conversion can be a great way to take advantage of low tax brackets or ordinary tax losses. Completing a conversion in a down market could magnify the impact. Let’s evaluate a Roth conversion of $100,000 using shares of a hypothetical investment in your pre-tax IRA called Fund ABC. In the first scenario, let’s assume shares of Fund ABC trade at $10 per share at the time of your conversion, meaning you can convert $100,000 to a Roth IRA by transferring 1,000 shares of Fund ABC to a Roth IRA. If the price of the fund doubles in ten years, the Roth IRA is now worth $200,000.
Now, let’s examine the impact of completing a conversion after the price of Fund ABC dropped to $5 per share. In this scenario, you would convert 2,000 shares to get to your $100,000 target. If the price of the fund still increased to $20 per share in 10 years, now you have $400,000 in your Roth IRA. By converting investments at depressed prices, you have a greater ability to lower your tax bill in the future.
2. Transfer Wealth
Many wealth transfer techniques rely on low asset values and interest rates to transfer wealth. One of our favorites, a Grantor Retained Annuity Trust, is just one strategy that might make sense. If your financial independence is in good shape, and you have a taxable estate, now might be the time to think about transferring wealth to others.
3. Rebalance Your Portfolio
We review client portfolios at least once every four weeks to check them against the agreed-upon mix of stocks and bonds from your Investment Policy Statement. Based on the performance of the market, your portfolio may become riskier (stocks rise) or less risky (stocks decline) over time.
It’s quite possible you sold stocks in the past few years because they had done quite well until recently. Now it’s time to consider the opposite. Rebalancing in a down market by purchasing more stocks (at cheaper prices!) can allow your portfolio to appreciate more quickly during a market recovery.
4. Tax Loss Harvesting
When you sell an investment for less than its purchase price the resulting capital loss can be used to offset other capital gains. This works particularly well when you have already realized (or expect to realize) a capital gain in the same tax year and can benefit from immediate tax savings.
If your realized capital losses exceed current year capital gains, you can use $3,000 of the excess to offset ordinary income and then carry over the rest to future tax years.
5. Investing Excess Cash
We are big fans of a well-funded emergency fund
but this might be an opportunity to invest some of that cash that you won’t need for at least five years towards longer-term goals. For example, if you are retired and have 24 months of living expenses plus other known expenses (a new car, an upcoming trip, your child’s wedding, etc) covered, it’s probably safe to invest any excess cash in your accounts.
If you are still working and have more than 12 months of expenses saved in an emergency fund, now might be a reasonable time to invest some of that cash.
Comentarios