April 14, 2020

5 Financial Opportunities in a Down Market

By Alynne Zielinksi, MBA, CFP®, CDFA - Manager, Financial Planning

5 Financial Opportunities in a Down Market

In times like this, it is natural to feel overwhelmed, stressed, anxious, nervous, uncertain.  Name a negative emotion and everyone has likely felt it at least once over the last two months.  No individual has control over the market, no doctor has an exact time when the pandemic will end, and everyone is left wondering when we can hug our families again.  During these times it is easy to fall into a downward spiral of negative thought and emotion, wondering if there is anything we can control.

For many, investing is emotional too.  Taking a disciplined approach and knowing how to take advantage of situations is critical.  Removing emotion from the decision-making process can help give investors some measure of control over the future. In this unprecedented environment here are a few strategies to think about implementing.

1. Tax Loss Harvesting.

In taxable accounts, consider selling some securities that have experienced a loss. By realizing the loss (harvesting), taxes on both short and long-term gains as well as income are offset. When looking for investments to harvest, consider those that may not fit your strategy or that can be easily replaced by similar investments. Before harvesting please keep in mind:

  • The tax code mandates that the loss you harvest must first be used to offset a gain of the same type. You could do yourself a disservice by harvesting short-term losses when you only have long-term gains.
  • Capital losses are first applied to capital gains and then to taxable income.
  • The current tax code allows carryforward of any losses not used in the current year to offset future gains.  If you file a joint return, up to $3,000 of capital loss carryforward can be used each year to reduce your taxable income.
  • Avoid wash sales.  A wash sale is triggered when the security or substantially identical security is purchased either 30 days before or after the tax loss sale. 

2. Make Estate Planning Gifts Now

If there are assets in your portfolio you were considering gifting to the next generation, make that gift today. The value of your gift will be lower and may help you save on future estate taxes.

3. Rebalance your portfolio

With the downturn, it is likely that your asset mix may not be in line with your intentions. Equity prices have fallen much more than bonds possibly making you overweight in Fixed Income in your portfolio. Consider slowly rebalancing your portfolio by moving money from your fixed income investments to your equity holdings until you reach your intended allocation.

4. Dollar-Cost Average Back into the Market

If you have cash on the sidelines, create a strategy to invest a specific amount of money on a regular basis. This is how contributions are made to 401(k), 403(b) and 457 plans. Be the tortoise in this race. It isn’t necessary to get in at the bottom and have all funds invested before the top of the market. Having some cash left will allow you to take advantage of future dips in the market.

5. ROTH Conversions.

  • If you are age 70 ½ or older the SECURE ACT is working in your favor.  While taking RMDs it was likely financially imprudent to do a ROTH conversion on top of the RMD.  This gives you a chance to make one more ROTH conversion.  So, take the RMD and convert it to ROTH this year.
  • If you are expecting to be in lower tax bracket this year, then doing a ROTH conversion now can save on taxes later.  ROTH conversions are recommended when in a lower tax bracket.
  • Deflated asset prices can lead to a lower cost-basis on your ROTH conversion.  If any underlying holdings have taken a sharp turn down this year, it may be prudent to transfer those securities into a ROTH in order to take advantage of the low current price.  In this way, the ROTH converted securities have further to grow tax-free.

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