The stock market is not for the faint of heart! However, those who have been through the Dot-Com bubble burst, the Great Recession, and the COVID blip know that this too shall pass. Now that we’ve acknowledged our emotional right-brain, your left-brain might be asking for some logical analysis of conditions. Volatility presents some opportunities for tax benefits which have nothing to do with market timing.
Systematically rebalancing your investment portfolio mix of assets between stocks and bonds is a simple way to take advantage of market movements and add to your bottom line in a long-term investment. Rebalancing is the process of periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation risk. For example, at the end of 2021 when stocks may have grown 5% over the original target allocation because the stock market was at an all-time high, disciplined rebalancing would have allowed you to lock in those gains when the stock market was up. Presently, in mid-2022, U.S. stocks are down about 15%. Rebalancing would encourage you to buy stocks that are priced low, taking advantage of bargain prices, and allow for recovery growth to occur inside your portfolio.
Roth conversions are transfers from a traditional pre-tax IRA to an after-tax Roth IRA. It sounds like moving money from your right pocket to your left pocket, but the transfer is treated as taxable income to the IRS. Therefore, you only want to transfer as much as you can stand to pay taxes on as additional income for the year. However, once money is moved into the Roth IRA, it can never be taxed by the government again. Also, unlike traditional IRAs, Roth IRA funds are not subject to future RMDs (Required Minimum Distributions). Therefore, if you believe a higher tax environment is on the horizon, or you have accumulated retirement funds that you might not use for many years, the idea of tax-free future growth to you and your heirs might be very appealing. The best time to do a Roth conversion is when the stock market has experienced declines. This is because you can roll over or transfer shares of stocks, funds or ETFs at lower valuations, which means lower taxes compared to if you had completed the same transfer during a market high. When the market recovers, the gain inside the Roth IRA will not be taxable to you.
If you are up for a little extra work, you can couple your Roth conversions with some tax-loss harvesting, or selling positions at a loss to realize a tax benefit. Realized losses can offset realized gains, but excess loss can be used to offset ordinary income up to $3,000 per year, which may offset your taxes on a Roth conversion strategy.
Please consult your CPA and your Certified Financial Planner™ prior to implementing these strategies to ensure your strategy aligns with your particular tax situation and your long-term investment goals.