We realize markets will have rainy days; therefore, we focus on building portfolios for all-weather markets. With the recent rainy days in the financial markets, we all can have jitters and feelings of uneasiness. However, rainbows often come with rain, which in wealth planning, these are planning considerations that can be beneficial, specifically during rainy days in the markets. I think of these considerations as “rainbows in the rain.”
- Roth conversions: When you convert IRA assets to Roth IRA assets, you must pay tax on the converted amount in the year of conversion. With asset values down, this can lower your tax bill from the conversion and allow for the potential for greater tax-free growth in the future.
- Tax loss harvesting: Tax loss harvesting is selling an investment at a loss and replacing it with a similar investment, which keeps your portfolio allocation intact while simultaneously reducing your tax bill.
- Utilizing IRA funds for charity: If you are 70½ and are charitable, making a gift from your IRA directly to a qualified charity can be a more tax-efficient strategy in down markets versus donating stock that has not appreciated from an after-tax investment account.
- Gifting to family members: If you have considered making gifts to family members, with the market decline and resulting lower asset values, this results in a lower gift amount today and allows for greater future growth potential of the assets given.
- Converting UGMA/UTMA assets to a 529 Plan: If you have been saving for college via custodial savings accounts, these accounts might be subject to the kiddie tax rules. With the market decline, it might be a good time to consider liquidating these accounts and using the proceeds to fund a 529 plan, reducing capital gains tax upon the liquidation. Upon funding the 529, you can then benefit from tax-free growth and tax-free withdrawals, assuming funds are utilized for qualified higher education expenses. Depending upon your state rules, you might also receive some tax benefits for the 529 plan contribution. Also, it is important to note that 529 accounts are treated more favorably than custodial accounts for federal financial aid purposes.
We recommend you complete a mid-year review with your financial and tax professional to see if any of these “rainbows in the rain” make sense based on your individual goals and objectives.