by Jack Nicklaus Tunge, CFP®, CRPC® | Principal | Midwest Capital Advisors, LLC
With all the negative headlines and market volatility caused by the COVID-19 pandemic, I thought it would be timely to shed some light on what opportunities investors have right now. While there are a lot of things in this world that we cannot control, such as the market, there are a lot we can. I am a firm believer in managing the variables over which we have some measure of control.
In times of turmoil, I like to take a “glass is half-full” approach and look for things we (as investors) can do to position ourselves in a way that will lead to better outcomes in the coming months and years. As an investor, here are a few things you can do during times of turmoil to help put yourself into a better financial position:
- Rebalance Your Accounts
Rebalancing accounts is a great practice to make sure you maintain the level of risk you are comfortable with throughout market cycles. This is especially important in both bull and bear markets. Rebalancing in bull markets reduces equity exposure, and therefore risk. (Think of it as trimming profits.) Fast forward to the current bear market, and that same process applies. In this case, a rebalance will result in purchasing equities while they are down. Think of this as an easy way to buy low and sell high.
- Tax Loss Harvesting
Tax loss harvesting is one of the easiest strategies to execute when markets are down. The concept is simple:(1) Sell one of the holdings (securities) in your taxable account that’s at a loss so you can take a tax benefit this year, and (2) simultaneously buy a similar security to replace the one you sold to maintain your position in the market. Be careful though, you cannot buy a “substantially identical” security within 30 days of the sale or the IRS will not allow the loss. That would violate wash-sale rules, so make sure to understand the nuances beforehand.
Tax Loss harvesting is beneficial because losses can be used to offset up to $3,000 of non-investment income or offset capital gains. Keep in mind, this is only beneficial in taxable accounts.
- Roth Conversions
A Roth conversion involves moving money from a pre-tax account to a Roth account (e.g., pre-tax IRA to a Roth IRA). There are two main reasons why right now is a great time: (1) markets are down, and (2) we have historically low income tax rates.
This strategy results in paying taxes today on any amount converted in order to realize tax-free growth within a Roth IRA. The reason this is best executed while markets are down is because your tax bill is based on the value you convert. If you convert while your IRA value is lower, and therefore your tax bill is lower, you may be able to realize tax-free growth when the market recovers. You must follow the rules for qualified Roth IRA distributions in order for distributions to be tax-free.
Roth conversions are also beneficial right now because tax rates are at historic lows. This is a great way to benefit from today’s low rates without having to worry about where tax rates are in the future. Think of this in the context of refinancing a mortgage. People refinance to take advantage of low interest rates. The same principal applies to a Roth conversion, only you are locking in tax rates instead of interest rates.
Keep in mind: Conversions result in increased income that may impact deductions, credits, exemptions, phase-outs, the taxation of your Social Security benefits and Medicare Part B and Part D premiums. Roth conversions are also not a “one-size-fits-all” strategy, so consult your advisor.
- Retirement Funding
Once in a while I get the question, “Should I stop contributing to my accounts while the market is dropping?” The answer is, unequivocally, no! Now is the best time to remain disciplined and continue saving in your retirement accounts. Those contributions are buying stocks at prices that are much lower than 2-3 weeks ago. This makes those contributions much more valuable because those dollars are able to buy more shares. Market volatility should never stop an investor from saving unless their emergency fund or other cash accounts are lower than advised.
Sometimes it is tough to remain optimistic while all we see in the news are negative headlines. Keep an optimistic attitude, focus on your health and family, and take the time right now to make sure you are doing everything within your control to position yourself and your family for the future.