When markets take a tumble, it’s easy to get caught up in headlines. But it’s important to take a step back and think about the broader context surrounding the bear market. The good news is that, even in a market that saw the quickest fall in history, there are some opportunities for you to proactively reduce your tax bill for next year:
1. Utilize Tax-Loss Harvesting
With a bull market lasting a remarkable 10 years following the last recession, chances are you haven’t done much with tax-loss harvesting recently—but now you could. Tax-loss harvesting cannot restore losses, but it can mitigate them. No one likes to experience investment losses, but you could have the opportunity to use those losses to offset future capital gains, thereby avoiding capital gains taxes down the road.
In short, you can sell Security A at a loss to offset the capital gains tax liability on Security B, lowering your personal taxes, assuming the sales meet certain conditions. That said, the effectiveness of tax-loss harvesting can vary depending on the composition of your portfolio. If you need cash and are thinking about withdrawing from your portfolio, work with a financial advisor to consider how to strategically sell assets, even if it’s at a loss, in order to help set you up to turn lemons into lemonade.
2. Maximize Waived 2020 RMDs
With the passage of the CARES Act, required minimum distributions (RMDs) from regular and inherited IRAs and defined contribution plans (401(k), 403(b), etc.) are suspended for 2020. If you do not need your RMD to fund your lifestyle expenses, you are encouraged to not take the RMD, which may mean stopping future monthly distributions or automatic annual processing of your RMD.
By forgoing your RMD this year, you’ll have more money invested to take advantages of any gains in value following the down market. Skipping RMDs may also put you in a lower tax bracket, which gives you the chance to make some creative choices. For example, you could use this opportunity to talk to your financial advisor about taking advantage of Roth conversions, selling appreciated stock or other assets, or distribution planning.
3. Strategize for Tax-Efficiency
It’s easy to get “stuck in our ways” when it comes to our asset class allocations and tax treatments. But now is a good time to review your investments with your financial advisor to discover any tax inefficiencies.
For example, if you’re holding stocks that consistently pay out dividends, it could be in your best interest to hold them in qualified accounts to avoid paying income tax rates on dividend income. On the other hand, municipal bond interest is typically tax-free and could be more useful in taxable accounts than qualified ones. Maybe you’ve already talked about this with your advisor in the past and decided that relocating didn’t make sense then, but now is the time to revisit these asset allocation conversations. That’s because during market volatility, you might find opportunities for repositioning that were not there in a bull market.
While no one likes to see the markets take a dip, the current bear market does provide some strategic opportunities that you could take advantage of. Make sure you’re in contact with a financial advisor to help ensure you are making the most of these circumstances to plan for your future.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
CFP®, AIF® Peter has more than 10 years of experience in the financial services industry, specializing in working with physicians and medical practices on their unique needs in the changing medical landscape. He also enjoys helping busy professionals in establishing their planning strategies, families saving towards education and retirement goals and individuals managing risk and expenses during retirement. Peter currently serves as Vice President with the Enright Melanoma...Read More