During turbulent times in the market it’s often hard to redirect your attention away from the media and refocus on things that are important, like your long-term financial goals and objectives. In response, we’re going to share 6 financial planning strategies to consider during market downturns.
- Reassess Risk – The market has appreciated significantly since the 2008/2009 recovery. Last year left many investors wondering if they’re taking enough risk. Now that we’re experiencing a pullback, investors are wondering if they have too much risk in their portfolios. Use this time to reassess and reappraise your expectations, and make sure those expectations and goals are in line with your long-term financial plan.
- Roth Conversions – Use the market pullback to your advantage. While it’s painful to think about paying more in taxes during turbulent times, and you believe the downturn you’re experiencing is temporary, then it may be an opportunity to convert assets at depressed prices. By converting pre-tax IRA assets into a Roth IRA, you pay tax on the conversion with after-tax money, and all of the growth in the Roth IRA is now tax-free. Note – the Roth IRA account has to be open for 5 years before you are permitted to withdraw investment earnings; otherwise, you will be subject to a 10% penalty on the investment earnings.
Example: You own shares of stock valued at $100, but due to a temporary setback in the market they’re now only worth $80. You should consider converting the $80 into your Roth, pay tax, and all of the growth above $80 is tax free in the Roth IRA.
- 529 Plan Contributions – They say cash is king, and that’s especially true in market corrections. If you have a regular savings goal into a child or grandchild’s 529 plan, then consider making a larger than normal contribution or accelerate your contribution strategy during market corrections.
- Gifting Out of Your Estate – The 2020 lifetime gift tax exemption amount is $11.58MM per person. If you’re considering making a large gift to a child, grandchild, or trust, then consider making more significant gifts when asset prices are depressed. After you make the gift you are getting all of the appreciation out of your estate since you hopefully gifted assets that are only temporarily lower in price.
- Grantor Retained Annuity Trusts (GRAT) – Similar to #4, a GRAT is a trust established for a specified period of time, and to the extent the growth in the assets exceeds the IRS 7520 rate, then the appreciation goes to your beneficiaries without reducing your lifetime gift exemption amount.
Example: You fund a two-year GRAT with $1,000,000 at March 2020’s Section 7520 rate of 1.8% and the assets grow by 8%/year. At the end of the first year you will receive a payment back to yourself of $513,531. At the end of the second year you’ll receive a payment back to yourself in the same amount. Any remainder will pass to the beneficiaries named in the trust. In this example it’s slightly more than $98,000.
- Stay Focused on Savings Goals – Market downturns are ultimately a saver’s friend. The media, friends, colleagues, and family may lead you to believe it’s easy to time the market. Trying to time the market is a loser’s game. If you have savings goals in place, then stay focused on them as they are likely in place for the long term. Averaging into the market in a disciplined manner is still one of the best long-term savings strategies one can employ. Don’t lose sight of the long term despite the short-term setback.
Not all of these strategies are applicable or appropriate for everyone, and some of them require the assistance of a tax professional or legal counsel. If you have questions on whether they’re applicable to you then please feel free to reach out to us and we’d be pleased to have a conversation with you.
Email the author at: eric@accretivewealthpartners.com
