When life hands you lemons, make lemonade is the proverbial phrase that has stood the test of time to encourage optimism and a positive can-do attitude in the face of misfortune. It’s good advice as you look at your retirement and investment account statements.
During the first half of 2022, investment market performance, including stocks and bonds, certainly fits into that category of misfortune. Those performance statements are not nearly as gratifying as they were last year. With asset prices significantly down from recent highs, the bear market is here. We do not know when the bull market will return. Don’t let the market’s disappointment distract you from taking advantage of the recent market downturn. Consider the following strategies to make lemonade in your portfolio.
Reap the Tax-Loss Harvest
Tax-loss harvesting strategies are often associated with year-end tax planning. However, this strategy isn’t restricted to the year-end. Volatile markets can present an opportunity to sell assets with capital losses to offset the capital gains taxes if you follow the loss harvesting rules. Assuming you reinvest the proceeds and will not need the funds for at least one year, this strategy is particularly effective in offsetting capital gains on equities that you have with a low basis, and you are subject to the current 15% or higher capital gains bracket. Given the previous long bull market and the impressive performance last year – you probably still have some of these in your account.
Even if you don’t need to offset capital gains this year, tax-loss harvesting can still make sense. Not only can you use up to $3,000 of losses to offset your current ordinary income, you can also carry the loss forward to future years, offsetting future capital gains plus the $3,000 annually until the amount of the loss is exhausted.
Rebalance Your Portfolio
Reviewing your investment allocation with a focus on both your short- and long-term goals makes sense. With rollercoaster market performance, investments can become out of balance, and your portfolio may need tweaking. Portfolio rebalancing is vastly different from panic selling. Diversification can help to cushion the volatility in your portfolio. With the recent market adjustments there may be assets that represent better value or growth potential now that prices have declined. Once you’ve determined the right strategy for you, buy and sell assets to nudge your portfolio back in line with your preferred risk parameters positioning your portfolio to take advantage of the future rebound.
Don’t Neglect Savings
Imagine your favorite store just posted a 20% sale. It is easy to see yourself looking to see what kind of a deal you can find. Investing when asset prices are lower can make sense, particularly if you have a long-term perspective. A note to your emotional well-being – it is best to buy low and sell high. Investing in a bear market, with the potential for the markets to go lower doesn’t feel great, but comparatively, think of stocks as “on-sale” from recent highs, and we know from history that the market has gone higher over time.
The Roth Conversion Is More Attractive
Retirement tax planning is critical to keeping as much of your retirement income as possible. Let’s be honest. It’s not about how much you have; it’s about how much you can spend. Typically, traditional tax-deferred retirement savings are essential in your accumulation years when your tax liability is more significant, as they lower your current taxable income. However, at distribution, amounts withdrawn become taxable.
On the other hand, Roth’s allows after-tax contributions, with the advantage of qualified tax-free distributions. Lower-income levels during retirement can reduce the amount of taxation on your social security benefits. Lower taxable income means less tax liability and can help you avoid the IRMAA surcharge on Medicare Part B and Part D premiums.
For a select few, who are in the sweet spot, converting traditional retirement assets to a Roth can make a lot of sense. There are no income limitations on conversions, but ordinary income tax is due on the conversion. So, currently, those in a low tax bracket have an advantage. With lower asset prices, conversions will be subject to less tax. As markets recover, growth will be tax-free, and future qualified withdrawals will be tax-free.
The Bottom Line
No one likes misfortune. Unfortunately, it happens in life and in the market. Changing your perspective during market downturns to proactively look for ways to make the most of today’s market volatility can help you ride out the discomfort and help keep your plan on track. Some strategies can be complex and are riddled with rules and regulations. You should work with a trusted certified financial planner to help you consider and implement complex strategies. If you need some help, we are happy to assist. Now, let’s make some lemonade.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.