At an elemental level, for instance, we have no say in when the market inevitably will fall, and when the market inevitably will rise. Bear cycles will come, and bear cycles will go. That’s precisely why your long-term plan – the one tailored to your situation and created around your values – anticipates and prepares for such unavoidable occurrences. Even those as severe as the – in some respects – unprecedented events we’re living through now. And that’s why you so often hear from us to stay the course, because doing so gives you the best odds of realizing the benefits your plan is constructed to deliver.
Staying the course means standing still with purpose, even amid the economic fallout and the tragic human toll of COVID-19. It means focusing on what you can truly control – which, incidentally, are the same things you could control yesterday, last month and last year, and at no point included what the market would do next. It means proactively choosing to continue implementing a well-thought-out and comprehensive financial plan.
Working your plan, of course, involves taking advantage of important wealth-building opportunities that a down market can offer. So, talk with your advisory team about the following planning items – they might make more sense now than after stock prices recover. That way, whenever the market does bounce back, you’ll be able to maximize the benefits it brings.
Increase your contribution to your company’s retirement plan. For long-term retirement savers, bumping up the amount you put into your 401(k) account or equivalent plan may be a wise move. Lower prices now mean a chance to buy more shares at a better rate, and increasing your savings amount in such environments can amplify its impact over time.
Consider making a contribution (or an extra deposit) to a 529 education savings plan. Do you know a future college-bound kid? Especially a young student still years from needing the tuition money? Right now stocks are on special (relative to prices just a few weeks ago, anyway), and all future growth in a 529 plan is tax-free if its funds are used to pay for qualified education expenses.
Harvest portfolio losses to offset taxes. Tax swapping is the sale of an investment that you own at a loss, and the simultaneous purchase of a similar investment. In this way, you get a tax deduction against future gains and still maintain the structure of your investment portfolio. Several factors – like the availability of other suitable options and transaction costs – go into determining whether this strategy is appropriate for your individual circumstances. Include your tax professional in this conversation to help evaluate the tax implications of harvesting losses.
Rebalance your portfolio. Rebalancing is a smart way to systematically buy low and sell high, increasing the investments in your portfolio that have gotten relatively less expensive and decreasing those that have gotten relatively more expensive until you arrive back at your target asset allocation. If your plan’s target asset allocation is right, you rebalance only back to the predetermined level of risk that you feel comfortable with and you need to meet your goals.
Convert your traditional IRA to a Roth IRA. If you’ve been thinking about this, now – when your account’s value is down – might be a good time to transfer your traditional (taxable) IRA assets into a Roth (tax-free) IRA. You will pay income tax on this rollover, but there is no penalty. All the future growth can then be income-tax-free. There are a bevy of rules around this step, so we would again suggest looping in your tax professional to help determine if all the pieces are in place for you.
Protect the future you envision by staying the course we designed together. Build for it by making the most of a down market. Doing so not only will give you the best odds of achieving your most important financial goals, but hopefully will also provide some valuable peace of mind in volatile times.
Important disclosure: The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each individual should seek independent advice from a tax professional based on his or her individual circumstances.
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