Financial Affairs

Five Ways to Make Lemonade at a Lemon Market

A virus spreads, stocks drop, anxiety rises, people are crowded into their homes, listening and reading talking heads predicting that the world will never be the same again. Do you believe it?

You’ve seen this movie before and the ending is no different this time around. The virus will become a distant memory, the world will turn around, things will return to normal, and everything will be fine in the neighborhood.

If you also believe This too should pass, what should you do today to improve your financial situation for the future? Here are five ideas:

1) Tax-loss harvest: If you have stocks or mutual funds in your taxable account that are losing money, reap those losses. You can use harvest tax losses to offset realized capital gains that result from selling securities this year at a profit, selling other investment assets where you made money and, if your funds While mutual funds distribute capital gains at the end of the year, you can use the losses to offset those distributions. You can also use the tax loss crop to offset up to $ 3,000 in non-investment income.

Harvesting tax losses is a strategy that only applies to taxable accounts. Deferred tax retirement accounts as IRAs and 401 (k) grow on a deferred basis, so they are not subject to capital gains tax. Consult your tax advisor if you have any questions.

2) Swap in total market funds: You don’t want to be a market timekeeper because we don’t know where the bottom is or if you’ll be back on time. To stay in the market after you’ve sold your stocks or mutual funds, switch to something similar by not substantially identical to avoid IRS wash sales rules. A great way to stay invested is to trade in total stock index funds. Over time, total market index funds and ETFs outperform the vast majority of actively managed mutual funds because index fund fees are very low.

For US stocks, I recommend one of the following stocks:

  1. IShares Core S&P ETF Total US Stock Market (ITOT)
  2. ETF Schwab US Broad Market (SCHB)
  3. SPDR Portfolio Total Stock Market ETF (SPTM)
  4. Vanguard Total Stock Market ETF (VTI)

For international stocks, I recommend one of the following:

  1. IShares Core MSCI Total International Stock ETF (IXUS)
  2. Vanguard Total International Equity ETF (VXUS)
  3. ETF Vanguard FTSE All-World outside the United States (VEU)

3) Rebalance your portfolio: Rebalancing means adjusting your holdings to realign your portfolio to the desired long-term asset allocation. Occasional rebalancing has its advantages in that it controls the risk of the portfolio and sometimes results in a higher return. Let’s say your asset allocation is 60 percent stocks and 40 percent bonds. The market is down now, so you would sell bonds and buy stocks to bring your allocation back to those levels.

Maintaining your asset allocation is counterintuitive to what’s going on in the market, and that makes things difficult. Buying stocks after losing money is upsetting, and talking heads make matters worse by saying to do the opposite, as they almost always predict that the future trend will be like the immediate past. You have to put all that aside. Rebalancing creates benefits once the hard times are over, and there’s no reason to believe it won’t help anymore this time around.

4) Make your 2019 IRA and Roth IRA contributions. April 15 is fast approaching. If you haven’t contributed to an IRA or Roth IRA in 2019 and are eligible to do so, now is a good time. The annual contribution limit for Traditional and Roth IRAs is $ 6,000 in total for both types of accounts for those under 50 and $ 7,000 for those 50 and over.

Tax deductions for traditional IRA contributions start to disappear at certain income levels if you or your spouse have a workplace retirement plan. You will lose your deduction entirely once your income is too high, but you can still make non-deductible contributions and can still use that contribution to backdoor Roth conversion. Check with your tax advisor.

5) Do a Roth conversion. If you have money in a tax deferred account and it makes sense based on your current and future tax brackets, you can use the bear market to make a Roth conversion and then buy index funds with that. money in your Roth account. A Roth IRA conversion involves moving all or part of a pre-tax retirement account, such as an IRA or 401 (k), to an after-tax Roth account.

To make the conversion, you would pay income tax now on the conversion amount while the market is going down. Personal tax rates are low under the Tax Cuts and Jobs Act, making the option even more attractive. This will move more money from your pre-tax savings to tax-free savings, and it should benefit you in the long run by having fewer pre-tax accounts that you will have to pay taxes on later. Consult your tax advisor before proceeding.


Source link