‘Silver Linings’ of the Stock Market Selloff

‘Silver Linings’ of the Stock Market Selloff

The stock market tumble that began in earnest on February 24, 2020 has been one of the most vicious selloffs in the modern era. The S&P 500 stock index fell some 28.2% from February 21 through March 18 – less than one month!

While the shaky market naturally causes concern, we continue to encourage investors to not react rashly. Knee-jerk reactions are not a long-term investment strategy. We feel most investors are better suited to remain calm, using this episode as an opportunity to visit their personal investment objectives, tolerance for financial risk, and time horizon. As always, our team is here to help in that regard.

As our team’s long-term outlook is optimistic, are there any “silver linings” to this foul stock market? Could it present some financial planning opportunities?

Roth IRA Conversions

One potential benefit of this month’s lower stock market is that doing a Roth IRA conversion might be more attractive. A conversion from a traditional IRA to a Roth IRA is a strategy whereby an account owner chooses to pay Uncle Sam now on a previously untaxed traditional IRA balance, which allows the money to flow into a Roth IRA for future tax-free withdrawals. As a traditional IRA’s value declines, it can be converted to a Roth IRA with less tax owed, all else being equal.

By way of background: A traditional IRA generally provides a tax deduction in the year contributions are made, but taxes are due upon withdrawal. Contributions into a Roth IRA do not provide a tax deduction, but the account is not taxed when withdrawals are made in retirement. Also, Roth IRAs do not have required minimum distributions like traditional IRAs, meaning the account owner does not have to begin withdrawing money at age 70.5 or age 72 if they do not want or need. For more thoughts about Roth IRA conversions, please see https://bcswealth.com/2018/04/08/roth-ira-conversions-in-the-new-tax-era/ and speak with your tax advisor.

Tax-Loss Harvesting

Tax-loss harvesting is a strategy whereby certain investments in taxable accounts are sold at a loss in order to reduce tax liability on investments with gains. Additionally, it could offset up to $3,000 in non-investment income. Investments sold at losses allow for a credit against any realized gains that occurred in the portfolio. A sold asset can be replaced with a similar asset to maintain the portfolio’s target allocation.

For many investors, tax-loss harvesting is an important tool for reducing taxes. Although tax-loss harvesting cannot restore an investor to their previous position, it can lessen the severity of the loss. For example, a loss in the value of Security A could be sold to offset the same amount of increase in the price of Security B, thus eliminating the capital gains tax liability of Security B.

Buying Lower

The time-tested adage about investing is “buy low, sell high.” If withdrawals from an account are not expected soon, market selloffs like this provide better entry points for long-term investing. Many investments are now being offered at lower prices.

It is smart for folks who are still working and saving towards retirement to continue to do so – as opposed to stopping during market downturns. This concept is intuitive, even if it is emotionally difficult to do. Indeed, keeping emotions in check is a fundamental part of success for investors at all stages.

We feel history is a reassuring guide reminding us that no downturn lasts indefinitely. A fresh look at one’s financial aspirations and preferences, as well as financial planning strategies, should serve investors well for when the market turns for the better.

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