Estate Planning

Is there a silver lining to 2022’s market volatility?

Domestic equity markets experienced their worst first half of a year since 1970 when the markets closed on June 30, 20221. The S&P 500, as an example, was down 21 percent the first half of this year. Additionally, the bond market has experienced volatility largely due to rising interest rates.

Many investors understand that market volatility is expected when investing for the long-term but that does not make losses any less painful.

Is there a silver lining to this year’s market losses?

Tax planning opportunities

There are a few tax planning strategies that investors may consider taking advantage of while asset prices are low. The first is tax-loss harvesting.
1. Tax-loss harvesting:
Investors can review their portfolios and consider whether tax-loss harvesting is appropriate. Tax-loss harvesting is done by selling a security that has a fair market value below its cost basis in a taxable account. Capital losses are used to offset capital gains. If losses exceed gains, investors can use up to $3,000 of capital losses to offset ordinary income when they file their tax return.
Investors can reinvest the proceeds from selling the loss assets. However, it is important to be cognizant of the wash-sale rule which prohibits selling an investment for a loss and replacing it with the same or a “substantially identical” investment within 30 days of the sale date. A wash sale will result in disallowing the tax loss.

2. Roth conversions:

Roth conversions can be particularly advantageous when the market is down, when a taxpayer’s income is lower than usual, and when a taxpayer expects to have higher itemized deductions.
Why are Roth conversions a good strategy when the value of your IRA has declined? Investors can convert their investments from a traditional IRA to a Roth IRA by doing in-kind transfers, meaning they won’t have to sell an asset for a permanent loss. The amount that is converted to a Roth will be recognized as taxable income in the current year. However, if the asset values are lower due to market volatility, investors can transfer more shares to their Roth IRA than they could when the share price was higher for the same tax cost.
3. Required Minimum Distributions:
If an investor is subject to Required Minimum Distributions (RMDs), they may consider taking the RMD as an in-kind distribution.
RMDs can be satisfied by distributing cash or securities. If there are assets that have declined in value that are held in a traditional IRA or another retirement account subject to RMDs, investors can take an in-kind distribution to satisfy their RMD. The amount distributed will be subject to ordinary income tax. However, the investor will effectively be converting any future appreciation of that asset to preferential capital gains treatment. The future appreciation would be subject to ordinary income tax if it were left in the IRA for a future distribution.

Estate planning opportunities

In addition to tax planning strategies, market volatility may offer unique estate planning opportunities.
Investors who intend on gifting to loved ones, may consider gifting shares of investments in-kind. Like the Roth conversion strategy mentioned above, the donor will be able to gift more shares to the donee when the asset’s price is lower. This could be advantageous to keep gifts below the annual gifting limit ($16,000) or to use less of the Federal estate tax exemption amount ($12,060,000 for 2022).  Note that gifting depreciated shares to charity is typically not an optimal strategy.
While these are all strategies to help investors take advantage of the current market conditions, we emphasize that wealth management is not a “one size fits all” approach. At Schultz Financial Group, we conduct tax planning as a part of our wealth management services, where we consider each client’s unique circumstances and analyze various strategies. Investors should weigh all consequences of a given strategy before making a final decision. Contact us to schedule a complimentary introductory meeting.

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