Financial PlanningTaxesPlanning Strategies for a Down Market

With sharp stock market declines so far this year it’s understandable that investors’ nerves are challenged. While it can be difficult to navigate in a down market, investors may be able to take advantage of tactical planning opportunities.

 

Here are six tax-planning ideas to consider that may offer an advantage when stock markets fall.

  1. Tax loss harvesting

Many investors and tax advisors typically harvest capital losses as the year-end approaches. However, they may miss out on sudden market declines during the year to adjust portfolios and harvest losses. In particular, there may be opportunities to conduct a tax swap between mutual funds. This entails selling one fund and investing in another that is similar. The strategy may allow the investor to realize a tax loss while retaining essentially equivalent market exposure. For example, selling out of an actively managed large-cap mutual fund or ETF and swapping it for a large-cap fund managed by another firm with a different portfolio structure. As long as the two investments are not considered “substantially identical,” then the wash sale rules prohibiting taxpayers from deducting losses would not apply. Investors should consult with a tax professional on their specific circumstances.

For more information about wash sales, read IRS Publication 550 (PDF), Investment Income and Expenses (Including Capital Gains and Losses). Also, see more detail in our investor education piece, “Using investment losses to your advantage.” (PDF)

  1. Roth conversions

With many IRA values moving lower due to recent market declines, it may be time to consider a Roth IRA conversion. The lower the value of a traditional IRA right now, the lower the tax bill upon conversion, and the greater the opportunity for tax-free growth post conversion.

  1. Gifting to family members

For higher-wealth individuals or couples considering gifts to other family members, now may be a good time. If account values have depreciated, it can result in a lower completed gift now, combined with the potential for longer-term appreciation after the gift is completed. This can present an opportunity to “freeze” the value of those assets now, and shift wealth from family members who may potentially be subject to the federal estate tax to heirs who are below the estate tax threshold.

  1. Use IRA funds for charitable giving

When considering what type of asset or account to use to satisfy charitable wishes, taxable accounts with significant appreciation can be an attractive option. For example, by donating appreciated stock or mutual funds to a charity, the donor can avoid the long-term capital gains tax. Conversely, donors generally should avoid donating depreciated, taxable property to charities. Since many account values may be lower right now, IRA owners over the age of 70½ may want to consider making charitable contributions with their IRA instead of tapping taxable accounts, which may have fallen in value. To learn more about this strategy, read “Donating IRA assets to charity.” (PDF)

  1. Convert UTMA/UGMA assets to a 529

Many families saving for college own custodial savings accounts, which may be subject to the kiddie tax rules. If those funds are earmarked for college, it may be a good time to liquidate those accounts and fund a 529. Selling out of an UGMA, which has fallen in value, could minimize any potential taxable capital gains when the account is liquidated. When the funds are placed within a 529, clients may benefit from tax-free growth and tax-free withdrawals, assuming funds are utilized for qualified higher education expenses. Additionally, 529 accounts are treated more favorably than custodial accounts for federal financial aid purposes.

  1. Reset cost basis of company stock held within an employer retirement plan

The Net Unrealized Appreciation (NUA) rule allows participants to potentially benefit from preferential tax treatment when distributing shares of company stock from the retirement plan. If executed correctly, the NUA portion of the company shares is taxed as long-term capital gains instead of ordinary income upon a sale of the shares. The greater the market appreciation of the shares held within the plan, the more attractive the NUA option will be. However, what about cases where shares of the company stock have declined in value? Participants holding company stock within a retirement plan that has decreased sharply in value may want to consider resetting the cost basis of that stock by selling the stock within the plan and repurchasing it shortly thereafter. We refer to this as the “Net Unrealized Depreciation” strategy. Unlike stock transactions outside of a retirement plan, the “wash sale” rule does not apply. Lowering the cost basis of the stock might improve the potential benefit of applying NUA treatment when distributing the stock from the plan in the future. To learn more read, “Understanding the NUA rule.” (PDF)

Seek expert advice

Investors should seek expert advice from a financial professional with knowledge of their individual financial situations. Those taking actions that involve buying or selling assets or changing the type of an account through a conversion should understand the impact on their overall tax-planning strategy.

For informational purposes only. Not an investment recommendation.

This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.

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Holly Farrar

Client Services Associate

As director of First Impressions, I strive to make sure our clients have a comfortable and meaningful experience while providing remarkable customer service at the highest standards. I enjoy going to local Everett events and festivities while spending time with friends and family. I love to read, especially dystopian novels.  I am involved in volunteering opportunities within the community including grocery shopping for homebound people, coffee trailer and first responder appreciation.

Education and Biography

Training

Holly Studied Business and Management at Sno-Isle Business and Management & Everett Community College. She has over 20 years of customer service and administrative experience.

Specialisms

Holly’s focus is to create meaningful connections between our clients and our office. She schedules appointments, answers calls, processes transactions, preparing paperwork to maintain accounts as well as opening new accounts, and transfers.

Albert Ballesteros

With over 25 years of customer service working in the Financial Industry and the State of Washington, Albert is a welcome addition to the service team. He helps with opening new accounts and servicing current accounts. You have probably received appointment reminders from him. He also works with the marketing team in planning monthly letters to clients, planning special events and creating the weekly newsletters.
In his spare time, he volunteers at Northshore Christian Church, having completed two mission trips to the Philippines and has a passion for singing. He enjoys playing and watching most sports but is especially an avid fan of the Everett Silvertips.

Education and Biography

TRAINING

Albert attended Honolulu Community College where he obtained his AA in Liberal Arts.

SPECIALISMS

Albert joined Bailey Wealth Services in 2022. His focus is to provide support to both prospective and existing customers with exceptional customer service. He is very personable and brings professionalism to his role.

Wes Burroughs

One of the things I enjoy most about what I do is educating clients on what is available to them as an investor. Our clients know where they’re at financially and where they are going because we make breaking down the complexities of a constantly changing world a top priority. Outside of work, I love spending time with my wife, Blyn, and playing with our daughter, Sophia. I also enjoy running and hosting game night with friends.

Education and Biography

TRAINING
Wes attended Liberty University where he obtained his BA in Philosophy.

SPECIALISMS
Wes joined Bailey Wealth Services in 2021. His focus is helping families maintain and grow the wealth they already have. Wes enjoys working with our valued clients to facilitate financial relationships by providing solutions, solving problems, and helping them manage their financial lives.

A. Sean Bailey, CFP®

My mission is to assist families as they strive to acquire, accumulate and retain wealth in a tax efficient manner so they may live in retirement with confidence and dignity. When I’m not engaged in professional activities, you can find me on a mountain top with my wife, Kim, and our two children, Eleanor and Oscar.

Education and Biography

TRAINING
Sean received his Bachelor’s Degree in Business Administration, Finance Concentration, from the University of Washington.

SPECIALISMS
Sean Bailey has been in the financial services industry for 30 years. He specializes in developing comprehensive financial, estate and retirement planning strategies for clients nearing and in retirement. Sean is a Registered Principal and Investment Advisor with LPL Financial. He is a CERTIFIED FINANCIAL PLANNER™ Practitioner. Sean is also a member of the Financial Planning Association and Ed Slott’s Elite IRA Advisor Group.

Ed Slott’s Elite IRA Advisor Group is not affiliated with Bailey Wealth Services or LPL Financial.

Sonya Jones

I endeavor to provide excellent service to our clients and organizing processes and procedures to ensure our office runs smoothly. When not working, I enjoy spending time with my fiancé, Erik, and our two boys, Lukas and Archer along with our dog Pixie. I love cooking for them and experimenting with different recipes and techniques, including treats for Pixie. Our favorite family activity is taking road trips, especially to California to visit family and friends.

Education and Biography

TRAINING

 

Sonya received her BA in Art at California State University, Chico and has over 25 years of administrative and customer service experience in the financial services and accounting industries.

 

SPECIALISMS

 

Sonya’s focus is to help clients reach their financial goals by assisting them with their various transactions and paperwork to service and maintain their accounts. This includes opening new accounts and initiating transfers from and to financial institutions. Sonya is constantly looking for new ways to improve our processes to ensure we work efficiently and in a manner that creatives positive experiences for our clients.

Sonya Jones

I endeavor to provide excellent service to our clients and organizing processes and procedures to ensure our office runs smoothly. When not working, I enjoy spending time with my fiancé, Erik, and our two boys, Lukas and Archer along with our dog Pixie. I love cooking for them and experimenting with different recipes and techniques, including treats for Pixie. Our favorite family activity is taking road trips, especially to California to visit family and friends.

Education and Biography

TRAINING
Sonya received her BA in Art at California State University, Chico and has over 25 years of administrative and customer service experience in the financial services and accounting industries.

SPECIALISMS
Sonya’s focus is to help clients reach their financial goals by assisting them with their various transactions and paperwork to service and maintain their accounts. This includes opening new accounts and initiating transfers from and to financial institutions. Sonya is constantly looking for new ways to improve our processes to ensure we work efficiently and in a manner that creatives positive experiences for our clients.