In the Money Insight: Three Winning Moves in a Volatile Market

Joe Ibarra, CPA, an associate director of financial planning at Falcon Wealth Advisors, recently joined me on In the Money Insight to discuss three winning moves investors can consider during times of market volatility, like the one we’re currently experiencing. A summary of our conversation is below.

Cory:?Thanks for joining me today, Joe. The first winning move I think we should discuss is tax loss harvesting. Can you talk at a high level about tax loss harvesting?

Joe:?Sure. Tax loss harvesting involves locking in a capital loss in a taxable investment account—you achieve this by selling a stock for less than you paid for it—to offset capital gains taxes you would have to pay for this tax year. You can also carry some of that loss forward to the next tax year.

No firm wants to pride itself on tax loss harvesting, because it means you’re selling a stock when it’s down. But a down market does present all different types of opportunities, including lowering your tax burden.

Tax loss harvesting also allows investors to lower their cost basis if they want to sell shares and then re-buy them after a scheduled period. This is relevant because of the wash/sale rule, which I know you will talk more about, Cory.

Cory:?You make a good point that tax loss harvesting is relevant in taxable investment accounts. It is not relevant in traditional or Roth IRA accounts, as selling a stock in them is not a taxable event. Clients should know we evaluate the potential for tax loss harvesting for every client, every year.

The wash/sale rule you referenced states that you cannot buy a stock in a taxable investment account within 30 days of selling it. But if you wait 30 days and the stock is still down, you can consider re-buying it and lowering your cost basis. Obviously, tax loss harvesting can get a little complicated, so if you want to pursue it, it’s important to work with fiduciary wealth advisors, like our team here at Falcon Wealth Advisors.

Joe:?As you alluded to, we usually wait until the end of the year to examine tax loss harvesting, as that’s when we have a better idea of a client’s tax situation. But with the market down now, it’s possible tax loss harvesting opportunities may not be as numerous at the end of the year, so we should look into them now.

Cory:?Indeed, Joe. Let’s talk about the next winning move to make in a down market: Investing cash reserves.

Joe:?We are not in the business of trying to time the market, but we do try to take advantage of downturns. If you have cash available for any number of reasons, and if you don’t need that money for short-term expenses, you may want to consider using it to buy stocks while they appear to be ‘on sale.’

While stocks can drop further, we know they’re cheaper than 6 or 12 months ago. At Falcon Wealth Advisors, there are several stocks we feel are trading at a discount given their fundamentals, and we are seeking ways to help clients buy more shares of them while they’re priced lower. If you want to speak with us about putting cash you have on hand to work, please don’t hesitate to contact Falcon Wealth Advisors today.

Cory:?Well said, Joe. If you have cash inside your investment portfolio, now may be the time to deploy it and purchase stock. Or if you have cash in a checking or savings account and have been wondering what to do with it, it may be a good time to invest it.

We all know the cliche ‘Buy low, sell high.’ This moment in time is likely an opportunity to buy low. I like what you said about not trying to time the market—no one can predict the future, including us. But if we can take advantage of lower prices and accept the fact that investments we buy today could drop further in the near term, it can be a prudent time to buy without greatly increasing the amount of risk in a client’s portfolio.

Joe:?Correct. We are not suggesting clients use this moment to become more aggressive – unless that was part of the predetermined plan. Instead, we believe it’s a time to bring your portfolio back in line with the allocation spelled out in your financial plan. If your plan calls for owning 70% stocks and 30% bonds in your portfolio, that number may be off because of the market’s recent dip. Buying stocks ‘on sale’ allows you to get the portfolio back into balance and should serve you well in the long term, because you bought low and own more shares.

Cory:?An ongoing joke I make with clients is that everyone wants a correction until it happens. Stocks are one of the few things people don’t feel confident buying on sale. But if you want to sell high, you must be willing to buy low.

Joe:?And for long-term investors, it’s just as important to think about the number of shares you’re buying, rather than the price at which you’re buying them. The more shares you can buy today, the better it is for your financial plan as we look 10 or 20 years down the road.

Cory:?Good point, Joe. Let’s now talk about the third winning move to make, which are Roth IRA conversions. Can you explain them, Joe?

Jake:?Sure. If you have money invested in a pretax retirement account, like a traditional IRA, you will have to pay taxes when you withdraw from it. A Roth conversion involves taking funds from that traditional IRA account and converting them into a Roth account. While you must pay taxes on the withdrawal from the traditional IRA, once they are in the Roth IRA, they will grow tax free.

It’s important to think about your tax bracket if you want to take advantage of a Roth conversion. For example, if you believe you’re in a lower tax bracket now than you will be in 5 or 10 years, it may make sense to go ahead and withdraw the money now from the traditional IRA and convert it into a Roth IRA (while of course being careful to make sure you don’t push yourself into a higher tax bracket this year).

You can not only convert money from a traditional IRA to a Roth IRA, but you can convert specific stock positions. That can be helpful in today’s market because you can take a stock that’s down, convert it into a Roth IRA, and then when it hopefully rebounds, all that growth will be tax free.

Cory:?Roth conversions are a great tool as we think about tax planning. Does an investor need to be a certain age to execute a Roth conversion?

Joe:?No. An investor can execute Roth conversions at any age. And while there are income limits for Roth?contributions, there are no income limits for Roth?conversions.

Cory:?One age people should keep in mind is 72. That’s when the government begins requiring you to take Required Minimum Distributions (RMDs) from pretax retirement accounts. If you’re 72 and want to do a Roth conversion, you must first fulfill the RMD. Of course, executing Roth conversions well before age 72 can help lessen the impact of RMDs.

Joe:?Yes, I think the primary demographic for Roth conversions are retired, not yet 72 and in a lower tax bracket than when they were working. While it’s less common, people who are still working could consider a Roth conversion if they have most of their savings in pretax retirement accounts, like a traditional IRA. This is something you will of course want to discuss with your fiduciary wealth advisor.

Cory:?Yes. I would encourage anyone to speak with their fiduciary wealth advisor before pursuing any of the three winning moves—tax loss harvesting, investing cash and Roth conversions—that we have discussed today. These are all ways we can take advantage of opportunities, but it’s important that we not sell every stock that’s down, or invest?all?our cash on hand, or convert so much into a Roth account that we get pushed into a higher tax bracket. It’s vital to work with a fiduciary wealth advisor who acts in your best interests if you want to pursue any of the strategies we’ve discussed today.

Joe:?Well said. Even when the market is down, there are opportunities to consider. That’s why we actively manage the portfolios for our clients at Falcon Wealth Advisors.

Cory:?I do want to note our firm has invested in a new tax planning software that can help us get a clearer look at a client’s current and future tax picture. This software can be especially helpful when considering Roth conversions. Let us know if you’re interested in learning more about our tax planning capabilities.

Thanks so much for joining me today, Joe. If you would like to discuss any of these three winning moves, please don’t hesitate to contact Falcon Wealth Advisors today. You can reach me directly at?[email protected] .

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