Table of Contents
by James Lange, CPA/Attorney
In addition to your day-to-day life being totally disrupted by COVID-19, your portfolio took a major hit.
What, if anything, should you do about it?
Frankly, we are not in the short-term stock market prediction business and don’t know what the market will do next week, next month or next year. That said, historically when the market takes a 20% hit in one week or less, it has come back—at least in the long run. If you accept that premise, there are a few actions you can take now that are relatively certain to cut taxes for you and your family in the long run.
The recent drop in the market gives many, if not most investors, short-term opportunities to cut their taxes. This newsletter will concentrate on two specific strategies that will likely cut your taxes.
IRA and retirement plan owners should strongly consider making a Roth IRA conversion while the market is low. For investors with money outside their IRA or retirement plan, now may be the time for tax-loss harvesting. If you have an IRA and money outside your IRA, you should consider utilizing both strategies.
Strategy 1: Roth IRA Conversions
As virtually anyone familiar with my work knows, I have a reputation for being an advocate of making Roth IRA conversions. I would prefer to think I am the owner of a firm that “runs the numbers” and presents objective recommendations for strategic financial planning and that it just so happens that, often, one of those recommendations is to make a series of Roth IRA conversions.
Obviously, the best time to make a Roth IRA conversion is when you are in a lower tax bracket and when the value of the IRA you want to convert, or at least partially convert into a Roth IRA is low. Since we aren’t market timers, we normally use the current and projected future income tax brackets of our clients and their heirs as one of the most important factors when determining whether, when and how much a client should convert.
There is some historic precedent for the market rebounding after a fast downturn like the one that has just occurred. Of course, there is never any certainty in market forecasting, but if that precedent holds this time around, it might be a great time to do a Roth IRA conversion. Another idea is to do part of the conversion you were thinking about this year and perhaps if the market goes down, even more, do some more later.
One area of caution about making Roth IRA conversions is that I don’t want you using up too much of your after-tax savings that you may need to maintain your lifestyle. Hopefully, you have some investments you will not have to sell at a loss to maintain your lifestyle. Ideally, you would have enough to cover spending needs and Roth conversions. If you do, there may be a great opportunity.
Strategy 2: Tax-Loss Harvesting
We are big fans of tax-loss harvesting, and I believe that all the money management firms that we work with have been extremely busy with tax-loss harvesting in the last two weeks.
We write about tax-loss harvesting every year in our year-end tax planning letter. A better practice is to do tax-loss harvesting throughout the year and particularly after a drop in the market.
Basically, to tax-loss harvest, you sell a stock or a fund that is currently at a lower share price than when you bought it. To properly execute this strategy, you can’t just select a stock that is down for the year and sell your shares; this is about selling a stock that is currently trading for less than the price you paid for your shares. Most clients with money outside their IRAs and retirement plans have significant appreciation in those investments. If some of those highly appreciated investments are now underwater, at a break-even point or at a price that would only incur a small capital gain, selling them while they are down may be a great strategy. Of course, this only works in a taxable account, not an IRA or retirement plan.
You can’t sell a stock, claim the loss, and buy it back the next day. The rule with a stock or fund sold for a tax-loss is that you must wait 30 days before you can buy back the same security in a taxable account. This is known as the wash rule. But, you can probably get around that rule by buying something similar to the security you just sold for a loss.
The potential short and long-term tax savings you could reap from employing these two strategies under current market conditions are significant. However, due to the unprecedented challenge facing our community and our world from the COVID-19 pandemic, we have canceled all our upcoming public workshops. So, in order to provide our readers, clients and business friends with even more information about these strategies and the possible benefit to you and your family, we will be holding a webinar, Tax Savvy Responses to COVID-19 on Tuesday, April 14th at 1 p.m. To reserve your spot, please go to www.paytaxeslater.com/webinar.
Let’s start this message with a useful suggestion. If you are not set up for home video conferencing, we strongly recommend that you investigate your options. Both Skype and Zoom are free to download, and there are other options available as well. Expanding your options for communicating with colleagues, friends, and family will help you during this challenging time as we practice social distancing to slow down the outbreak of COVID-19.
Generally, these programs can be set up with minimal difficulty—but if you struggle with modern technology, there are usually help forums available through the company. If you are lucky, as I am, you can do what I do and enlist the help of an expert. My wife has a master’s degree in electrical engineering from CMU, so I have the privilege of being able to turn to her and ask, “Hey Cindy, can you help me with this?” And whenever she can’t solve the problem as quickly as I would like, I have been known to make a wisecrack, “Next time I am going to marry someone with a PhD in electrical engineering from CMU.” As I said, I am very lucky—perhaps lucky to be alive! But jokes about my long-suffering and technologically gifted spouse aside, enlisting a friend, spouse, or your most tech-savvy kid to help you install a video conferencing program might reduce your stress level.
Video conferencing capability could be useful to you for a variety of reasons. Perhaps you will need to see a doctor but won’t want to risk going to a doctor’s office or hospital. It would be both convenient and substantively preferable for the doctor to be able to see you virtually, if not in person. You may want to do the same for meetings with other professionals or even our staff. We are setting up in-office video conferencing capability for all staff members who are likely to have client meetings. In the event it makes sense to have our staff work remotely, we are also ensuring that our CPAs and attorneys can utilize video conferencing programs from their home computers. We don’t know what is going to happen with our ability to move about freely and visit friends and family wherever they are. Talking on the phone is fine, having a video conference is better. It will be especially important and useful if in-person social interaction continues to be discouraged, and we are all cooped up in our homes for extended periods of time.
The health of our clients and employees is our top priority. With that in mind, as the global COVID-19 public health emergency continues to spread creating challenges for communities and businesses, I wanted to take the opportunity to inform you of the proactive steps that we are taking at Lange Financial Group, LLC to ensure the health and safety of our employees and clients.
Our offices will remain open, at least for now, during regular business hours unless local, state or federal authorities mandate otherwise. At least as of right now, we are not doing in-person client meetings unless absolutely necessary. We are setting up most employees to have the option of working in the office or at home with video capability both at home and in the office.
We respect and honor any client’s request to cancel or postpone existing appointments, although opting for a virtual appointment may be the best solution.
By the time this newsletter arrives in your mailbox, we may already be conducting our day-to-day operations remotely under guidelines from Allegheny County officials. But, assuming our offices can remain open, for your safety, before opening each day, we will clean door handles, other high-touch areas, and the bathroom much more frequently than we ever did before. Hand sanitizer is available in public spaces throughout the office, and our employees will work only if healthy. Please excuse us if we don’t greet you with a handshake or a hug.
We will have a pick-up and drop off bin at the base of our entrance steps to allow us to transfer information without contact. You might want to call to say you are here and someone from the front desk will pick up your package right after you close the door.
We have a comprehensive plan to ensure business continuity which is designed to allow our firm to continue providing unparalleled service to our clients in situations just like this. We believe we are relatively well prepared, and we believe that day-to-day operations will continue to be conducted successfully, whether it is with you or us at home or at our office.
We appreciate your understanding as we navigate this rapidly evolving situation alongside you, our loyal clients.
Thank you for your ongoing confidence, care, and trust. We hope you and your family remain safe during these challenging times. As always, we are committed to remaining transparent and keeping you informed of any changes to our approach.
Also, please excuse the lateness of this month’s newsletter. We had a completely different newsletter prepared, but thought a special newsletter regarding COVID-19 was appropriate.
Not only has your daily life been turned upside down, but the gyrations in world markets have also devastated your portfolio. What should you do about it? While many advisers are either hiding or saying sell, buy, or hold, we are saying do something which is almost certainly a good decision: take action to cut your taxes.
You can join Jim for this important webinar from the comfort of your home computer.
Register now at:
for our rebroadcast on
Tuesday, April 14th at 1 p.m. EST.
More Important Than Ever to Stay Connected
As our community grapples with the COVID-19 pandemic, state and local mandates restricting the physical operation of businesses are continually changing. Although we were able to print this edition of the Lange Report, going forward we don’t know whether we will have the ability to do so.
If you do not already receive our digital communications, now is the time to sign up! Simply go to paytaxeslater.com/signupnow and enter your email address.
Special Thanks to Clients Who Attended The Mother of Fishes Opera
I was pleased to host interested clients to the United States premiere of The Mother of Fishes, an opera composed by our client, Roger Dannenberg and Jorje Sastre. The opera was sponsored by the Greater Pittsburgh Community Food Bank, with 10% of ticket proceeds donated to community members in need.
We had a delicious dinner at the Grand Concourse in Station Square and then were chauffeured to the CAPA Theater where we thoroughly enjoyed the opera. Bravo!
If you were unable to join us but would like to see Act 1 of The Mother of Fishes, a video of the premiere in Valencia is available on the opera’s website at https://themotheroffishes.com/.
It was fortunate that this wonderful gathering occurred when it did, as now, in response to COVID-19, we must all practice “social distancing” to protect everyone’s well-being.
*When discussing clients, we must state that our mentioning a client should not be misconstrued as an endorsement of our services.