Tax Savvy Actions to Take Now in Response to COVID-19

Tax Savvy Actions to Take Now in Response to COVID-19 

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.

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 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 great opportunities.

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. A good 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. 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 free webinar, Tax Savvy Responses to COVID-19, on Tuesday, April 14th at 1 p.m. To reserve your spot, please go to