It’s common for investors to feel apprehensive about investing when the markets are volatile. But it’s also common for those same investors to regret not investing when things eventually improve (and are more expensive). In another words, why wait for higher prices if you can buy something on sale today?

Tax-Loss Harvesting

Tax-loss harvesting means selling securities that have lost value in your portfolio, realizing losses for tax purposes. Losses can offset taxable capital gains, and potentially ordinary income by up to $3,000 in the current year. Any remainder can be carried forward to future years. For investors with a brokerage account or living trust, tax-loss harvesting could present a tax planning opportunity.

Netting gains and losses

Your taxable capital gain or loss ultimately depends on how your gains and losses net out at the end of the year. The process for netting capital gains first applies to gains and losses of the same holding period: long-term gains against long-term losses, and separately, short-term gains against short-term losses. If the resulting short-term and long-term figures involve a gain and a loss, they are netted once more.

Wash-sale rules are one of the most important parts of tax-loss harvesting to be aware of. Under the wash-sale rule, if an identical or substantially identical asset is purchased within a 30-day period (before or after) when an asset was sold for a loss, the loss will be disallowed.

Harvesting losses can be a good way to:

• Diversify a concentrated stock position
• Sell an investment no longer aligned with your goals or strategy
• As part of periodically rebalancing
• Offset large taxable gains

Roth Conversions With Shares

A market downturn or selloff in the stock market could actually be helpful for investors looking to convert pre-tax money to a Roth IRA. When you convert from an IRA to an after-tax Roth IRA, the amount converted is included in your taxable income. It’s not typically advantageous for high-earners to do Roth conversions while working, but in retirement or market downturns, it may be worth considering.

Instead of selling your positions and converting cash, consider converting the ETFs or mutual funds instead. This way you won’t be out of the market or incur additional transaction costs. Again, although no one likes a down year in the financial markets, it can be a good time for Roth conversions as market values are depressed. This can enable some taxpayers to get a bigger Roth payoff for the same tax liability.

Why convert? 4 main benefits of converting to a Roth IRA:

1. No required minimum distributions (RMDs)
2. Tax-free withdrawals if requirements are met
3. Leave a tax-efficient inheritance
4. Greater flexibility for tax planning opportunities in retirement

Before taking any action, always weigh the pros and cons as it relates to your personal financial and tax situation.

When markets give you lemons…

We don’t dictate market movements, but we do determine our reactions. During bouts of volatility, many investors feel the urge to act in ways that can hurt them financially. Although these three money moves won’t make sense for every investor, in the right situations, it may be a path to turn market challenges into strategic opportunities.