Is there a silver lining in market volatility in 2022?

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Dnational stock markets had its worst first half since 1970 when the markets closed on June 30, 2022. The S&P 500, for example, was down 21% in the first half of this year. In addition, the bond market experienced volatility largely due to rising interest rates.

Many investors understand that market volatility is expected when investing for the long term, but that doesn’t make losses any less painful. Is there a silver lining to this year’s market losses?

Tax planning opportunities

There are a few tax planning strategies investors can consider taking advantage of when asset prices are low. The first is tax-loss harvesting.

1. Harvest at tax loss:

Investors can review their portfolios and determine whether tax loss harvesting is appropriate. Harvesting tax losses is done by selling a security whose fair market value is less than its cost base in a taxable account. Capital losses are used to offset capital gains. If losses exceed gains, investors can use up to $3,000 of capital losses to offset ordinary income when they file their tax returns.

Investors can reinvest the proceeds from the sale of loss-making assets. However, it is important to be aware of the wash sale rule which prohibits selling an investment at a loss and replacing it with the same or “substantially identical” investment within 30 days of the date of sale. A fictitious sale will result in the rejection of the tax loss.

2. Roth conversions:

Roth conversions can be particularly advantageous when the market is down, when a taxpayer’s income is lower than normal, and when a taxpayer expects to have higher itemized deductions.

Why are Roth conversions a good strategy when the value of your IRA has gone down? Investors can convert their investments from a traditional IRA to a Roth IRA by making in-kind transfers, which means they won’t have to sell an asset for a permanent loss. The amount that is converted into Roth will be recognized as taxable income in the current year. However, if asset values ​​are lower due to market volatility, investors can transfer more shares to their Roth IRA than they could when the share price was higher for the same tax cost. .

3. Required Minimum Distributions:

If an investor is subject to Required Minimum Distributions (RMD)they may consider treating the RMD as an in-kind distribution.

RMDs can be satisfied by distributing cash or securities. If there are assets that have declined in value that are held in a traditional IRA or other retirement account subject to RMDs, investors may receive an in-kind distribution to satisfy their RMD. The amount distributed will be subject to ordinary income tax. However, the investor will effectively convert any future appreciation of this asset into preferential capital gains treatment. Future appreciation would be subject to ordinary income tax if left in the IRA for future distribution.

Estate Planning Opportunities

In addition to tax planning strategies, market volatility can provide unique estate planning opportunities.

Investors who intend to donate to loved ones may consider donating shares of in-kind investments. Like the Roth conversion strategy mentioned above, the donor will be able to give more shares to the donee when the price of the asset is lower. This could be beneficial for keeping donations below the annual donation limit ($16,000) or for using less of the federal estate tax exemption amount ($12,060,000 for 2022). Note that donating impaired stock to charity is generally not an optimal strategy.

While these are strategies aimed at helping investors take advantage of current market conditions, we emphasize that wealth management is not a “one size fits all” approach. At Schultz Financial Group, we perform tax planning as part of our wealth management services, where we consider each client’s unique circumstances and analyze various strategies. Investors should weigh all the consequences of a given strategy before making a final decision.

Disclosures

This article is brought to you by Schultz Financial Group, Inc. (“SFG”) which is a registered investment adviser. Registration as an investment adviser does not constitute endorsement by securities regulators or imply that SFG has attained any level of skill, training or ability. Although SFG believes the content to be factual and up-to-date, it is based on information obtained from various sources which have not necessarily been independently verified, and it should not be considered a comprehensive analysis of the topics discussed. All expressions of opinion reflect the judgment of SFG as of the date of publication and are subject to change. This does not constitute personalized advice from SFG or its affiliated investment professionals, or a solicitation to execute specific trades. SFG is not a law firm and does not intend any content to be construed as legal advice. Readers should not use this content as the sole basis for any investment, financial planning, tax, legal or other decision. Rather, SFG recommends that readers consult with professional advisers (including their own financial professionals, lawyers and accountants) and consider independent due diligence before implementing any of the options directly or indirectly referenced. Past performance does not guarantee future results. All investment strategies have the potential for profit or loss, and different investments and types of investments involve varying degrees of risk. There can be no assurance that future performance of any specific investment or investment strategy, including those undertaken or recommended by SFG, will be profitable or equal any historical level of performance. Index performance data referenced directly or indirectly is based on data from the respective copyright holders, trademark holders or publication/distribution rights holders of each index. Index performance does not reflect the deduction of transaction fees, custodial fees or management fees, which would diminish historical performance results. Indices are unmanaged and investors cannot invest directly in an index. Not all of SFG’s services will be appropriate or necessary for all clients, and the potential value and benefits of SFG’s services will vary depending on the client’s individual financial, tax and investment situation. The effectiveness and potential success of a tax strategy, investment strategy, and financial plan depends on a variety of factors, including, but not limited to, how and when it is implemented. work, coordination with the client and other professionals engaged by the client, and market conditions. Additional information about SFG, including its Form ADV Part 2A describing its services, fees, and applicable conflicts of interest, and Form CRS, is available upon request and at https://adviserinfo.sec.gov/firm/summary/108724.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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