Is there a silver lining in market volatility in 2022?


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.


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