As the Coronavirus continues to spread throughout the country and the world, we have seen an incredible rollercoaster ride on Wall Street. Some of the largest gains and losses in history have happened over the last few weeks. The markets hate uncertainty, and that is exactly what we have had. Unfortunately, I believe the uncertainty will continue in the near future. I have no idea as to when the Coronavirus crisis will be behind us, but I know it will. That being said, investors should look into new opportunities that have presented themselves as a result of the crisis.
One strategy that you may want to consider is tax harvesting. This means to sell investments where you now have a loss thus, allowing you to deduct your loss for tax purposes. For those individuals who do not want to be out of the market, you cannot sell an investment where you’re going to recognize a loss and then turn around and re-buy the same investment. We have what are known as wash sales rules, which basically say if you recognize a loss for tax purposes, you cannot re-buy that investment back within 30 days. If you do, you cannot deduct your tax loss. However, you can buy a similar investment. Therefore, if for example you have a loss in a long-term growth mutual fund, you can immediately buy another long-term growth fund without violating the wash sales rule. Thus, you can write off your loss for tax purposes and reinvest immediately in a similar fund, so you are not out of the market when the rebound occurs.
Another opportunity to consider is investing new money. The stock market is probably the only store where people run away from it when it’s on sale. Wall Street is on sale and particularly for a long-term investor, this could be a great opportunity to add new money into your portfolio. That doesn’t mean I believe we’ve hit the bottom, but the sale is significant. Remember, you don’t have to invest at the ultimate low or sell at the ultimate high to be successful.
Many of you can also take advantage of the down market by converting your existing IRA into a Roth IRA. When you convert from a traditional IRA into a Roth IRA there is a tax consequence. The money you are converting is subject to ordinary income tax. However, with the market significantly lower than it was a couple months ago, you can convert more shares than you could have just a month or so ago.
When it comes to converting traditional IRAs into Roth IRAs my general rule is 1) you have to have the money to pay the tax without touching any of the money you’re converting; 2) by converting the money it won’t throw you into a higher tax bracket; and 3) you are comfortable leaving the money in the Roth IRA for at least five to seven years.
Anyone can convert a traditional IRA into a Roth IRA. It doesn’t matter how much you make or whether you’re working or not. Therefore, it’s a strategy that everyone should be looking in to.
Keep in mind, one of the benefits of Roth IRAs is the fact that Roth IRAs are not subject to minimum required distributions. In other words, they can grow tax free for as long as you choose.
There is no doubt these are difficult and trying times for investors. I wish I could tell you when this will be behind us, but I can’t. That being said, by taking advantage of some of the aforementioned opportunities, it may allow you to recover from this crisis a little faster.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at email@example.com.