Practical Cents #9: Taking Advantage of a Down Market

Hello everyone and thank you for joining me. The stock market has recently finished another great year. And now that we've had back-to-back-to-back years of strong performance, investors are beginning to wonder just how long can this continue. The truth: no one knows. We work with what we do know, and that is at some point there will be a market downturn, and when there is a downturn, it can be difficult to remain optimistic. There is inherently some event that's triggered a market sell-off, and despite attempted prognostication, no one knows how severe it will get or how long it will last. But as Winston Churchill once said, "The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty." At Presilium, we choose optimism. And today, I want to talk with you about a few planning opportunities when the market has its next downturn.

Roth conversions. For those unfamiliar, a Roth conversion is when you take funds from a pre-tax retirement account, where they are growing tax-deferred, and move them to a Roth IRA, where they grow tax-free. You owe taxes on the amount converted, with the long-term goal in mind of paying less in overall lifetime taxes through the conversions. And for those with Roth conversions as part of their plan, a down market presents a great opportunity to execute on them. The dollar amount converted is the same, however, as a percentage of your net worth, you are shifting more from tax-deferred retirement accounts to tax-free retirement accounts. And when the market recovers, you'll have even more money working for you tax-free in a Roth IRA.

Inherited IRA withdrawals. Through the changes made in 2020 to the rules on inherited IRA withdrawals, they can be somewhat of a challenge to those inheriting pre-tax IRAs. With the average inheritance taking place at age 51, often right at the peak of someone's earning years, the funds received can come with a hefty tax bill, and one that can't always be planned around. For those in their peak earning years, they often do not need the funds and plan to reinvest them in their brokerage account anyway. Completing those withdrawals in a down market allows the rare opportunity to get more tax-inefficient funds out, so that when the market recovers, they are growing more tax-efficiently for you and your family in a brokerage account.

And last, gifting. For those that have passing wealth on to the next generation during their lifetime as part of their financial plan, a down market can help you accelerate that and provide even more support to those you love most. As the market is temporarily down, your gifts of stock or ETFs stretch further, as you are gifting more shares within the dollar amount of the gift you have as part of your financial plan. And when the market recovers, you will effectively have gifted more to those most important to you, for them to either continue holding the investments and continue growing, or putting them toward their own personal goals.

Market downturns can be downright scary. They don't occur in a vacuum, and inherently are created by uncertainty. But by partnering with the right team, we can help you not only navigate them, but use them to your advantage, and be like Churchill, where we never let a good crisis go to waste. Thanks for watching.