Tax-Smart Investing Strategies for a Bear Market

By Brian Carter, CPA

Let’s be honest: Market performance in 2022 has been disappointing at best, and for many investors, “alarming” would be a more accurate description. Stock prices are down and volatility is high, with each new day bringing the potential for further carnage as jobs reports, inflation figures and other economic data arrive. But, while bear markets are inevitable, not all of them are bad news. In fact, bear markets have advantages and opportunities for tax-savvy investors. These strategies can help you take advantage of this tough time on Wall Street.

Roth Conversion

For investors who hold large balances in a traditional IRA, today’s challenging market conditions present an exceptional time to convert some or all of those funds into Roth savings. Transferring pre-tax cash to Roth dollars requires you to treat the converted amount as taxable income in the year of conversion. By making the change when the balance is at a relatively low level, you will minimize the tax impact of the conversion. And, when the markets rise again and take your Roth account balance with them, withdrawals will be tax-free.

Tax exchange

You probably have a handful of particularly poor performers in your portfolio that you’d like to throw away. Rather than abandoning the entire portfolio or sector, consider selling only the positions you see no future for and reinvesting the proceeds into individual stocks or funds that you believe will perform better. in the future. Making the switch now allows you to acquire attractive investments that you had your eye on while they were on sale.

Collection of tax losses

If your tax swap activities have resulted in a capital loss, consider them part of a timely tax loss recovery strategy. Selling underperforming investments that you really don’t want to hold anymore locks in the loss. That’s true, but it also allows you to offset this year’s capital gains while reshaping your portfolio to match your preferences today. You can deduct capital losses from capital gains and deduct an additional $3,000 of capital losses from ordinary income and carry forward any remaining losses to the next year to offset future capital gains.

Portfolio rebalancing

Periodic portfolio rebalancing is basic financial management for all investors. The long bull market has likely left your portfolio allocation misaligned with your goals for each account, at least to some extent. While the markets are down, you can rebalance without incurring the painful tax consequences that might accompany a sell-off in high-performing stocks at their peak. Sell ​​what you need now, to keep the portfolio properly balanced; falling stock prices mean you won’t generate as much taxable income today as you did a year ago. Plus, you’ll pay less when you buy what you need to build the optimal balance.

Leveraging Retirement Accounts

You contribute to a 401(k) and an IRA every year, sure, but are you maximizing those contributions? How about a health savings account (HSA) and a 529 plan to finance the education costs of your children and grandchildren? It is strongly recommended that you store cash up to the legal limit, in every tax-advantaged account you may hold, during a bear market. By investing now, you will get more for your money. When the market comes back up, which it always does, you’ll be glad you invested those dollars when prices were low.

Bargain hunting

Tax-advantaged accounts aren’t the only attractive investment opportunity while the bears are in control. If you have a taxable investment account, now could be a great time to make some carefully selected investments — it’s a sale!

Buying in the midst of volatility may seem risky, because it is. When you buy into the type of market we are witnessing this year, the value of your investments may very well decline in the short term and it is never a pleasant experience. But cost averaging forces you to invest money when times are tough, as well as when the market is booming, and it’s a proven and effective approach.

Investing now may seem more anxiety-provoking, but your exits into the market now are more likely to generate capital growth than investments made near the top of the market. Do your research, diversify as you expand your holdings, and take the leap while sale prices last.

If you’ve taken advantage of the strategic opportunities the bear market presents and are losing patience with the current volatility, simply follow the first law of investing in any type of market: don’t risk anything you can’t. allow you. to lose. You can take comfort in knowing that eventually the economic horizon will brighten and the market will begin to rise again. Bear markets never last forever – they just feel that way.

Brian Carter

Brian Carter, CPA, is a partner at Mauldin & Jenkins, LLC. Brian earned his BBA in Accounting from Mercer University in 1996 and is a licensed CPA in Georgia and Florida. Since joining Mauldin & Jenkins, Brian has specialized in providing a variety of accounting, auditing and tax services to non-profit organizations, affordable housing developers, restaurants, construction contractors and manufacturing and distribution entities. Brian also consults with nonprofit boards on governance and policy issues and is a frequent speaker to various business and civic organizations on topics affecting the nonprofit industry. Brian is a member of the American Institute of Certified Public Accountants, the Florida Society of Certified Public Accountants, and a member of Florida Cornerstone Class 38 Leadership.

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