With traditional IRA balances slashed by the market downturn, the moment is opportune to cash out, take the tax hit and convert into a non-taxable Roth. Roth IRAs, which provide tax-free withdrawals in retirement, are favored by those who believe their current tax rate is lower than it will be down the road. And unlike conventional IRAs, Roths don’t require any withdrawals during the owner’s lifetime – an important consideration for those looking to leave wealth to their heirs.
Lowered stock values mean wealthy investors can maximize the amount of stock shares they give to heirs while avoiding federal gift taxes. To oversimplify, if your XYZ stock has fallen by half thanks to the market rout, you can now gift double the number of shares you could have just a few weeks ago. The lifetime gift tax exemption in 2020 stands at $11.58 million.
You can consider refinancing to take advantage of rock-bottom interest rates – not just for mortgages but for student loans and any other higher-rate debt.
A strong, sustainable market rebound could mean huge realized gains from taxable accounts in the next few years – and those tax losses can be carried forward indefinitely to neutralize realized capital gains. Harvested losses can also be applied against gains beyond the financial markets. Squirreling away losses will present benefits for some of the entrepreneurs who have business exits on the horizon.
Another piece of routine portfolio maintenance, rebalancing may now have amplified consequences. You can rebalance your portfolios during the recent pullback, and with volatility expected to continue, another rebalance is likely.