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3 TAX STRATEGIES FOR THE 2020 BEAR MARKET
PETE HOGLUND
Senior Vice President, Financial Advisor
When markets take a tumble, it’s easy to get caught up in headlines. But it’s important to take a step back and think about the broader context surrounding the bear market. The good news is that, even in a market that saw the quickest fall in history, there are some opportunities for you to proactively reduce your tax bill for next year:
1
Utilize Tax-Loss Harvesting
With a bull market lasting a remarkable 10 years following the last recession, chances are you haven’t done much with tax-loss harvesting recently—but now you could. Tax-loss harvesting cannot restore losses, but it can mitigate them. No one likes to experience investment losses, but you could have the opportunity to use those losses to offset future capital gains, thereby avoiding capital gains taxes down the road. In short, you can sell Security A at a loss to offset the capital gains tax liability on Security B, lowering your personal taxes, assuming the sales meet certain conditions. That said, the effectiveness of tax-loss harvesting can vary depending on the composition of your portfolio. If you need cash and are thinking about withdrawing from your portfolio, work with a financial advisor to consider how to strategically sell assets, even if it’s at a loss, in order to help set you up to turn lemons into lemonade.
2
Maximize Waived 2020 RMDs
With the passage of the CARES Act, required minimum distributions (RMDs) from regular and inherited IRAs and defined contribution plans (401(k), 403(b), etc.) are suspended for 2020. If you do not need your RMD to fund your lifestyle expenses, you are encouraged to not take the RMD, which may mean stopping future monthly distributions or automatic annual processing of your RMD. By forgoing your RMD this year, you’ll have more money invested to take advantage of any gains in value following the down market. Skipping RMDs may also put you in a lower tax bracket, which gives you the chance to make some creative choices. For example, you could use this opportunity to talk to your financial advisor about taking advantage of Roth conversions, selling appreciated stock or other assets, or distribution planning.
3
Strategize for Tax Efficiency
It’s easy to get “stuck in our ways” when it comes to our asset class allocations and tax treatments. But now is a good time to review your investments with your financial advisor to discover any tax inefficiencies. For example, if you’re holding stocks that consistently pay out dividends, it could be in your best interest to hold them in qualified accounts to avoid paying income tax rates on dividend income.
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