Tips on Dealing with a Turbulent Global Economy
By Paul Jarvis, CFP®
AreaVoices Financial Planning Blog
With Britain’s recent vote to leave the European Union, the stock market experienced a momentary decline. In moments like these, the urge to do something with your U.S. and international equities can be overwhelming.
Like pulling your hand away from a hot stove, we are hardwired to avoid pain. When it comes to investing, short term volatility can feel like pain and emotions often cause investors to feel like they should DO something.
Here are a few ideas for those looking to make a move in the wake of a changing global stock market:
- Doing an IRA-to-ROTH conversion
One of the potential benefits of a ROTH account is that your assets may grow tax-free for your lifetime and that of your heirs. At the time of conversion, you will incur an ordinary income tax liability on the value of the assets transferred. Doing this when asset values are depressed allows you to get more of your IRA assets into a ROTH for a given tax cost. To qualify for the tax free penalty free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½.
- Undoing, then redoing, an IRA-to-ROTH conversion
When stock prices fall significantly in value a window of opportunity also opens for those who did an IRA-to-ROTH conversion in the prior year or earlier in the same year when asset prices were higher. You are able to reverse this conversion, putting the assets moved into the ROTH back into the IRA, which eliminates the tax liability incurred at the time of converting. You can then move the assets returned to the IRA back into a ROTH after a 30-day waiting period. In so doing, again you will incur taxes, but because asset values have declined, the tax cost of the second conversion will be much lower. (Be sure to check the rules and deadlines for ROTH re-characterizations and subsequent conversions on www.irs.gov.)
- Leveraging gifts
Let’s suppose you have a block of stock that you intend to give to children or grandkids, but want to keep within the annual gift tax exemption limits. If you make the gift at the time of a big market decline, you can get more shares of stock to your beneficiaries without incurring any gift tax liability.
- Reducing the value a large estate to save estate taxes
A down stock market may benefit beneficiaries of very wealthy, recently deceased individuals whose taxable estate consists primarily of stocks. Estate executors can value the estate at the time of death or at an alternate date up to six months after date of death if property is not otherwise sold before, in which case the sell date determines the estate value of the disposed property. A market decline soon after the death of a wealthy individual opens the possibility of using an alternative date for estate valuation, resulting in more wealth being transferred to beneficiaries and less to the IRS.
So when the next crisis hits and the urge to do something becomes overwhelming, try this: Call a CFP® professional and get your own exit plan, one that is triggered by changes in your life and circumstances, and not by all the other people running for the doors.
ABOUT Paul Jarvis
Paul Jarvis is a CFP Board Ambassador and leads United Capital’s office in Fargo. Read more of Paul’s blog by visiting financialplanning.areavoices.com or by calling 701-293-2076.