Impact – Wealth Management


Don’t just stand there, DO something! What to do in a market downturn.

When the stock market takes a dip, it’s easy to feel uncertain and anxious about your investments. While financial advisors often tell investors that this is the time to do nothing, there are actually some things you really SHOULD be doing to make the most of this situation.

Consider a Roth Conversion

A Roth conversion allows you to convert funds from a traditional IRA or 401(k) into a Roth IRA. A Roth conversion is a taxable event so it’s very important to work with both your financial advisor and your accountant before you execute a conversion strategy, but doing so when the market is down can offer big advantages. Here’s why:

  1. Tax Efficiency: By converting when your investments are experiencing lower valuations, you’ll convert more shares per dollar. This can be especially beneficial if you anticipate being in a higher tax bracket in the future.
  2. Future Tax-Free Growth: Eventually the markets always find their way to recovery and rise to new heights. The growth in Roth IRA’s is tax free. By converting when the markets are down, the growth you experience when the markets recover and the compounding return in subsequent years, is all tax free.
  3. Diversification: Converting a portion of your traditional retirement funds into a Roth IRA allows you to diversify your tax liabilities. By having funds in both accounts, you’ll have more flexibility when planning for retirement income.

Consider Gifting to Children

If making gifts to your children is part of your personal or estate plan, initiating them during market downturns, can be a great strategy.

  1. Take Advantage of Lower Valuations: Gifting appreciated securities or other assets to your children when the market is down can provide them with investments that have the potential for future growth. This can be a valuable long-term gift, especially if they have a longer investment horizon.
  2. Teach Financial Responsibility: By involving your children in the process of managing investments and explaining market fluctuations, you can help instill financial literacy and responsibility at an early age.
  3. Reduce Estate Tax Liability: Gifting assets can be an effective estate planning strategy, potentially reducing your future estate tax liability.  No one is really talking about the fact that the tax provisions in the Tax Cuts & Jobs Act of 2017 are due to revert back to what they had been in 2017—just 26 months from now.  But if and when that threshold is crossed, it could be a rude awakening for a number of taxpayers.  Today, that exemption is a whopping $12.92 million; for married couples, the combined exemption is $25.84 million.  The ‘revert’ would bring exemption down to something like $6.5 million—a third as high as currently.  Consult with a tax professional or estate planner to understand the specific implications in your situation.

Loss Harvesting

Loss harvesting is an approach where you strategically sell investments that have experienced losses to offset taxable gains. Here’s how it can be beneficial during market downturns:

  1. Tax Benefits: By realizing losses, you can use them to offset gains, potentially reducing your overall tax liability. This strategy is especially useful if you have realized capital gains from other investments.
  2. Portfolio Rebalancing: Loss harvesting can also be an opportunity to rebalance your portfolio. Selling investments that have experienced losses allows you to reallocate funds into other potentially more promising investments, aligning with your long-term goals.
  3. Future Tax Deductions: If your realized losses exceed your gains, you can use the remaining losses to offset up to $3,000 of ordinary income. Any unused losses can be carried forward to future tax years, providing potential tax benefits down the road.

Remember, it’s crucial to consult with a financial advisor or tax professional to evaluate these strategies in the context of your unique financial situation and goals. While these approaches have the potential for benefits, they may not be suitable for everyone.

By taking advantage of the opportunities presented by a down market, you can potentially position yourself for future growth and financial well-being. Remember, maintaining a long-term perspective is key, and seeking professional guidance is always advisable.

Disclosures: Impact Wealth Management LLC is a fee-only Registered Investment Advisor (RIA). We are based in beautiful Sioux Falls, SD and regulated by the State of South Dakota. Throughout this site, we went out of our way to present unbiased data believed to be from reliable and respected sources. However, its accuracy, completeness, and relevance are not guaranteed, and no responsibility is assumed for errors or omissions.  Tax law and individual situations change often.  Always consult your tax and financial professionals before implementing a Roth conversion strategy.  And remember the age old financial advice: past performance is no guarantee of future results.