With Great Market Volatility Comes Great Opportunity
Bill Seyfarth, VP & Relationship Manager (Portfolio Solutions Group)
Volatility has quickly hit the markets to start 2022 due to worries over inflation, future Fed rate hikes, and a possible Russian invasion into Ukraine. During unprecedented periods of market volatility, emotions can run high when it comes to your investments. It can be unpleasant—easy to panic—when the financial goals you’ve spent years working toward seem at risk. For many individuals and households, there is also significant uncertainty about what their ‘tax future’ will look like, given both the potential for job and income changes, sudden wealth events (for better or for worse), and the potential that Congress itself will change the rules of the game.
Historically, staying the course has outperformed emotionally driven reactions, when they happen to strike. But staying the course doesn’t have to mean standing still. Drops in global markets can be stressful for many reasons, but they also provide opportunities to achieve a better financial position in the future. There is no aggregate market trading in and out of our individual tax futures, arbitraging away opportunities to generate alpha. Instead, we are uniquely privy to our own tax situation and expectations for the future, creating a unique opportunity to define outcomes and optimize return. The markets themselves, policymakers’ actions, and unanticipated events such as pandemics are beyond our control. But resiliency, through planning, discipline, and thoughtful response to such events, is a lever we utilize to great effect.
Keebeck’s Portfolio Solutions Group was founded on establishing and reinforcing our guiding principles of alignment, access, and edge with our proprietary network. We serve as the central resource for our clients’ financial wellness, providing provocative and in-depth financial planning, as well as seamless coordination across your existing professional relationships. In light of recent volatility and in anticipation of the 2021 Income Tax Filing Season, we’ve outlined relevant tax savings strategies to consider in this current market environment:
When converting a traditional account (or a portion of it) to a Roth, taxes must be paid upfront on the amount being converted. During a downturn, when most asset prices are depressed, the tax bill will most likely be lower than it would be were the assets trading at their “normal” valuations. Assuming those assets eventually rise in value, performing a Roth conversion in a down market can provide significant tax savings immediately. Over time, those savings, coupled with the power of compounded, tax-free growth in a Roth account may mean more retirement security, higher retirement income, and a larger legacy.
Tax Loss Harvesting:
The gains and losses incurred during up and down markets can be leveraged to work together to minimize the taxes investors pay on capital gains. Temporary market drops can provide opportunities to reduce your current tax bill and potentially increase your long-term wealth. Tax Loss Harvesting (TLH) is a key feature of tax-smart investing. We leverage innovative FinTech capabilities to capture investment losses in your portfolio in order to offset your near-term tax liabilities – ultimately, increasing after-tax returns.
Many of us prefer to combine our support for the causes and people we care about with a desire to save on taxes. Fortunately, there are strategies that may help us accomplish both. Whether you want to donate to charity or invest in a loved-one’s future, consider these tax‐smart ways to help make your giving go further.
Education: Anyone, including grandparents, can contribute up to $16,000 per year ($32,000 for married couples electing to split gifts) to any individual’s 529 plan, without incurring federal gift tax or using the federal lifetime gift tax exemption. Many states offer state income tax deductions to residents who contribute to their own state’s plan, while some states offer tax deductions regardless of which plan you invest in. Additionally, unique to 529 plans, the federal tax code allows you to front load up to five times the annual gift tax exclusion in a single year. Single individuals are therefore able to contribute up to $80,000 per recipient in a single year, while married couples electing to split gifts can contribute up to $160,000 per recipient in a single year.
Appreciated Securities: Since taxes are based on a gift’s fair-market value at the time it is made, temporarily depreciated assets may offer an opportunity to give more shares, whether directly to an individual or through a trust. Appreciated investments can be donated to qualified charitable organizations, which allows individuals to take a deduction in the year the donation is made and avoid paying capital gains tax on the appreciation.
Annual Exclusion Gifts: This is a good time to make annual exclusion gifts (up to $15,000 per person). Using marketable securities when volatility is high and valuations are down can provide for extra tax advantages on these gifts. Making larger gifts with low value securities allows a taxpayer to remove assets from the taxable estate while retaining more of the estate tax, gift tax, and generation skipping transfer tax exemptions (currently $11.7 million). Investors who have concerns that the exemption will be lowered with possible changes in legislation should consider consuming a larger portion of the exemptions sooner rather than later.
Grantor Retained Annuity Trust (GRAT): GRATs generally perform best when funded in rising markets with assets that have the potential to appreciate in value; however, a declining market and low interest rate environment can give assets held in a GRAT more upside potential. If the value of the GRAT’s assets rebounds, most of the appreciation can pass through to beneficiaries with minimal transfer tax consequences. Even if appreciation is never achieved, assets simply flow back to the grantor (or the grantor’s estate) without any adverse tax consequences. As a result, a GRAT is a low-risk gifting strategy (Heads you win, tails you tie!).
Will Congress raise the top marginal income tax rate from 37% to 39.6%? Will it raise the capital gains tax of high-income individuals from 20% to 37%? Will the lifetime estate tax exemption decrease? And will these changes be retroactive?
While we don’t yet know what actions Congress will take this year, these are immediate tax planning strategies to help prepare. The PSG mission is to ensure we leverage the best strategies and intellectual capital to meet the needs of your unique situation. If you need assistance talking through or implementing the above strategies, we are always available and are here to help!