When the noted Stanford economist Paul Romer said that a crisis is a terrible thing to waste, he was so on the money that his observation has become a cliché. Since we’re currently mired in a health and financial crisis rivaling any we’ve seen in the past 100 years, this is a good time to take that advice to heart.
For many, the next step is likely to be inertia, but if you’re standing still, you’re likely falling behind. Listed below are a few tips that might be useful for clients who want to position themselves to come out of the COVID-19 crisis better than they went into it.
1. Make a Roth IRA Conversion
The first thing I’ve been telling my clients to do is converting their traditional IRAs to Roth IRAs, if they haven’t already done so. It’s easy to accomplish and can provide huge benefits in the long run.The client simply opens a new account with the same custodian and transfers all or part of their holdings into it.
Sure, they’ll have to pay tax now, but since the values on just about every account are down, the tax impact will likely be considerably lower than at some future date.
And the holdings don’t have to be cash. They can also be shares of stock that right now are valued at all-time lows but can be reasonably expected to grow in the future. The client can move that value at the lower rate into the Roth and when it rebounds it will grow tax-free.
The account holder can then draw out that money during retirement or leave it as part of their estate. Either way, Uncle Sam has already gotten his share.
2. Exercise Stock Options
Another strategy that I recommend to executive clients is to exercise their incentive stock options.
If the stock has declined in value, but the executive believes in the long-term value of the company, this could be an excellent time to pick up a valuable asset at a bargain price. That can be an easy home run, particularly since the purchase incentive stock option is taxed differently than a nonqualified stock option.
You have to make sure that you’ve considered the Alternative Minimum Tax (AMT), but the recent tax legislation raised the threshold for inclusion, so that’s not as much of an issue as in previous years.
3. Be Generous
Right now, charities and nonprofit organizations are suffering along with businesses and individuals. The irony is that many of these groups, such as food banks, are being asked to do more at the same time that donations have dropped off.
The silver lining is that for the 2020 tax year, individuals can make direct contributions to charities and to be able to deduct the full charitable deduction against their income. It’s a one-time incentive allowing taxpayers to in effect shield some income through previously limited deductions while also helping philanthropic organizations when they need it most.