Tariff-fueled market turmoil is putting investors’ mettle to the test this week, and although it is a painful time for retirees drawing income from depressed portfolios, some big opportunities exist for mid-career and younger savers.
One key consideration, according to Carson Group’s Debra Taylor, is Roth conversions. As she told ThinkAdvisor during a hectic market session Monday, there are both tax strategies to take advantage of and minefields to avoid when reviewing portfolios during a market correction.
“Like most advisors, we typically advise our clients to stay the course and not react to sudden market volatility,” said Taylor, Carson Group's new managing partner and chief tax strategist. “We’ve seen this before, and while corrections never feel good in the moment, history tells us patience will pay off.”
Account balances have fallen, Taylor observed, but they nonetheless remain near all-time highs. In such an environment, “every advisor” should be speaking to clients about the benefits of a Roth conversion.
“This was a very effective strategy in June 2022 and October 2022 when the market hit tradeable lows,” Taylor recounted. “Indeed, converting technology stocks such as Amazon in October 2022 would still create a tax-free gain of 47% from then until now, even factoring in the recent pullback. This is a way to make lemonade out of lemons, as I like to tell clients.”
Taxable Account Considerations
Long-term investors may also be sitting on substantial gains in taxable accounts, Taylor noted. The “good news” from the recent declines is that there are now likely to be losses in the portfolios to offset those gains — particularly absent systematic tax-loss harvesting in the portfolio.
For taxable accounts, Taylor said, a number of considerations merit review before taking action.
Before any trades are placed, advisors should assess each client portfolio as a whole, and particularly each holding, the individual tax lots for each holding and the holding period. Tax trading opportunities could be buried within the lots of each of these positions.
In addition, Taylor urged, advisors must remember to consider the desired pairing of losses against gains, focusing on losses to offset short-term gains, wherever possible.
Third, if selling at a gain, advisors should be sure to review the carry-forward losses that can be used to offset the gain. And finally, mind the wash sale rule when tax loss-harvesting.
“If you sell a security at a loss and then buy it back within 30 days, you may lose all or part of the initial tax loss’ tax advantage,” she warned.
Keeping It All in Context
When talking about tax strategies, Taylor said, it is always helpful to place the ideas within their broader context.
For example, although the recent pullback likely created losses in portfolios, those of long-term investors may still be carrying sizable gains. And as the Nasdaq and the S&P 500 are “basically trading in the same range as one year ago," she noted. For clients who entered the markets over a year ago and have long-term holdings, many positions are still likely trading at gains.
“Although the long-term capital gains rate is preferred, we would counsel against any extreme moves simply due to recent market volatility,” Taylor suggested. “Having said that, for some clients, absorbing a 15% long-term capital gains tax may feel like a small price to pay to rebalance a portfolio that may have strayed from its original intent.”
If that is the case, advisors must also include the Net Investment Income Tax and state taxes as part of the analysis. And, they should remind clients that these positions could rebound quickly after a sale.
“So, be sure that these sales are part of a thoughtful strategy,” Taylor said.
Shorter-Term Positions
Clients who entered positions within the past 6-12 months may be able to sell some of those securities at a loss, but there are various factors to contemplate. Amazon is a telling example, Taylor said.
“If you purchased Amazon within the last six months, the position is only minus 8%,” Taylor observed. “So, although there could be specific opportunities for tax-loss harvesting among a variety of stocks, you need to review each situation and holding period; some of the tax-loss trading opportunities may not be there or may not be as impactful as one assumes.”
And again, the wash sale rule can easily trip people up — “so track that 30-day period.”
“We find that during times like these, clients want to take action, even if the best course is to do nothing,” Taylor concluded. “This is where Roth conversions, gifting and estate planning can make the most sense.”
Pictured: Debra Taylor
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.