We entered 2020 with a cautiously positive outlook, although we still felt it would likely be a turbulent year. When we made that statement in our 2020 market outlook, we may not have anticipated the severity of the turbulence, but we considered that there could be something unexpected that could put us in the situation we are in today.
So, as we find ourselves in these economically challenging times, listed below are some options we are reviewing in your portfolio:
Tax Loss Harvesting | In the past several years, making portfolio adjustments came with tax implications due to capital gains that would be realized upon the sale of the securities. The recent declines in the market may allow LAMCO an opportunity to harvest some losses in your portfolio. Tax loss harvesting is a tax optimization strategy designed to reduce your tax liability by selling securities that have declined in value from the original purchase price and reinvesting the proceeds into a similar security to maintain market exposure.
The Investment losses on the sold securities (“Realized Losses”) can be used to offset realized gains in the current tax year. Any excess losses (Realized Losses greater than realized gains in the current year) can be rolled over to offset realized gains in future years. Further, if you have more Realized Losses than realized gains in any given year, you can use up to $3,000 per year to offset ordinary income on federal income taxes until all your losses have been used.
LAMCO incorporates tax loss harvesting in your portfolio when appropriate and we will evaluate opportunities presented by the current market environment.
Keep your Required Minimum Distribution | Do you need to take your required minimum distribution to fund your annual living expenses? If not, you can elect to forego your 2020 RMD and allow the funds to continue growing tax deferred in your IRA. The Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act), the third COVID-19 relief bill, afford you a temporary waiver of required minimum distributions for IRA’s and certain retirement plan accounts for 2020.
Eliminating (or reducing) the RMD for 2020 can help reduce your 2020 tax bill, however, you may still make a voluntary withdrawal from your IRA regardless of the waiver. If your portfolio is subject to an RMD, we will be in contact with you to discuss the best approach for you.
Convert your Traditional IRA to a Roth IRA | Converting from a traditional IRA to a Roth IRA while the portfolio is at a lower value provides the opportunity to lock in future gains, tax free. Unlike a traditional IRA, where you will pay ordinary income tax when you withdraw gains, those same gains in the Roth IRA can be withdrawn tax free. In addition to this, it may make sense to liquidate some of your taxable assets that have losses in order to pay the taxes on the conversion, making this a tax neutral transaction.
This strategy does not make sense for everyone, however. If you are currently in a high tax bracket and still have employment income, it is a good possibility that your tax bracket will be lower in retirement and this strategy may not make sense for you. We will discuss this with you in greater detail if we feel this is a strategy worth considering for your individual situation.If you still have questions or concerns regarding this topic, reach out to our retirement plan team experts—we would be happy to help.