The recent stock market downturn has caused significant concern among investors, with President Donald Trump’s decision to impose tariffs on various goods and services contributing to the volatility. However, amidst the uncertainty, there are opportunities for individuals to save even more on taxes through strategic planning.
A great fiduciary financial planner can help business owners implement proactive strategies and capitalize on current tax laws and market conditions. The good news is that tax savings are permanent, whereas historically, stock market fluctuations have only been temporary.
Three Tax Planning Strategies to Consider
- Do Roth Conversions During The Stock Market Correction
- Tax Loss Harvesting to Save on Capital Gains Taxes
- Buy-Borrow-Die Pledged Asset Line
Do Roth Conversions During The Stock Market Correction
The best time for Roth conversions is when stock market values and tax rates are low. At the very least, when your personal tax brackets are relatively low. This may be a blessing in disguise if you are able to get more dollars into your Roth IRA during a stock market correction.
For example, if you have a large IRA and the stock market has experienced significant losses, you may be able to convert a portion of it to a Roth IRA, which can provide tax-free income in retirement. Additionally, each Roth conversion minimizes the future tax burden of required minimum distributions on your IRA holdings.
I generally recommend using multiyear Roth conversion strategies to optimize the tax brackets that apply to your realized income. Going 100% Roth in retirement may not be the most efficient use of tax brackets with lower tax rates over your working life.
Tax Loss Harvesting to Save on Capital Gains Taxes
Many investors have been sitting on huge capital gains after the market reached new record highs. However, some holdings may have experienced significant losses, even if your overall portfolio performance has been relatively good.
Tax-loss harvesting allows you to sell investments to minimize taxes on your investment portfolio. This can be especially beneficial for investors with taxable investment accounts.
Free trading and modern technology have made it easier for anyone with taxable investment accounts to benefit from tax-loss harvesting. In essence, tax-loss harvesting is more about taxes than investing.
Buy-Borrow-Die Pledged Asset Line
The “buy-borrow-die” strategy is a popular tool among the wealthy to avoid paying taxes. Essentially, you take a loan against an asset to fund your lifestyle and avoid realized gains when selling the asset.
Loans are tax-free and often carry lower interest rates than the expected growth of the underlying assets used as collateral. This strategy is also known as a pledged asset line (PAL) or securities-backed line of credit.
Rates can be substantially lower than those of other types of debt, making it an attractive option for business owners who need access to capital.
Recently, I worked with a client who needed $5 million to buy a second home in Palm Springs, California. By using a PAL, they were able to avoid paying tax capital gains of $1.7 million and secured a lower interest rate of 2.25% per year compared to traditional mortgage rates.
Conclusion
While the recent stock market downturn has been concerning, there are opportunities for individuals to save even more on taxes through strategic planning. By considering tax planning strategies such as Roth conversions, tax loss harvesting, and buy-borrow-die pledged asset lines, investors can minimize their tax burden and maximize their returns.
Ultimately, tax planning and tax preparation are not the same thing.
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