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Tax considerate planning may pay off during volatile markets

Jan 16, 2024 | RBC Wealth Management


Want some tax considerate wealth planning ideas to consider during volatile markets? See the new issue of Investor’s Edge to read the article.

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Market swings are not new, but what are investors to do differently during volatile markets? Several options may be considered with your financial advisor, including Roth IRA conversions, tax loss harvesting, charitable giving, as well as other gifting.

Consider a Roth IRA conversion

With a Roth IRA conversion, you convert some or all of your money in a traditional IRA into a Roth IRA and owe income taxes on any funds you convert. A down market could be a good time to consider a Roth IRA conversion or partial conversion, because when your IRA’s value is lower, the tax liability of a Roth conversion would be reduced. Once converted, your assets grow tax free and your withdrawals in retirement are also tax free as long as you have had the Roth for five years and you are older than 59 1/2. Your financial advisor can help you assess if this strategy is right for you and your situation.

Look into tax loss harvesting

Tax loss harvesting is a strategy where you can sell investments like stocks, bonds, mutual funds and exchange-traded funds at a loss during market downturns to offset having to pay taxes on capital gains realized from profits from other assets. Be sure to work with your financial advisor in strategizing this opportunity, as you’ll probably want to replace any assets you sell with similar assets to maintain a balanced portfolio. You will need to be careful not to buy the same asset to help you avoid violation of the IRS wash-sale rule.

Charitable giving to the rescue

If you’re over the age of 70 1/2, charitable giving through your IRA is an option. And if you’re over the age of 73 where required minimum distributions (RMD) are required, a Qualified Charitable Donation (QCD) to a qualified charity may provide you with a triple win.

  1. You fulfill your RMD requirements (up to $100,000) for the year.
  2. You reduce your taxable income by the amount of your QCD.
  3. You support the causes that you hold close to your heart.

Note, you are not allowed to take the charitable deduction for the donation on your taxes. Consult with your tax advisor to determine if this strategy would benefit your tax situation.

Estate planning and gifting

Be aware of the upcoming expiration for many of the favorable estate tax provisions enacted by the 2017 Tax Cuts and Jobs Act. The estate and gift tax exemption this year for an individual is $13.61 million for lifetime gifts made, or bequests made by someone passing away, but is scheduled to revert to an expected $6.8 million for individuals in 2026. Planning for the sunset of those provisions may significantly help your family. Giving assets to friends and family can help reduce your estate taxes but requires strategy to determine the best approach. For example, this year you can give any number of people up to $18,000 each (or $36,000 for a married couple combining gifts). Assuming you do not need the assets for your life expenses, this is an option for reducing your estate value prior to the 2026 sunset.

Work with your financial advisor to create a strategy that reflects your risk tolerance, time horizon and financial goals, allowing you to make relevant adjustments over time as the markets fluctuate.

Read more in the Q1 edition of the Investor’s Edge>


Wealth planning