With recent volatility in both equity and fixed income markets, investors are likely, and rightfully, focused on asset values. However, these challenging times can present certain financial planning opportunities.
1. Refinance mortgage debt
Market conditions may result in historic low rates in the mortgage market. Investors may want to explore the advantages of refinancing mortgage debt which may significantly improve cash flow. Rates have varied widely over the past week so it’s important to follow closely if considering a refinance.
2. Improve tax diversification through Roth conversions
The sunset of current tax rates after 2025 combined with fiscal pressures facing the federal government suggest that there may be a relatively narrow window of low tax rates over the next few years. Roth accounts can help mitigate the risk of higher tax rates in the future, and lower account values now means less taxes due on conversion.
- Taxpayers should carefully consider diversifying their retirement savings by utilizing a Roth account where appropriate
- Owning a combination of traditional retirement accounts and Roth accounts offers flexibility to draw from different sources in retirement depending on tax circumstances
- For those looking to leave a legacy, the new 10-year rule imposed by the SECURE Act for most non-spouse heirs means that inherited retirement savings must be distributed more quickly. This can result in bracket creep for those inheriting traditional, tax-deferred retirement accounts. Leaving Roth accounts to heirs may be more tax-efficient
- However, it’s important to remember that the option to recharacterize — or undo — a conversion has been eliminated as a result of the Tax Cuts and Jobs Act (TCJA). Careful consideration of current tax consequences must be weighed before converting
The TCJA doubled the amount of the lifetime estate and gift tax exclusion beginning in 2018 from roughly $5.5 million per individual to roughly $11 million. The new exemption levels resulted in a significant scale-back of the federal gift and estate tax. However, after 2025, these levels are scheduled to revert to pre-TCJA levels — to roughly $5 million per individual, adjusted for inflation.
- Higher-net-worth individuals and families may want to consider larger, lifetime gifts over the next few years in the event the current levels expire as scheduled after 2025
- Since asset values have declined as a result of current market conditions, gifting assets now at lower values can shift future appreciation out of the grantor’s estate
- The combination of lower asset values and lower interest rates may make more advanced planning strategies such as grantor retained annuity trusts (GRATs) more attractive
As account values trend lower, there may be opportunities for investors to adjust portfolios and realize capital losses that can be used to offset gains. Additionally, mutual fund owners may benefit tax-wise from a tax-swap strategy. Read Putnam's investor education piece, "Using investment losses to your advantage."
5. Reset cost basis of company stock
Participants holding company stock within a retirement plan that has decreased sharply in value may want to consider resetting the cost basis of that stock by selling the stock within the plan and repurchasing it shortly thereafter. Unlike stock transactions outside of a retirement plan, the “wash sale” rule does not apply. Lowering the cost basis of the stock might improve the potential benefit of applying NUA treatment when distributing the stock from the plan in the future. Learn more by reading “Understanding the NUA rule.”
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.