Financial Planning Corner

There is an ever-growing risk that the U.S. economy will officially slip into a recession during the second half of 2022. The highest reported yearly increase in the Consumer Price Index (CPI) in over four decades combined with the end of pandemic era stimulus programs (e.g., stimulus checks, enhanced unemployment and child tax credits, PPP loans, etc.) provides the backdrop for the current Bear Market to which the U.S. equity market currently finds itself. After two years of FANG stocks, “meme” stocks, and the crypto rally, investors are encouraged to follow the sage advice of Peter Lynch, “Know what you own and why you own it.”

As a financial planner, I remind my clients that recessions, while a normal and unavoidable part of the business cycle, do create planning opportunities that they may wish to consider.

Roth Conversions

Completing Roth conversions after a market decline can be advantageous due to the conversion value essentially being “on sale” or at a discount. It’s important to remember that the cash earmarked to pay the taxes on such a conversion should come from outside the IRA as to not create additional tax liability.

Tax Loss Harvesting and Diversifying Concentrated Positions

Tax loss harvesting entails selling one fund or security and investing in another one that is similar. The strategy allows the investor to realize a tax loss to offset tax gains while staying invested for future growth. Keep in mind that the wash-sale rule states that after an investor sells a security at a loss, they cannot buy a “substantially identical” security within 30 days before or after the sale date.

Estate Planning

Clients who find themselves with potential estate tax liability may want to take advantage of the market decline to either gift or “freeze” the value of their assets today to shift the future appreciation outside of their taxable estate.

Update Financial Plan

The comprehensive financial planning that we do for our clients includes an analysis of stressful market conditions like the one we are experiencing today. Being able to see your portfolio balances in the context of your long-term financial goals offers perspective on what is in your control (i.e., how much you spend, save, how your investments are allocated) and what is left to policy makers and “animal spirits.” Consider updating your current financial plan or creating an initial plan to take control of your financial future in these uncertain times.

Written by Jarrett E. Hindrew, CFP®, ChFC®, Financial Advisor