Education Funding with 529 Plans

In my experience providing financial counseling, I have fielded many questions with regards to the best ways to fund college education for a child or grandchild.

When it comes to selecting a vehicle for your education saving, there are a variety of options. However, often the best solution is a 529 plan. A 529 plan offers the benefit of tax-free growth and withdrawals for qualified education expenses.

A pre-paid in-state tuition plan is a specific type of 529 program. These plans have the most limited options for use and can have drawbacks if your student ends up not attending school or goes to an out-of-state school.

The 529 savings plan is the more flexible of the two accounts and can be used for a wider variety of costs, including associated expenses like room and board, and vocational apprenticeship programs. K-12 tuition expenses and student loan payments are also allowed up to $10,000.

Contribution limits are quite generous. In addition to an annual exclusion of $17,000 per person for 2023, one could also “superfund” a 529 plan by using up to 5 years’ worth of annual gift exclusions in one year. This could add up to $170,000 combined between spouses.

There are a variety of 529 plan providers available which offer a range of investments options, a common choice being a target enrollment fund which begins with more growth oriented strategies and becomes more conservative over time as your student approaches starting school. This provides the real advantage of potential long-term appreciation of your savings above and beyond the rising costs of education.

If your student does not use all of the 529 funds for whatever reason, the beneficiary could be changed to another family member including even yourself.

As a last resort, non-qualified distributions can be made for needs other than education, like helping your student with a home down payment. These distributions would be subject to taxation on the growth in the account plus a 10% penalty. A distribution as a result of receiving a scholarship would be an exception to this.

At Tanglewood, we are pleased to answer any questions you may have about how best to fund education for your student. Please reach out to your Wealth Advisor to begin the conversation.

Helping Adult Children Buy A Home

High home prices, high interest rates, low inventory, and tough competition have made many prospective buyers feel that home ownership is out of reach entirely or they can no longer afford the home they want.

This environment has prompted new ways of approaching a potential purchase and led to more conversations with clients about helping a child buy a home. There are several potential ways parents can help but only after addressing the first and most important question:”Do we have enough to help at all?” (As Keith discussed on the previous page, our Capital Sufficiency pillar is an excellent tool that can be used to find the answer.) Once that critical question is addressed, consider the following:

Outright Gift

If you are comfortable gifting money, you could give enough cash to your adult child to buy the home outright, assist with the down payment, or help with making mortgage payments. Depending on how large the gift is and how it is structured, you may need to file a gift tax return. You may also be asked to confirm that it is a gift and not a loan so as not to interfere with mortgage underwriting.

Intrafamily Loan / Landlord

In lieu of an outright gift, you could become the “family bank” and loan the money to your adult child. This works best when financing the entire purchase. As an alternative, you could buy the house and then rent it to your adult child. In both cases it is important that you properly document any loan or rental agreement and associated tax reporting on income.

Be On The Hook

If your adult child is struggling to meet mortgage loan underwriting requirements (e.g., they are self-employed), you could co-sign the mortgage or co-borrow. The co-signer is on the mortgage to guarantee the loan for the borrower. The co-borrower has equal responsibility to pay the mortgage.

Gift or Sell the Family Home

If you find yourself in a position of wanting to downsize and your adult child wants the family home, you could sell it or gift it to them. In both cases, it is wise to hire a real estate appraiser to determine and document the fair market value of the home, as well as hire an attorney to prepare and file any required paperwork to properly document the transfer of ownership.

Each of these has its unique advantages and disadvantages along with the potential impact on your taxes (income, gift, and estate), family dynamics, liability, financial independence, and estate planning.

Helping an adult child is an admirable goal and a big financial decision to make. We encourage you to contact your Wealth Advisor if it is something you are considering.

Disclosures

The Next Generation of Comprehensive Planning Illustrations

Nearly 20 years ago I developed the first iteration of Tanglewood’s proprietary Retirement Illustration. This started the expansion of our comprehensive wealth planning initiative for Wealth Management clients.

The goal was to use the Illustration as a proprietary tool to quantify and visualize the alignment between a client’s invested assets and various future income streams (such as social security, pensions, etc.), with their projected future spending needs throughout their retirement years. It has served us very well.

Over the years the Illustration saw many enhancements from initial plan creation and updates to incorporating current tax laws, future tax law changes, Roth conversions, gifting and more.

I give credit to Victor Powell for advancing the spreadsheet’s capabilities and user friendliness. He took it to the next level after he joined the team in 2014.

Along with the advancements in the tool itself was the evolution of its delivery. It started with me bringing in a stack of printouts into a meeting considering various scenarios and assumptions. I now cringe at the thought of covering half the conference room table with a sea of paper reports. A major advancement was the development of an online presentation that provided the ability to make changes on the fly and immediately see the impact of those changes. Tanglewood uses tools like this to help enhance client awareness of lifetime resources and needs.

Having that level of interaction and immediate “what if” variability offered much more client confidence and ownership in the results. We want every wealth management client to see the final results as THEIR plan.

As good as it was in helping answer important questions regarding retirement timing, income and asset distribution planning, industry tools and technology were swiftly advancing as well. Over the past several years, we thoroughly evaluated several comprehensive planning programs and selected one that best supports the four pillars of Tanglewood’s wealth planning process.

Our new comprehensive program checked all the right boxes for us as it provides an exceptional balance between depth and detail without sacrificing ease of use and simplicity. Here are some of the highlights of what this advanced tool offers as part of our hands on wealth planning.

Goal Based Financial Planning:

A comprehensive goals-based approach with the capability to create comprehensive plans that incorporate retirement planning, investments, insurance, tax planning, college funding and more.

Scenario Modeling:

We can run multiple scenarios to analyze the impact of different variables in real-time. We can make adjustments to lifestyle spending, savings rates, retirement ages, investments and other factors to understand the potential change in outcomes.

We can also incorporate probability analysis that goes beyond traditional linear projections to understand the impact of variable returns over time.

Interactive Client Portal:

The software allows us to provide a secure and user-friendly client portal, enabling interactive access to a client’s financial plan as well as progress toward their goals. It is also capable of account aggregation to bring together all investment accounts, assets, and debts to build a balance sheet that automatically updates values over time.

Tax Planning and Optimization:

We find the tax planning features, including future tax projections, tax-efficient withdrawal strategies and Roth conversion analysis particularly helpful. Helping clients make wise decisions regarding their lifetime tax exposure not just year-over-year.

Cash Flow Management:

With its robust cash flow management capabilities we can track client’s income, expenses and debt repayments. It automatically categorizes these transactions from linked accounts, generates reports and offers insights into spending patterns for making better budgeting decisions. Detailed cash flow transactions are for the client’s eyes only and not seen by your Wealth Advisor unless shared by the client.

With this program we can provide greatly enhanced flexibility and “what if” capabilities and with it we can provide clients the confidence, clarity and definitive path to move forward in reaching their personal financial goals. Equally important is that as each client’s situation and goals change, the plan can easily change direction as well.

We are working with additional clients on this platform seemingly every day in preparation for Wealth Planning review meetings. Contact your Wealth Advisor to discuss this further or to set up a review meeting at your convenience.

Disclosures

Four Pillars of our Total Wealth Management® Relationship

The objective of our Total Wealth Management® is to make a positive and lasting impact on the financial wellbeing and outcomes of our clients. This is more than just a one-time exercise but a long-term partnership that aligns the firm and its wealth advisory team with our clients. We aim to know all the specific details of both our client’s financial situation as well as their personal goals and objectives, which puts us in a very unique position not held by other professional advisors.

While investment management has been a core expertise at Tanglewood since inception, our wealth planning capabilities truly stand out in our field. Tanglewood has and will continue to enhance our wealth planning resources adding to the depth and breadth of our services, our people and expertise as we grow.

We consider the following to be the four pillars of planning that are at the heart of every wealth management relationship. While these pillars are the foundation of our wealth planning, individual circumstances, needs, and goals often lead us into areas of importance to specific clients such as: business capitalization, ownership structures, and succession; special needs of children; corporate trusts; charitable foundations; and more.

Balance Sheet Creation and Maintenance

Creating a comprehensive and current balance sheet or personal net worth statement is the first planning pillar of our wealth management process. It is critical to establish this foundation for nearly all areas of planning with our clients.

The Balance Sheet offers a snapshot of a client’s financial resources and overall financial health. In order to establish a current financial position, all assets including, bank, investment and retirement accounts, real estate, and other illiquid assets should be included along side all liabilities including mortgages. This is a valuable report for both wealth accumulators and those in retirement looking to grow and preserve their assets.

We offer clients several ways to keep up with this information via PDF or excel templates (manual entry and updates) to digital balance sheet aggregators which will securely link financial account websites to provide updated values. We prefer the latter as once this “living” balance sheet is set up it automatically updates most “liquid” holdings.

Annual Tax Return Review and Analysis

The second planning pillar, tax return analysis, is a combination of annual tax planning within the context of a client’s lifetime potential tax exposure. It is an ongoing and recurring added value for clients in an ever-changing tax environment.

Understanding a client’s entire tax situation beyond what is attributable to their managed investments is critical to lifetime tax planning. This requires a detailed analysis and preview in tax years with material changes or opportunities. Every client’s tax situation is unique, there is no one size fits all approach.

Roth conversions, capital gain/loss management, deferring/accelerating income, estimated tax payments, IRA distributions, and deductions are just a few of the areas that offer opportunities.

As you complete and file your 2022 return, please send Tanglewood a copy. This can be uploaded to your document vault or you can request a secure upload link from your Wealth Advisor. Due to the sensitive information within a tax return, please do not send an unprotected return via regular email.

Upon receipt and review of your tax return, we will prepare and send a detailed Tax Report, which provides a comprehensive analysis and summary of your recently filed return. This report helps us understand the various components of your tax return, including an overview of your income, deductions, and credits. Among its many benefits are where you stand in terms of tax brackets and phase outs, along with some observations and strategies to consider going forward.

Capital Sufficiency Analysis

The third planning pillar, running a capital sufficiency analysis, takes time and effort up front to gather all the details needed to fully build out a projection. The balance sheet and tax review add valuable insights in the preparation of this analysis.

During client planning meetings, we are often asked questions, such as, “when can I retire”, “how much do I spend without the fear of running out too soon”, “how much do I need for my children’s education”, or “what are the most advantageous ways of making large gifts to family or charity”. These are just few of the goals and objectives that provide an important context to our wealth planning and investment decisions.

A well thought out plan helps answer these questions and greatly improves the chances of a successful outcome. Having a plan in place acts as a financial road map. When situations and goals change, as they often do, the plan serves as a baseline for comparison. New inputs such as an earlier retirement of increased spending can be quickly evaluated.

In times of market volatility, this big picture context helps many clients focus on their long term objectives rather than the short-term noise.

Estate / Legacy Plan

Having an appropriate and well thought out estate plan is the fourth planning pillar of Tanglewood’s wealth management process. For clients who do not have a plan, or cannot locate the documents, or it has not been looked at in 10 years, this should be a priority!

Our role is to define our client’s overall objectives and propose possible solutions that fit the composition of their estate. The balance sheet once again is a prerequisite to understanding the size and complexity of the estate.

Often unique family circumstances are as important as financial details. Personal conversations of any potential challenges should be thoroughly explored. While Tanglewood does not draft legal documents, we facilitate the process by spending as much time as needed to introduce and explore various planning strategies.

Another important aspect to the estate planning process is the coordination of beneficiary designations for life insurance and retirement accounts. The designations themselves if not aligned with the documents can work against an otherwise well thought out plan.

With the plan in place, Tanglewood will prepare a flowchart illustrating the overall disposition of the plan which includes the important provisions and people involved.

At Tanglewood we believe these four pillars of our planning provide a sound foundation on which to build a long-term partnership with each of our wealth management clients. Once in place, special planning needs or opportunities can be better evaluated. The collective experience and knowledge of all our wealth advisors supports our Total Wealth Management® mission.

It is the firm’s intent to engage with each wealth management client to maintain these pillars as a core responsibility of our partnership.

Social Security Family Benefits

Social Security has three main benefit programs. The most well-known is the Retirement Benefit for individuals who worked and paid into Social Security. Even if you did not work under Social Security, you may still be eligible for benefits as a Spouse, Ex-Spouse, or Survivor.

Spousal Benefit

If you are married and never worked under Social Security, at your full retirement age you would be eligible to receive up to one-half of your spouse’s full Retirement Benefit amount, or even a reduced benefit as early as age 62. To the extent you have any work history, you would receive the higher of the two.

Ex-Spousal Benefit

In general, if you are divorced and never worked under Social Security, you may be eligible to receive Retirement Benefits based on your ex-spouse’s work history if: you were married at least 10 years, you never remarried, and you are age 62 or older. If one-half of your ex-spouse’s Retirement Benefit is higher than yours, you would receive the higher of the two.

Survivors Benefit

If you are a widow(er) and have children under age 18 (or age 19 in secondary school), you and each of your children may be eligible for survivor benefits. Your age and whether you have qualifying children at the time of your spouse’s death determines the amount of Survivor Benefit you can receive, which ranges between 71.5% and 100% of your spouse’s full Retirement Benefit at the time of death. Each qualifying child can receive up to 75% of the deceased parent’s full Retirement Benefit.

There is a limit on the combined monthly benefit amount a family can receive. It is typically equal to 150% and 180% of the deceased parent’s full Retirement Benefit at the time of their death. If the total amount payable to all eligible family members is greater than the limit, the monthly benefit amount is reduced proportionately.

If you are a widow(er) with no children and never worked under Social Security, you may be eligible to receive reduced Survivor Benefits as early as age 60 vs. the early retirement age of 62. Remarrying after you turn 60 has no effect on survivor benefits.

The Bottom Line

Your Social Security statement outlines your benefits based solely on your work history. At the end of the day what type and amount of benefit you receive ultimately depends on your specific situation and how you qualify.

Three Ways to Address Inflation in 2023

With inflation rates topping 8% last year, the average American household is spending significantly more for the same goods compared to the previous year. Here are three ways you can address the impact of inflation.

Watch Out for Budget Creep

Budget Creep occurs when your expenses are consequently going up due to the increasing cost of goods brought about by inflation. Though reviewing a budget is hardly anyone’s favorite pastime, the effort could be an eye opener when you determine where those hard-earned dollars are being spent. Most of our clients can afford everyday luxuries but are also practical. How much more did your favorite restaurants cost this past year? Review your subscriptions (streaming services, for example) that auto renew each year. For fixed expenses such as utilities, internet, insurance, this may be a good time to check your rates and shop around. Using a resource like powertochoose.com can be very helpful in keeping energy costs down.

Review Homeowners Insurance

With the increased costs of rebuilding homes caused by the aftermath of natural disasters and high inflation, review your home coverage limits. Most insurance companies use cost estimators annually to reflect current construction prices. However, consider adding a “Guaranteed Rebuilding Cost” endorsement. Although this comes with an additional premium, it provides piece of mind knowing the policy will pay the full cost of rebuilding even if it exceeds policy limits.

Make an inventory of all the valuables in your home. Consider getting an updated appraisal when renewing scheduled coverages to reflect any increased values of personal property.

Check Yields on Cash Savings

If you have cash sitting in the bank that exceeds your emergency reserves, check your interest rates. Three of the well-known bank chains are paying as low as 0.01% – 0.15%! In today’s high inflationary environment, you are leaving money on the table by holding cash at such low rates.

As of this writing, Schwab’s Value Advantage Money Market fund is currently yielding 4.26% while 1-Year Treasury Rate are now 4.75%. These are significantly better cash vehicles to combat inflation’s toll on purchasing power. Tanglewood uses these short-term investment options in your portfolio whenever possible and can facilitate getting a client’s other cash holdings working harder as well.

Disclosures

SECURE Act 2.0 Has Arrived

Included with the 2023 government spending bill that was just signed into law by the president last week was the latest version of SECURE Act 2.0. The first SECURE Act was passed in late 2019 and it made some major changes. The most significant being the elimination of the “lifetime stretch IRA”. In place of the stretch was a much less tax-friendly 10-year rule which puts the maximum stretch at – you guessed it – 10 years.

SECURE 2.0 adds even more retirement account related provisions that affect savers, retirees, plan participants and plan sponsors. Here are the top items worth noting to clients.

Required Minimum Distributions age extended and penalty relief

Starting in 2023, the Required Minimum Distribution (RMD) age for certain IRA owners is now age 73 and will be further extended to age 75 in 2033. Here is the breakdown of RMD start years by year of birth:

  • Born 1950 or earlier – no change

  • Born 1951 through 1958 – RMDs start at age 73 (2024)

  • Born 1959 or later – RMDs start at age 75 (2033)

For many clients, the additional year(s) affords more time for strategic Roth conversions or other lifetime tax planning opportunities that become much more limited after RMDs begin.

The penalty for failing to make a required distribution was a steep 50% of the shorted amount. The egregious penalty was mostly a deterrent but rarely ever enforced. SECURE 2.0 reduces the penalty to 25% or just 10% if corrected in a timely manner. The lesser penalty makes it much more likely to be imposed and/or voluntarily paid.

Roll unused 529 balances to Roth IRA

We’ve always considered 529 accounts as pseudo-Roth IRAs for college expenses as they offer similar benefits of tax-free growth when accumulations are used toward college expenses.

The SECURE Act 2.0 includes a never-before offered opportunity to roll 529 balances into a Roth IRA for the beneficiary of the 529 plan starting in 2024. There are some limits and qualifications. The 529 must have been maintained for 15 years or longer. Also, contributions made to the 529 within the past 5 years are ineligible. Rollovers are allowed annually up to the Roth IRA contribution maximum (currently $6,500) subject to a lifetime rollover maximum of $35,000.

That may not seem like a lot on the surface but provides a nice Roth IRA foundation to build investing momentum for children or grandchildren entering the work force. Assuming this begins when the beneficiary was 16 years old, that’s easily over a million tax-free dollars by their late 60s without ANY further contributions!

Qualified Charitable Distribution (QCD) limit indexed to inflation

QCDs were first introduced in 2006 and offered to those older than 70½ an alternative means of making charitable donations directly from retirement accounts. These donations satisfied the owner’s RMD obligations while being excluded altogether from taxable income – a better economic value than a typical (itemized) charitable deduction in many cases. The limit was $100k in 2006 and remains $100k in 2022. Beginning in 2024 it will be indexed to inflation.

There’s also an opportunity to make a QCD gift up to $50,000 (indexed to inflation) to a charitable trust as an expansion of the types of entities that can receive a QCD. Questions remain about this given the small amount and special requirements of the trusts.

Higher catch-up contributions

Today, participants in a 401(k) or 403(b) over the age of 50 are allowed a catch-up contribution of $7,500 in addition to the standard allowable max deferral $22,500 for 2023. These contributions are all made on a preferential pre-tax basis.

Starting 2025, plan participants who are age 60 to 63 will be allowed a “super-sized” catch-up equal to the greater of $10,000 or 150% of the catch-up amount in place at the time.

One new caveat is that for those earning more than $145,000 in the prior calendar year, all catch-up contributions must be made on an after-tax basis to a Roth account. That’s the loss of approximately $2,400 per year income tax incentive (or more) for those over that income threshold who want to max out savings.

Employer matching enhancements

Employers were previously not able to deposit matching contributions to their employee’s Roth accounts. SECURE 2.0 now gives this option. Matching in this Roth form however will be fully taxable as income to the employee in the year of contribution.

Also, starting in 2024, employers can include student loan repayments as retirement plan contributions to determine the amount of employer matching funds paid to the employee.

SECURE 2.0 brings dozens of other provisions and additional complexities. It will be an evolution over the next several years as they work their way into plan documents. We will keep you abreast of major developments and work with you to help navigate your expanded options and decisions.

Helping Aging Parents

I recently visited my mother across the globe. Though in relatively good health, the pandemic aged her in some ways. We shared many laughs along with serious conversations about her finances and her desire to live at home as long as possible.

Since many of us have parents who are aging (or YOU are the aging parent), it is prudent to have discussions about their wishes, aspects of their lives that are important to them, dreams that have yet to be fulfilled, concerns about the future, and plans for potential incapacity or illness.

Topics for discussion

Make sure that your parents’ legal documents are in order. Have your parents executed a Will, a Living Trust, and/or Durable Powers of Attorney for financial matters and healthcare? Are they up to date? Do you know where they are?

Discuss your parents’ preferences regarding healthcare. Do they have doctors who they trust? If they are currently sick, what type of treatments would they consider and how will this impact their finances? Do they have medical directives that state the use or termination of life-sustaining care in case of terminal illness?

Housing considerations. Talk openly about moving to an Assisted Living Facility if they can not easily manage living at home. Or, do they prefer caregivers to help at home with daily activities such as driving, getting dressed or cooking?

Learn about your parents’ financial resources. What type of assets do they own? Are adequate funds earmarked for medical needs or prolonged illness? Do they have any insurance policies (life, auto, property, long-term care) and are they all current? Find out where they keep their password information for their digital accounts and smart phones (for access to two-factor authentication if necessary).

Discuss with family members what their roles and responsibilities are. Should a parent become incapacitated, is there a child who can devote their time to their care? What are the options available if no one is available to assist full time?

Ask what your parents’ preferences are for end-of-life arrangements. Do they want to be buried or cremated and where? Do they own any prepaid funeral plans or a burial plot?

Having these important and difficult discussions empowers children to make decisions that are consistent with their parents’ wishes which will positively contribute towards their more rewarding and peaceful twilight years.

Fraud Alert: Be Wary of Sweepstakes Scams

“Congratulations! You’ve won the grand prize.” How would you react to a call or an email saying this?

Fraudsters relentlessly try to separate people from their money. Retirees (especially those living alone) are the most vulnerable. This article addresses common schemes shared by clients and how to respond. Take and share these with ones you love who may be susceptible to these scams.

“Easy money” schemes

Did you even enter? If you don’t remember entering a lottery or sweepstakes, you probably didn’t. Don’t second guess yourself. Be skeptical.

Do not send them anything of value. If you really win a big prize, you do not need to prepay taxes, pay a processing fee, or send them gift cards.

No personal data. Do not provide your social security number or date of birth over the phone. Fraudsters may also ask for bank account information under the pretense of getting the “prize money” to you safely. Do not give it to them! This same information can also be used to steal money OUT of your bank account.

Money mule scams. This is where someone is used to launder and transfer stolen money. If someone sends you money and then asks you to send it to someone else, don’t walk, run away.

Legitimate companies. Scammers often spoof legitimate companies like Publishers Clearing House (PCH). PCH representatives will not call or email you if you win. When in doubt, go to the company’s official website or ask a trusted contact to do so on your behalf. It may save you a small fortune.

Keep the family informed. It is best that you tell your family or trusted contact about these alleged windfalls as soon as possible. Thieves discourage people from telling anyone so they can “surprise” their family later. Don’t keep it a secret.

“You owe them” schemes

According to AARP, in addition to fake prize scams, government impostor scams are on the rise. These scams involve people who claim to be from the IRS, Social Security, Medicare or the FBI. The government will not call you and ask for personal information they already have. You do not need to wire money, send a check, or mail a gift card to avoid arrest or having your account suspended.

The Federal Trade Commission (FTC) website (https://consumer.ftc.gov/features/scam-alerts) is a good resource to learn about current scams.

Feel free to call your Tanglewood advisor if you or someone you love receives a suspicious communication about an alleged sweepstakes prize.

Disclosures

Sometimes It’s OK to Feed the Bear

Market volatility is inevitable and a part of the investment experience. Since 1926 the S&P 500 has experienced 26 bear markets – defined as a decline of 20% or more from its previous high. These periods are unnerving and uncomfortable, but they should not be unexpected. Volatility (aka “taking risk”) is the price an investor pays for a superior return on their investment. For a well balanced diversified portfolio, committing to the investment process should ultimately lead to a full recovery and on to new highs.

With this as a backdrop, corrections and bear markets can be viewed as opportunities to enhance a client’s wealth planning objectives. This is not market timing in the traditional sense but simply reframing a temporary market downturn into a positive long-term planning opportunity. Let’s look at some of these opportunities.

Add sideline cash

When markets are down substantially from their all-time highs, it is a great time to add accumulated cash to a long-term investment portfolio. The deeper the decline, the more the reward on those contributed funds.

For every dollar invested when a portfolio is down 40%, that dollar achieves a 67% return when fully recovered. See below for the “recovery return” after various levels of decline.

This is not magic market timing or crystal balls, it’s just math!

Make an IP change

In the same vein as adding cash to the portfolio, adding stock exposure through a more aggressive investment policy accomplishes a similar result. Tanglewood’s investment policies range from 30% equity to 100% equity. Turning up the equity dial a notch after a significant decline will take advantage of a downturn with more equity growth during the recovery.

It’s very important to keep in mind that with either of these moves you never know where the bottom will be. You might initially feel good investing or getting more aggressive when down 20% or 30% but only to see it continue to fall further from there. Being too early can cause pain and/or regret in the short-term, but doesn’t change the math or advantage ultimately achieved when fully recovered.

Roth conversions

For someone considering a Roth conversion, a market decline may be the perfect time to pull the trigger. The greater the decline, the more a conversion is “on sale”. Remember the conversion is taxable income in the year it is converted. Most often, the goal is to target a specific conversion amount to fit within the client’s tax budget. When market prices are low, more shares get converted to reach the desired conversion amount.

The real payoff comes when the market (eventually) turns around and the conversion recovers tax free inside the Roth instead of the taxable IRA.

Accelerate gifts

Gifting is a simple and smart way to transfer wealth and reduce estate taxes over time. Whether using the annual gift exclusion ($16,000) or making a significant gift that uses some of the $12,060,000 per person lifetime exemption, a bear market provides additional leverage since the gift values are temporarily depressed.

Business owners may also find this to be a good opportunity to gift depressed company stock if their business has also been negatively impacted. Splitting the stock into voting and non-voting shares will further reduce valuations and provide an opportunity to give away value without losing control.

Diversify

A sharp decline in market value should reduce the tax impact of selling an investment with a large unrealized capital gain. We recommend not letting the “tax tail wag the dog” but if realizing that large gain was a barrier to diversifying, a bear market may open up that opportunity and lessen the tax pain.

Tax loss harvesting

This strategy is nothing new and one that Tanglewood implements when the right opportunities present themselves. Selling positions at a loss and simultaneously buying a similar security, pockets the loss to use against gains later while remaining invested. They never go to waste as any carryover losses from one tax year roll over indefinitely until fully utilized.

Accelerate IRA RMDs

Similar to a Roth conversion, taking an IRA RMD when the market is down can be a tax wise move. The reinvestment of the RMD in an after-tax account essentially “steals” appreciation from the IRA and shifts that growth from an ordinary income tax environment to a capital gain environment.

Tanglewood’s Wealth Advisors stand ready to discuss and analyze whether any of these moves make sense in your particular situation.