The stock market’s recent downturn has impacted just about everyone. This is a critical time to be able to think clearly about your investments. Specifically, what actions should you consider in light of the recent stock market decline? Here’s three that come to mind:
- Roth Conversions
- Implement Tax Loss Harvesting in taxable brokerage accounts
- Evaluate 401(k) contributions, or 2025 IRA contributions
Roth conversions in a down market
Roth conversions are the process of converting Traditional IRA assets to Roth IRA. This action triggers taxes on the amount you convert, but gets the assets inside a tax-free account (Roth IRA).
For example, if you transfer $25,000 worth of stock from a Traditional IRA to a Roth IRA, you will add $25,000 to your 2025 taxable income. Why should you consider doing this now?
- Because stock markets have fallen, the tax hit from a conversion is lower
- Converting 100 shares of Apple stock adds $20,000 to your taxes today vs $24,000 two months ago
- If those values come back, all of the gains will happen in a 100% tax-exempt account
Refer to this article here for a deeper dive on Roth conversions.
Tax loss harvesting
Tax loss harvesting involves selling an investment that has a taxable loss associated with it, and replacing it with a similar investment. For example, if you bought an S&P 500 fund at the beginning of the year, you are down 10-12% on it. You could sell that fund and replace it with a US broad market fund (which is also down 10-12% on the year). This action realizes the loss on the S&P 500 but does not really change your exposure to the market.
There are numerous benefits to tax-loss harvesting, such as:
- Up to $3,000 in losses can be used to reduce ordinary income
- at a 24% tax bracket, this amounts to tax savings of $720 at the federal level
- Losses can be used to cancel out gains
- A $3,000 loss can cancel out $3,000 worth of gains, resulting in a net $0 tax impact
- Losses carry forward year-to-year
- Losses that exceed $3,000 can be carried forward to the next tax year
The current market presents the best tax loss harvesting opportunities since 2022. Yet, new technology makes it even easier to implement daily tax-loss harvesting strategies. This is absolutely something we are doing for our clients.
401(k) and IRA contributions/adjustments
You can’t control what the stock market is doing, but you can control how much you are contributing to your 401(k) or IRA accounts (and when).
Our general advice: If you are confident in your income situation staying steady, consider increasing your 401(k) contributions today.
This will get more money into your 401(k) account while the market is lower than it was a month ago. You will hit your maximum contribution amount earlier in the year ($23,500 for 2025).
Then, if the market keeps going down, you will have larger paychecks later in the year (since you won’t have 401(k) contributions being deducted). These larger paychecks later in the year will give you flexibility. You could decide to save the extra cash if your situation has changed, or invest the excess in a taxable brokerage account.
Conversely, if you are nervous that the recent market volatility is going to manifest into an economic slowdown that impacts your job. You could reduce current 401(k) contributions to increase your personal savings. If you still wanted to get this money in the market, you could invest more conservatively in a taxable brokerage account. This way you still have investment exposure, but if you later decide you want the cash, you can pull from the brokerage account. If you are under age 60, you will not have great options for pulling money out of a retirement account.
Also, most people will wait until later in the year to make 2025 IRA contributions, but you should consider making such contributions today.
Planning on your terms
With all of the volatility in the market and headlines in the news, its easy to get lost in a state of paralysis. And while doing nothing might not be bad option, you should also consider how you can turn the market’s lemons into lemonade! Roth conversions, tax-loss harvesting, and increasing 401(k) contributions are just three things you should give some thought to. While these aren’t magic bullets, they are things that can have a positive impact on your net worth over time. Thinking clearly and strategically in light of the market environment is as important as ever.
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