Editor’s Note: This story comes from Wealthramp.
2022 turned out to be a very difficult year for investors, and the third quarter of the year did not deliver better news. Despite a stock market rally early in the quarter, September brought more bad news and the US stock market index lost another 4.5% for the quarter.
The U.S. stock market is down 17.6% for the rolling 12 months ending September 30, 2022. International markets provided no refuge, with stocks in developed countries down 9.2% in the third quarter and 23.9% for the rolling 12 months. Emerging market indices saw similar losses, losing 11.8% for the quarter and 28.1% for the rolling 12 months.
Adding to the pain felt by investors, bond markets fared no better. The broad US bond market index lost 4.8% in the third quarter and is down 14.6% on a rolling 12-month basis. The global bond market index fared slightly better, losing 2.2% for the third quarter and 9.9% for the rolling 12 months.
Poor economic conditions and disappointing market conditions have many people wondering what action they should take now. The good news is that there are always strategies we can use to improve our financial situation, but sometimes we need to dig a little deeper into the financial planning manual.
Here are seven financial planning steps to consider before the end of 2022 to improve your financial situation for the future.
1. Tax loss harvesting
Even the most laid-back football fan has probably heard an announcer at one time or another talk about a team’s attack taking advantage of what the opposing defense gives them. That’s exactly what we’re talking about here.
Tax loss harvesting is a strategy we can use to realize investment losses in non-qualified (non-IRA) accounts to reduce capital gains taxes, or potentially offset up to $3,000 of income taxes for the current tax year.
It is important to note that the strategy may be more or less beneficial to investors depending on a number of factors, including the investor’s tax bracket. It is also important to understand that tax-loss harvesting only defers tax liabilities, it does not eliminate them.
There are complicated rules associated with tax loss harvesting, including the IRS’ onerous wash sale rule, so it’s important to work with your financial planner and tax professional to ensure you don’t break the rules of tax loss. ‘IRS.
2. Roth IRA conversions
Another golden opportunity some investors might overlook in 2022 is the Roth IRA conversion. Converting traditional IRA assets to a Roth IRA can have several long-term benefits, particularly for taxpayers who are prohibited from making regular Roth IRA contributions because they earn too much income or for investors who long term before retirement.
With stock and bond markets down significantly in 2022, Roth IRA conversions are now very attractive because future appreciation in the value of converted assets will occur in Roth IRAs instead of traditional IRAs, reducing future tax liabilities during retirement.
There are a few rules of thumb to keep in mind when considering a Roth IRA conversion. First, any income tax owed on the converted assets must be paid with non-IRA savings and not with the IRA itself, or the benefits of the Roth conversion are eroded.
Second, the amount of converted IRA assets is added to your gross taxable income, so care should be taken to avoid converting amounts that will push taxpayers into higher tax brackets.
Finally, Roth IRA conversions provide greater benefits the longer assets will remain in a Roth IRA. Investors approaching or already in retirement should consult with their Certified Financial Planner and tax professional to determine the likely benefit of any Roth IRA conversion.
3. Acceleration and maximization of contributions
For investors who regularly contribute to workplace pension plans, Roths and/or traditional IRAs as part of their investment strategy, the market downturn in 2022 presents a tremendous opportunity to buy assets at a steep discount. With investment markets experiencing double-digit losses since the start of 2022, investors are presented with two exciting opportunities today.
The first opportunity is to accelerate future contributions in the present. If investors have enough cash, accelerating contributions can help them lock in gains when investment markets rebound. Similarly, contributing the maximum annual amount to Roth and traditional IRAs and/or workplace retirement plans like 401(k)s or simple IRAs will pay dividends as markets recover from the 2022 downturn.
4. Shorten Fixed Income Maturities
Bollin Wealth Management clients have been holding short-duration bond portfolios for some time now, anticipating the very environment we are currently experiencing: rapid rate hikes by the Federal Reserve caused by runaway inflation. But many investors may hold fixed income investments with longer maturities than what is currently recommended.
There are two reasons to hold shorter-dated bonds now. First, the yield curve is inverted, meaning investors get less yield for holding bonds maturing in more than three years. (By the way, an inverted yield curve is a classic sign of an economic recession.)
Second, bonds lose value whenever the Federal Reserve raises rates. Bonds with shorter maturities lose less value than bonds with longer maturities when this happens. Given that the Federal Reserve plans to raise rates several times through 2022 and 2023 in an effort to control inflation, further losses on longer-dated bonds are almost a certainty.
5. Make your money work for you
The rising interest rate environment has taken its toll on many investors’ bond portfolios, but there is one upside to higher interest rates: higher returns on cash reserves. Many investors have become conditioned to low or no returns on money market funds and cash reserves over the past decade. With changing interest rates, the opportunity to earn some return on your cash reserves exists again.
The opportunities for investing with cash reserves vary widely from institution to institution and even within institutions. Investors should therefore be careful when choosing the right option for their situation. It is important to understand that these alternative cash options and money market funds offer both different returns and liquidity risks. Consult with your financial planner to ensure you understand the risks and establish your comfort level with the options available to you.
6. Donation Strategies
For many wealthier Americans, gifts have become an important estate planning tool that helps transfer assets from their estate to younger generations and charitable interests. With the annual limit on opt-out gifts at $16,000 per person in 2022, simply changing their gifting strategy can help Americans pass on more wealth to their children, grandchildren and charitable interests.
Instead of giving money to their targets, investors may wish to pass on $16,000 worth of individual stocks or mutual funds that have lost value in 2022 due to the general market correction. When the value of the donated stock or mutual fund rebounds, the individual or charity will receive a higher value gift that avoids the gift tax rule. This strategy can also help the donor avoid some capital gains taxes!
7. Strategies for Borrowers
For Americans who are currently borrowing money or considering borrowing money, the opportunity for lower interest rates may be gone. But with the Federal Reserve predicting further interest rate hikes for the rest of 2022 and into 2023, there’s still time to lock in lower rates than will be available in a few months.
While interest rates on loans have risen dramatically as the Federal Reserve has raised rates at breakneck speed, borrowing rates are still relatively cheap by historical standards – even for mortgages. . Locking in a lower rate today can save borrowers money and position them to refinance their debt securities in the future when the Federal Reserve eases rates after the threat of runaway inflation wears off. is appeased.
Conclusion
Even adverse market and economic conditions can provide financial planning opportunities for savvy investors. The seven financial planning strategies won’t make sense for everyone, but investors can position themselves for future success by using some of these financial planning steps.
Investment performance data: Frank Russell Company, Bloomberg and MSCI.