The conventional wisdom is often to leave your investment portfolio alone and to ride it out because the market will come back.
Otherwise, smaller investors can make the mistake of selling when the market is down and then they don't get back in when the market comes back up. As a result, their overall rates of return are lower.
But as a one-size-fits all approach, I don't like that advice. I am okay with that advice for younger people who have the time to ride it out. But if you're already in retirement or close to retirement, like within five years of retirement, and if you're taking withdrawals, it could make it difficult to get back on track.
Knowing your numbers will help. If the market is down some 30 percent, and you're taking withdrawals of 5 percent, the market is going to have to come back more than 40 percent to make you whole.
By scrutinizing your portfolio, we can help you reposition its components to shift toward categories that are stable or growing.
For example, right now hospitality is suffering significant losses and it is not going to come back right away. Under the circumstances, you have to tell yourself, “Okay, I’m going to get rid of this and reposition that money to get it to grow back.”
Sometimes it's better to cut your losses and to move forward and the money managers we work with will do that. That's not an easy thing to do, but you need professional help to do that.
Tax loss harvesting is another strategy. If you've got things that are down, but you have other things like technology stocks that are up, you can go ahead and sell some of the bad crop outside of the retirement account for the tax benefits. Go ahead and sell some of those losers, if you will, and also maybe take some risk off the table with some of the winners.
Another strategy involves Roth IRA conversions. This isn't for everybody, but the idea here is pretty clear. If you are in danger of having to write a big check to Uncle Sam because you are in a tax bracket of 28 percent or more, then you can go ahead and convert a portion of your IRA to a Roth. Theoretically, you end up paying y taxes on a much lower account balance. So, you're saving on how much money goes out the door.
By doing that, you have to have the money outside of the IRA, though, to pay the taxes. The means that if you have a $50,000 Traditional IRA, and you want to convert it to a Roth, it's like a $50,000 withdrawal, and you're going to have to pay taxes on that, and then convert it to a Roth. The thinking is that when the market is down you execute that conversion and pay the taxes. Then when the market comes back up, you're going to benefit from that market growth, but it'll be tax free because it'll be a Roth and you don't have the same limitations, like earnings limitations out of Roth IRA conversion.
But again, it’s important that you discuss this with a professional.
At Treece Financial, we can walk you through the entire process and help you find the right solutions for your individual situation. You can reach me by calling 305-751-8855 or emailing me — I am always here to help!
Converting from a traditional IRA to a Roth IRA is a taxable event.