Uncertainty might make you want to stand pat instead of making traditional moves for the next year, but there are some things you can do to take advantage of a depressed market.

Maybe we’ll see a Christmas miracle. Maybe it’ll be a cold winter in more than one way. Most definitely, no one will be able to fully predict what happens to the global economy and markets in the coming months. The uncertainty of financial planning in a down market might be enough for some people to shy away from traditional end-of-year strategies and instead stand pat until markets recover. However, the current market environment creates financial planning opportunities to not only protect wealth but set the stage for future growth. Yes, even with winter’s gloom approaching.

Here are five things you might consider doing:

1. Convert Traditional IRAs to Roth IRAs.

Traditional IRAs do not eliminate tax, they defer it into the future. As the account grows, the tax liability grows, too. At some point, the IRS will be there to collect its percentage of your retirement savings, but what if you could buy out Uncle Sam’s interest in your IRA today?

Enter the Roth conversion. It doesn’t always make sense, but when markets are down, likely deflating an IRA’s value, it’s an advantageous time to convert a traditional IRA to a Roth IRA — because of the reduced tax hit to do so — and then enjoy capturing tax-free earnings when the market rebounds.

Additionally, there are new regulations that make inheriting traditional IRAs less advantageous because they will force faster withdrawals from the account than was required in the past. The SECURE Act changed the previous rule to say beneficiaries have 10 years to withdraw funds from an inherited IRA, but the new regulations further clarify that if the IRA’s original owner was already taking required minimum distributions (RMDs), the inheritor must continue taking the RMDs before completely taking out the money by the tenth year of ownership.

By converting that traditional IRA to a Roth, the account owner would not be required to take RMDs — and neither would the inheritors, as long as the money is removed by the tenth year.

A couple of final points on IRAs:

• You don’t have to convert all of an IRA at once. You can do as much or as little as you want — whichever makes the most sense for your current situation. The key consideration here is what level of tax you will pay on the conversion.
• IRA contributions do not have to be maxed out in a calendar year. You have until April 15 to do that, but you may not want to wait. The market can rebound quickly, as occurred during the onset of the pandemic in 2020, so you don’t want to miss potential growth.

2. Lend to a Grantor Trust.

This is an estate tax planning strategy in which someone sets up a trust for their heirs and loans an asset, such as a business or liquid security, to the trust. But with current applicable federal rates (AFR)(opens in new tab) hovering above 4%, that figure is four times as much as it was a year ago, seemingly making this a less attractive strategy.

However, loaning at 4% with the market down 25% in value is more appealing than 1% with the market at all-time highs. One of the primary benefits of the strategy is that the growth remains in the trust for the heirs, free of any estate tax or inheritance tax. For wealthy individuals, those taxes can be enormous, so simply taking assets and loaning them to a trust, the gains generally avoid being subject to federal estate tax and state estate tax/inheritance tax.

Business owners, especially, are taking advantage of this strategy because their companies are most likely worth significantly less than they were a year ago.

For example, if a business was worth $15 million last year but is down to $10 million today, it has a planning opportunity. That business owner could loan the business to a trust for $10 million (or less in some cases), so if in the future, the company rebounds and sells for $15 million, then the $5 million of gain is generally protected by the trust from the 40% federal estate tax.

Ultimately, the growth potential in this strategy significantly offsets today’s greatly increased interest rates — and frankly, if you don’t expect to see growth higher than 4% for a given asset, this strategy most likely will not produce much, if any, benefit.

3. Make More Aggressive Allocations.

Even more cautious investors are beginning to recognize that they can be doing more to take advantage of today’s depressed markets. While most investing decisions should come after analysis and consultation with a trusted adviser, it is reasonable to consider more aggressive allocations to prepare your portfolio to capture the inevitable rebound.

For example, those without much cash to spend and more conservative investments, such as bonds or real estate, may want to sell and shift the cash to equities. These are typically not drastic changes, but 1% to 3% shifts can make a considerable difference when done in depressed markets.

4. Harvest Tax Losses.

If you’re selling an investment that you recently purchased, it’s likely to be at a loss — and that’s not such a bad thing. Leveraging investment losses for tax deductions, or tax-loss harvesting, is a helpful strategy, with losses on short-term investments (securities held for less than 12 months) applied against the tax hit from short-term investment gains and losses on long-term securities (held for 12 months or more) applied against long-term gains. 

Up to $3,000 in leftover losses can be used to offset other gains — and given the condition of the market, it’s possible many investors will be able to use all of that. In fact, remaining losses beyond the $3,000 cap can be carried over to the next tax year.

Anytime tax-loss harvesting is discussed, it should come with a reminder of the wash-sale rule, which says investors must wait 30 days before repurchasing the same security for the sale to be recognized as a sale and for the loss to apply.

5. Fund a 529 College Savings Plan.

Your time horizon is short to save for your child’s education or future goals, even for young parents. Now is a good time to open a tax-advantaged 529 college savings plan and/or max out the contribution if possible ($16,000 for 2022). The main advantage of a 529 plan is tax-free growth, so buying when the market levels are down is generally to your advantage.

There Is Hope for 2023

When it comes to financial planning, growth is the easiest thing to get tax advantages on, and it’s much easier to predict growth when we’re coming off all-time market highs. If history tells us anything, the market is certain to rebound — although, how long it takes to get back to previous levels is far more uncertain — so making the right moves now can help you capture that growth in a much more tax-efficient manner.

Investing requires patience, often when it doesn’t feel good to do so. History has told us that we will get back to where we were and then some. Here’s hoping that’s in 2023. 

This piece was originally posted in Kiplinger. Read more here.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Waldron Private Wealth (“WPW”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from WPW. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. WPW is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of WPW’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.waldronprivatewealth.com.

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The college experience and career world are changing, offering parents and students alike new options to make it work.

The post-high school norm for millennials and their predecessors was to get accepted to a four-year college, physically move there, pay for books, pay for room and board, complete a degree program and get a job. Can’t immediately come up with the $200,000+ all of that requires? Take out some loans.

Signs of that norm cracking, or at least twisting into a new shape, are becoming more and more clear. Prompted by fears of a student debt crisis — and with fresh examples in their loan-laden forebears — new college-age students are increasingly turning to alternatives to the established paradigm in order to build a debt-free future.

A recent survey by TD Ameritrade made headlines with its finding that 1 in 5 young Americans (Generation Z, defined by the researchers as ages 15-21, and young millennials, ages 22-28) may opt out of college. A deeper look shows that much of what drives that thinking is the price and debt that come with it.

Notably, student debt is leading to roadblocks to achieving major milestones of financial freedom. Of the young millennials surveyed, 47% said they delayed buying a home because of what they owe, 40% delayed saving for retirement, and 31% delayed moving out of their parents’ home. Even 28% of parents said they pushed back saving for their own retirement to pay for their children’s education.

The cost – and value – of college is changing

The modern world’s opportunities could have a major impact on this trend in the years to come, however. Online courses are far more common than they were even 10 years ago, costly textbooks are available as eBooks, and even having an alma mater in general has less value in industries that value skills over degrees.

In a previous article, we looked at the 529 college savings plan and alternatives families might consider when saving for a child’s education. Broadening that, we find there are more ways to prepare for a child’s future than simply saving for a fill-in-the-blank university they may not even attend.

It comes down to being flexible. Paraphrasing the old saying, even the best laid plans tend to go astray. Saving for a child’s future in 2020 looks different than when today’s 18-year-olds were first born, and surely, that will be the case when today’s newborns are leaving the nest. The key for parents trying to give them a leg up is to learn how to adapt to the changing times.

Flexibility as parents

From a financial planning standpoint, preparing for a child isn’t always easy, as joyous as the occasion is. You take a newborn home and the list of expenses expands exponentially: furnishing a nursery, piecing together a wardrobe (that the baby quickly outgrows) and buying diapers — lots of diapers.

Unexpected expenses might arise, too. Let’s say the best or closest daycare in a couple’s area is outside of their budget. They may do the math and decide it’s easier, financially, for one of the parents to stop working or go to a reduced schedule, rather than pay for 40 hours of daycare a week.

In a change from the world of even a decade ago, however, staying at home doesn’t have to significantly disrupt a career or a couple’s finances. Now that people can access work servers remotely, videoconference easily and message co-workers instantly, many workplaces are letting employees work from home.

The advent of the gig economy and digitally enabled side hustles, too, gives people more flexibility to maintain their financial goals while preserving their personal lives. People can manage businesses online, such as a digital storefront, for example.

Ultimately, it means sudden changes in a family’s life circumstances — like the birth of a child that may have been a surprise, or a parent’s loss of a job — don’t have to alter plans for saving. Parents can adapt in new ways.

Flexibility as savers

When we think of flexibility, particularly in saving for a child’s education, that’s actually one of the major benefits of a 529 plan. While people are penalized when they make a withdrawal that isn’t for a qualified education expense, the penalties aren’t as bad as many think. Federal income tax is imposed on the plan’s growth, plus a 10% penalty on the growth, so depending on the amount withdrawn, the penalty may be negligible.

Still, the tax penalties bug parents enough that even when their goal is to save for their child’s education, they want to spread their savings into multiple accounts. This has some clear advantages, too, if the child ends up not attending college after high school. Fortunately, there are plenty of options to account for both possibilities.

• Other investment accounts: Creating an investment account with money earmarked for a child gives parents complete flexibility in how the money is used. The money can be used for expenses unrelated to education, making it malleable to the child’s changing plans, albeit with the downside of not having the tax benefits of the 529 plan (tax deferral and potential tax-free growth).
• Trusts: Taxed similarly to other non-529 investment accounts, trusts give parents complete control over the fund. Most importantly, parents can give direction to a trustor on just how the trust can be used. Perhaps it’s solely for education or seed money to start a business.
• Custodial accounts: These accounts are managed by a guardian (or custodian) until the child reaches the age of maturity, which differs depending on the state. In Pennsylvania, for example, once the child turns 18, they have full access to the funds. While they are simpler to set up than a trust and have great flexibility, these accounts may not be something parents are comfortable with. If a custodial account with $200,000 is suddenly available to recent high school grad, there’s no guarantee they’ll make the best decisions.

Mapping out how much they can save for their children’s future and what vehicles they’ll use to do so can be a confusing process for parents. There are advantages and disadvantages to all types of savings accounts, so it’s a plan parents should begin developing with their financial adviser even before their child is born.

Flexibility as students

As recently as 10 years ago, it felt as if high school graduates had a binary choice: Go to a four-year college or go into a field that involves physical labor. The decision was, and is, far more nuanced than that, of course, but young people’s options to build a career today are expanding rapidly.

As has been the theme of the 21st century, the digital world changes everything. Online courses are far more common today, and stay-at-home students can receive the same degree as someone on campus. Going that route, they avoid the major costs of room and board. Even more aspects of the college experience are digital now, including expensive textbooks that are cheaper online. These are benefits even on-campus students can enjoy.

Looking beyond college, more employers today also offer education assistance for employees seeking master’s degrees or entering other advanced programs. This method may even be preferable, since a master’s may not help someone as much if they have no relevant work experience.

Skipping out of the full college experience has some drawbacks. People make lifelong connections in college, be it through friends or fellow alumni who assist with networking later in life, and it’s a great opportunity to leave home but remain in a (somewhat) structured environment.

As the trends show, however, a growing number of young people aren’t necessarily interested in pursuing a bachelor’s degree. They’re interested in seeking challenges and building a life — just not drowning in debt. Be it parents or their children, a full understanding of financial options will make those challenges easier to surmount and a life simpler to build — until the norms inevitably change again.

A version of this article was originally published in Kiplinger’s Building Wealth section, here

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The bags are packed, the trucks are loaded up, and the route is in the GPS. Moving is already exciting, but if you’re heading to a state that promises a lower income tax rate — or none at all — or one that will create a favorable inheritance tax situation for your family, you might be hitting “go” on the GPS with some purpose.

A more favorable tax situation or the desire to live in a warmer climate have always been motivations for moving, but recent developments make the decision more feasible. Whereas in the past, employment situations may have tied down families, remote work is now a legitimate option in many industries. People have more freedom to move where they want to be.

But moving isn’t always as simple as selling a home, buying a new one and enjoying your improved tax situation. There is more to consider than meets the eye. Here are just a handful of the items to address before moving or when you’re moving to a lower tax state.

1. Try Before You Buy

As appealing as a new climate or lower taxes sound, it is recommended, if possible, to rent in a new location before buying a home. That way you’ll learn whether you enjoy living in the new area, if another lower tax part of the country is a better fit, or even that you prefer your current home.

This strategy often is more viable for retirees or “snowbirds,” because they may have adult children and don’t need to concern themselves with moving an entire family or worrying about their employment. If renting isn’t an option, younger families may still be able to “try before they buy” by taking extended vacations or by simply performing research on what living in the new state is like.

2. Establish Residency

Each state has its own rules for establishing residency. Typically, it’s the number of days you’ve lived in that state. However, some states may try to claw you back on an inheritance tax, too. For instance, if you’ve moved but continue to own an asset in the former state, that state may prorate the tax liability (example: Massachusetts).

Simply buying a home is often not enough to establish residency, though. For example, if you’re moving from Pennsylvania to Florida — or splitting time between the states but planning to spend the majority of the year in Florida — these items will help you establish your new residency:

• File a Declaration of Domicile with the clerk of court in your new county of residence.
• Register and vote in Florida.
• Obtain a Florida driver’s license and register at least one motor vehicle in the state.
• Use a Florida address on your federal tax returns.
• Claim the homestead exemption for your new Florida residence.
• Establish significant financial accounts with banking, brokerage and similar institutions in Florida. Also, remove the contents of safe deposit boxes outside of Florida and move the contents to Florida.
• All future estate planning documents should include the new address.
• File a final tax return in Pennsylvania.
• Consult a physician in Florida and have a copy of your medical records sent to them.
• Declare Florida as your place of residence in forms and documents, such as Social Security Administration papers, passport renewals, contracts, deeds, leases, etc.
• Spend less than 183 days per year in Pennsylvania.

Remember, this checklist is specific to Florida and rules can vary by state, but certain items, such as obtaining a new driver’s license and registering to vote generally are part of establishing residency in any state and are good practices once you’ve completed a move. This list is not comprehensive. We are not providing specific advice on what to do for residency. You should consult your tax preparer for complete guidance on what to do for your situation.

3. Consider the Cost of Living (and Adjust)

You may be saving on your taxes by moving to a new state, but your budget may increase in other areas that offset the difference, particularly if you cashflow remains the same as when you were living in your former state. Housing costs vary wildly in different parts of the country — a home you get for $500,000 in Pittsburgh might go for a whole lot more elsewhere. Groceries may be more expensive, tuition for your children’s school could jump considerably, or the cost of eating out may be more if you’re living in a higher-income neighborhood. Perhaps you’ll move to an area where you decide to buy a boat; you’ll need to pay for insurance and docking fees. Suddenly, the benefit from your lower taxes may be erased.

No matter what, expect your cost of living to change when you move (in a perfect world, of course, it will decrease). You’ll need to adjust your annual and monthly budgets accordingly to ensure you can continue to live the lifestyle you did pre-move.

4. Learn the New Rules

Plenty of times, the old saying is incorrect, and the grass is greener on the other side — or when you make a move to a side that’s thousands of miles away. But there is still validity to conventional wisdom. After all, governments must create revenue.

That means certain taxes or fees may be significantly higher than what you’re accustomed to paying. In states without income taxes, they may have increased property taxes or higher fees on vehicles. On the other hand, some cities and states, such as Alaska, offer incentives to move there.

Before moving, do some research to see what types of programs you may qualify for — and what extra expenses you can expect.

5. Consult Your Advisory Team

Moving can be a significant life event for your family, one not far off from having a child or selling a business when it comes to the financial impact. And just like you would during those occasions, you should speak with your advisors to determine how it affects you on a near-term basis and concerning your estate.

A trusted attorney or CPA can ensure you’re establishing residency the proper way, taking maximum advantage of tax benefits in your new state, and avoiding any potential pitfalls. Get started by reaching out to one of Waldron Private Wealth’s experts.

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2020 is nearing a close — sounds good, doesn’t it? With the end of the year, not only do we look toward a fresh start, we also take the time to ensure we’ve taken advantage of every opportunity from a tax-planning standpoint. Take a look at our Year-End Checklist to make sure you’re ending 2020 the right way, and feel free to reach out to your advisor or contact us.

Required Minimum Distributions: Required minimum distributions (RMDs) from IRAs normally must be taken by December 31, but this year’s CARES Act eliminated the requirement. Generally, if the RMD isn’t needed for spending, we recommend not taking it. Many retirees have their RMD processed automatically at the end of the year, so take the time to put it on pause if the money isn’t needed.

Capital Gains Distributions: Mutual funds and ETFs are required to pay out a percentage of their capital gains before the end of the year. For funds held in a taxable account, this can be very important and deserves attention. For tax deferred accounts (IRAs, 401ks, etc.), it’s irrelevant. In the former case, you have the option to sell the funds before the distribution to reduce your potential tax bill.

Employer-Sponsored Contributions: Have you maximized your retirement plan or health saving account (HSA) contributions for 2020 yet? In what has been a difficult year and depending on your circumstances, you might have pulled back from doing so. If you want to max out, though, the deadline is December 31. This is especially relevant for those over 50, as you are allowed to make a “catch up” contribution, which allows additional money to be deposited to these accounts. Contact your company’s HR department if you need some help.

Tax-Loss Harvesting: If you own a liquid investment in a taxable account and it is at a loss, it may be wise to sell the position. By selling at a loss, it can help offset any potential gains on your tax return. Be cognizant of the wash-sale rule, which requires you wait 30 days before repurchasing the same security.

Roth IRA Conversions: If you have money in a Traditional IRA, you can convert it to a Roth IRA at any time, but if you want it reported on your 2020 return, you have until December 31. Generally, any pre-tax money you convert will be subject to tax in the year converted, but the Roth IRA has the benefit of tax-free growth.

Charitable Donations: Most charities will accept donations up until the end of the year, but if you’re planning on making one, aim for mid-December at the latest, as charities can be backlogged with donations at this time of year. Additionally, rather than cash, appreciated securities are almost always the most tax-efficient donations. You avoid the gain and get the deduction — it’s a double tax benefit.

Spend Unused FSA Money: If your health care plan has a flexible spending account (FSA), you know it works similarly to an HSA, except you can only rollover $500 to the next year. Any dollars above $500 will be forfeited, so you’ll want to spend any excess before your plan year ends, which is typically at the end of the year or in the middle of the year. Check out FSAstore.com for eligible items.

Gifts/529 Contributions:  Many well-off families take advantage of the annual gifting exclusion, which is $15,000 for 2020. This can be done with outright gifts or a gift to a 529 plan. If you want to maximize your gifts, including 529 account contributions, you have until December 31.

TO RECEIVE A SUMMARY OF THE ABOVE YEAR-END CHECKLIST COVERING THINGS YOU CAN DO TO HELP RELIEVE YOUR TAX BURDEN AND MAKE THE MOST OUT OF YOUR MONEY, PLEASE CLICK “CONTACT US” BELOW.

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Click below to read the full article on Kiplinger.