First, there was the supply chain slowdown, then the inflation ramp-up, followed by the gas price explosion, and now, we’re staring down the real risk of recession. It probably should come as no surprise that this barrage of economic body blows finally tamed America’s long-running bull market.  If we are, indeed, nearing a recession, certainly some investors will be in better position to weather it than others. But for anyone, the sight of a retirement account dropping by thousands or the value of a business plummeting over a short period is painful. A market downturn is not necessarily devoid of upside, though.

This isn’t to highlight that old, tired cliché about turning a crisis into an opportunity — we’d all prefer to not have to deal with the crisis. Rather, it’s about being proactive, rather than just standing pat and riding out the trouble until the economy inevitably rebounds.

These are just a pair of simple, yet effective, strategies:

Investors: Consider Roth IRA Conversions

When the market sinks and the economy enters a period of decline, one of the most visible impacts will be in investors’ IRAs. Years of contributions and steady growth can evaporate (for the moment), but you can also make some significant tax savings, depending on the type of IRA you have.

Withdrawals from a traditional IRA are taxed as income, which can make for an unwelcome expense during retirement. A Roth IRA, however, has tax-free withdrawals and growth — with a drawback being that contributions are not tax-deductible. So, converting a traditional IRA that has lost value during a downturn to a Roth IRA will come with an immediate tax hit but will most likely lead to future savings that offset that cost.

For example, if you have a traditional IRA worth $100,000 that drops to $75,000 and decide to convert it to a Roth IRA, you might pay around $15,000 in taxes on your upcoming return. But let’s say five years later, the market may rebound, you’re ready to retire and your Roth IRA is now worth $200,000. Once you begin taking withdrawals from that account, the cumulative tax savings could be more than that $15,000.

As long as you expect to make up the immediate tax cost, a market downturn is an ideal time to make a Roth IRA conversion.

Business Owners: Focus on the Future

There is never a bad time to focus on estate planning, but there are special considerations a business owner can make during a recession. Notably, business transfers made to children or trusts have tax-affecting valuations associated with them, making a downturn with the potential to decrease the value of your business an opportune time to make those transfers.

Say you want to transfer 40% of your business to the next generation of owners, but the value of the business has dropped from $5 million to $3 million over a year. If you make the transfer while the business is worth less, you’ll be using less of the estate tax exemption, proportionally. If you wait to do the transfer, should the economy improve and the business make up the lost value or surpass it, you would have to use more of the exemption to transfer 40%.

As with Roth IRA conversions, it comes down to timing — and a recession, believe or not, is the right time for many wealth-building strategies.

The Days Ahead

We can’t guarantee the economy is headed to a recession or how severe it would be if it does occur in the months to come. Expert opinions vary, and despite all the recent turmoil, current conditions are different from the recession of 2020, which was largely created by systemic issues.

As with all of these strategies, you should always consult your own tax and/or legal adviser.

Ultimately, individual investors, business owners and wealth advisers like myself can’t change what the economy will do, but we can implement strategies that withstand the worst of times and position us well for the better days to come.

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Buck up. Yes, we are facing some crises right now, but once you put things into perspective, you’ll see things may not be as bleak as you fear.

War in Ukraine. Outsized inflation. Supply chain disruptions. A lingering pandemic.

Today’s global upheavals all contribute to a sense of general economic anxiety among investors and, more broadly, the American public. The University of Michigan’s Consumer Sentiment Index — a metric that gauges how consumers view the economy and their own financial prospects — is at its lowest point since 2011.

But is the worry misplaced?

A quick drive past a gas station might suggest it isn’t, but it also wouldn’t describe the full picture. The overall, sustained health of the economy is a reminder that we must view events with proper perspective.

Consumer sentiment currently appears to be running counter to other prominent indicators. For example:

• More people are employed as the unemployment rate ticked down to 3.6% in March.
• Wage growth is at its best rate in years.
• The stock market’s returns continue to grow at the same healthy rate they have since the middle of the last century.

These factors should not blind us to what is going on in the world. Unquestionably, the war in Ukraine is a tragedy and creating global waves, from humanitarian crises to gas pump pains. Certainly, too, inflation and the supply chain are factors that lead to volatility in the markets.

But again, we come to perspective. In the past 20 years that I’ve been a wealth adviser, for example, I’ve witnessed a vast range of economic disruptions — 9/11, the tech bubble, the Iraq War, a debt downgrade, a housing crisis and the massive ensuing recession, energy fluctuations and… well, the list could go on for quite a while. Through it all, we’re still standing — still thriving.

How, then, do we explain the lagging consumer sentiment? A few thoughts that immediately spring to mind:

1. We’re always connected

It’s not time for a Luddite screed, but there is little doubt that many Americans (maybe it’s fair to say most?) lead an always-online lifestyle that is complemented by a 24/7 news cycle — whether they want to hear the day’s headlines that often or not. Studies routinely find a link between poor mental health and overexposure to social media.

Does this mean investors and consumers should throw their modems in the trash and block out negative news stories? Of course not — the world faces serious problems and an informed public can make a difference. But by regularly “unplugging,” taking the time to get away from unproductive online stories, arguments and biased pundits, it can easily create more brain space that encourages financial thinking and decisions based on facts, rather than emotion.

2. We neglect our history

There is always a crisis in the world that holds the potential for turbulence in the market, even if it isn’t particularly notable on our shores. As discussed earlier, however, there is a long line of events that have impacted our economy but we were able to rebound from –  a list that stretches back to before there was even a United States.

Yes, it’s unreasonable to expect everyone to recall a banking panic from the late 19th century, but the Great Depression of nearly a century ago, gas shortages in the 1970s and the more recent 2008 financial crisis remain well-known examples of times that we weathered worse economic periods. Learning and remembering our history are crucial factors to building the perspective that helps us place current events in better context.

3. It’s human nature

While many of us are glass-full types, overall, we’re a negative species, with a tendency to focus more on negative interactions, memories and news. In prehistoric times, this behavior might have been a survival mechanism, but today, research suggests it can adversely impact decision-making and relationships.

Often, the advisers at my firm play the role of psychologist, not in a medical sense, but by digging into and breaking through clients’ negative financial attitudes and behaviors. Today, it’s simply part of the job, just as it is to maintain that one important sense: perspective.

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With the possibility of tax increases on the horizon, some business owners may be considering pushing up their plans to sell or transition their companies. Here are some things they should think about first.

Owning a business and navigating the twists and turns that come along with it is like following a map that is constantly rewriting itself. Depending on any number of factors, pathways that seemed clear are suddenly closed off while new routes regularly open — and sometimes, a fork in the road that appeared far away is unexpectedly near at hand.

Few entities can rewrite the map like the government can. Even the barest suggestion of a change to the tax code or new regulations can shake the market or jolt a business owner into making a decision that might greatly affect their organization.

We’re seeing that today with the introduction of the Biden administration’s new proposals investing on infrastructure and helping families with education, child care and paid family leave. Both are funded by tax increases that could have major impacts on business owners as they relate to income tax rates, capital gains tax rates and estate and gift tax exemptions. Such proposals, if they come to pass, will create another new tax environment for business owners to navigate.

So, for owners who have been mulling major decisions, such as selling their business, perhaps a fork in the road that appeared to be five years away is looming much closer. Here are just a handful of the decisions and items up for consideration:

Selling a business

Let’s imagine a business owner in their late 50s is planning on selling their company in three years. The question suddenly is, should they sell now at a lower capital gains rate, or in the future, when the business could be worth more, but potentially higher taxes could undercut the extra gains?

Using a broad example (and not counting other fees and taxes for simplicity’s sake), if the business sold for $10 million today and the business owner had to pay today’s 20% capital gains tax, they’d be left with  $8 million. If, however, they waited to sell for another three years, when the business is worth $12 million, they should expect to take home more from the sale, right? It depends on what happens to taxes between now and then.

If the tax rate doubles to 40%, the owner would be left with $7.2 million. In fact, under this tax rate, the business would have to sell for about $13.5 million for the same $8 million payout. I realize in the example above I did not account for the additional 3.8% surtax on net investment income as part of the Affordable Care Act, and I took some liberty with rounding the highest rate, but you get the picture.

In this scenario, the owner must ask, “If I’m going to wait to sell, will my business grow 35% in the next few years?” Even if the business is thriving and growing year after year, it may be a risk to wait to sell. As the past year proved, circumstances can change quickly. With that context, the increased potential for a tax increase forces a business owner to confront these questions and decisions.

Transitioning the business

Instead of selling their company, many business owners plan on transitioning it to the next generation. Even with a different exit strategy, the potential for tax changes that could impact estate planning and common transfer techniques should prompt a fresh look at succession plans.

For instance, owners commonly gift stock in the business to heirs. With the proposal from the Biden administration aiming to dramatically lower the federal lifetime exemption amounts on estates (from $11.7 million per couple currently to a proposed $7 million per couple), it would make this type of planning tough. In addition, with the annual gift-tax exemption set at $15,000 for individuals or $30,000 for married couples, an owner likely won’t completely transfer their business this way.

Even for an owner who plans on transitioning their business to the next generation but is still young and successful, now is a good time to consider succession planning. It always is, of course, but particularly when the tax environment changes, the proper strategy can ensure wealth is protected in the years to come. This may include getting the jump on shifting ownership to long-term estate planning vehicles, such as trusts.

Restructuring the business

Business owners should ask, what is the best way to own a business right now? Or rather, what’s the best way to structure a business?

For C corps, not only do they pay federal, state and sometimes local taxes, but also tax on profits, a rate that could increase (from 21% currently to a possible 28%) under the proposed legislation. Distributions to shareholders also have potential to be taxed at a higher rate, should that rate increase via new legislation. An S corporation, meanwhile, allows profits and losses to be passed through to personal tax returns.

Structures such as LLCs and sole proprietorships also avoid C corps’ double taxation issue, but it’s important to remember that an individual’s income tax rate may be higher than the corporate rate, adding another factor that may influence how an owner organizes their business. Even if tax rates don’t change notably in the coming years, there still may be an advantage to changing a business structure.

Choosing a path

Business owners constantly face decisions that affect their company’s lifecycle and its fortunes, whether that is a sale or transition to a new generation. We all want to be masters of our own fates, but often it is our environment that drives decision-making.

Nevertheless, owners don’t want to be too hasty in making a decision that could have a significant impact on their future, even if it appears the tax environment may be changing. It is always best to meet with advisers, break down the available options and their pros and cons.

While the fork in the road can arrive quickly, pausing before going left or right is the best decision.

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

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