Those of us who remember "The Great Recession" of 2007/2008 probably remember the investors who capitalized on the opportunity that followed. From 2009-2018, the S&P 500 saw a 10-year trailing return of 15.2%. In some markets, returns on real estate made that number seem small. Disciplined and opportunistic individuals suffered during the recession, but kept their wits amount them in difficult times to reap the benefits. Fearful individuals stayed on the sidelines.
While this logic seems like common sense, it defies human nature and what we know from behavioral finance. Additionally, most people aren't aware of the best ways to take advantage of a trough like this. What should we be doing? This is a questions we are going to help tackle in the coming weeks.
Our team is putting together content to give you actionable strategies so you can position yourselves to succeed in the coming years. Keep in mind these strategies are part of a 5-year plan. After 2008 it took nearly 4 years for the S&P to recover all of its value from 2007. We don't expect this shock to look much different. It will take time to recover, but we want to make sure you are there to benefit as it does.
Strategy #1: Roth IRA Conversions
If you're sitting on a large traditional IRA account, and have substantial cash on the sidelines, now is a great time to convert portions of that account to a Roth IRA.
Simply put, your account requires less tax to convert today than it will at higher values. If you had $100,000 in your account, but today it is worth $75,000, the tax required to covert the whole thing would add $75,000 to your earned income instead of $100,000. You pay less. When the account recovers, you will have $100,000 now growing in a fully tax-free environment.
If you don't have the cash on hand to convert the whole thing, partial conversions add value too. The cost per share has dropped. By converting funds now, you move more shares per dollar of conversion and position those shares for growth down the road.
Compounding the benefits of doing this right now is the current tax environment. The Tax Cuts and Jobs Act (TCJA) are still in effect. While scheduled to run through 2025, this is an election year. The possibility always remains that a new administration would alter the tax environment with new legislation. Additionally, many of you may be facing reduced income in 2020 as a result of the impact COVID-19 is having on businesses world-wide.
Keep in mind, converting a Traditional IRA to a Roth IRA will require cash. Taxes will be due in April of 2021 on the income you convert. It may help to make an estimated tax payment to the IRS on the date you initiate the conversion so you are not taken off-guard.
We will be bringing you more strategies in the coming days and weeks! We think this trough will last several weeks, if not months. All of these strategies should be executed within the framework of a sound financial plan. Want to talk further? Let us know how we can help!