As I write this post, the stock markets have dropped another 3% as Trump takes on Chairman Powell. This is on top of the markets dropping into correction territory after President Trump announced his draconian Tariffs on Liberation Day. While the news has been terrible for stock market investors recently, at least there may be a silver lining in some valuable tax planning strategies that are helping you save even more on taxes this year.
When markets get crazy, a great fiduciary financial planner can help your business implement proactive strategies and capitalize on current tax laws and market conditions. The good news is that tax savings are permanent, whereas historically, stock market drops have only been temporary.
We are sharing three fabulous tax-planning strategies for the average investor to at least benefit from the dire stock market performance since Trump announced his draconian tariffs. I hope you will find some joy in these tax savings, which could help reduce the irritation of unnecessary stock market losses under the current Trump tariff regime, and hopefully we avoid a full on trade war.
Do Roth Conversions During The Trump Stock Market Correction
The best time for Roth conversions is when stock market values and tax rates are low. At the very least, when your personal tax brackets are relatively low. This may be a blessing in disguise if you are able to get more dollars into your Roth IRA during a stock market correction. Hopefully, you will see the gains on an eventual stock market recovery in your Roth IRA and see more tax-free income in retirement. Likewise, each Roth conversion minimizes the future tsunami of taxes coming in the form of required minimum distributions on your IRA holdings.
I generally try to use multiyear Roth Conversion strategies for my wealth management clients to optimize the tax brackets that apply to their realized income. Going 100% Roth in retirement is likely wasting the use of tax brackets with lower tax rates over your working life. For example, doing a Roth Conversion of 100% of a large IRA would likely mean overpaying the taxes versus breaking up your conversion over a few years.
Tax Loss Harvesting To Save On Capital Gains Taxes
Many investors have been sitting on huge capital gains after the market continued to reach new record highs between the end of the COVID-19 market correction, during the Biden presidency and the Liberation Day stock market meltdown due to the Trump Tariffs.
However, some holdings you may have purchased more recently are probably showing some heavy losses, even if your overall portfolio performance has been relatively good.
Just a few years ago, tax-loss harvesting was mostly reserved for the high-net-worth investing set. The good news is that with free trading and modern technology, anyone with taxable investment accounts can benefit from tax-loss harvesting. Saving money on taxes is saving money on taxes. Granted, the bigger your accounts or the higher your income, the bigger the tax savings may be.
Put more simply, tax-loss harvesting amounts are used to sell investments to minimize the taxes on your investment portfolio. In the simplest terms, this is more about taxes than investing.
When using tax-loss harvesting in real life, it is more complicated than the description above. You can harvest short-term losses as well as long-term losses. Depending on your situation, one may be more valuable than the other.
When we are tax-loss harvesting, we are selling certain shares of an investment at a loss to reduce taxes on the investment portfolio at the end of the year. You can use up to $3,000 of short-term losses to offset regular income. If you sell an investment with a long-term capital loss, these losses can help offset the capital gains from other investments sold for a profit.
Buy Borrow Die Pledged Asset Line
One of the most amazing tools that the rich have to avoid paying taxes is the “buy-borrow-die” strategy. Essentially, you take a loan against an asset to fund your lifestyle and avoid realized gains when selling said asset. Loans are tax-free and often carry lower interest rates than the expected growth of the underlying assets used as collateral.
Schwab called this a pledged asset line (PAL). You may also see it called a securities-backed line of credit (SBLOC). Rates can be substantially lower than those of other types of debt.
Recently, I had a client needing around $5 million to buy a second home in Palm Springs. If they had pulled this amount from their investment account, they would have been hit with around $1.7 million in tax capital gains.
Using the pledged asset line allowed them to buy the house “in cash,” as far as the seller was concerned, beating out another competitive offer. Similarly, the rates on the PAL were about 2.25% less per year than the best traditional mortgage rate they had been quoted. Using a PAL versus a traditional mortgage saved the client almost $6,500 per month in interest.
Also, a PAL can be opened in a day or two, compared to the onerous hassle of mortgage underwriting. This can be advantageous for business owners who often face challenges when it comes to qualifying for a mortgage with self-employed income.
Markets hate uncertainty, and if/when this tariff debacle is resolved, there will hopefully be a nice stock market recovery, or perhaps we end up in a recession. Regardless of how anti-business government policies appear to be under Trump 2.0, I am still confident in the ability of the greatest companies in the world to find ways to make money. Historically, stocks have been the best hedge against inflation and, in my professional opinion, the best way to build wealth, and I don’t see any reason for that to change going forward.
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