First, we’ve all heard that the downturn is a “buying opportunity.” That’s easy to say, much harder to do. But I would encourage you to give it serious consideration if you have money sitting in cash that you’re not going to need for the next 5-10 years. Warren Buffet writes eloquently on this topic in his op-ed column “Buy American. I am.” in the NY Times on October 17. Click on the article title to link to the NY Times website and read the article.
Roth Conversions On Sale
The second silver lining created by this situation is an opportunity to do Roth conversions “on sale.” This opportunity isn’t available to everyone this year, only those with incomes under $100K. But if you are eligible, this could be a great time to convert traditional IRAs to Roths. You will need to pay the income taxes when you do the conversion, but you’ll bepaying taxes on a much-reduced amount verses last year at this time or what your account may have recovered to in a couple of years. For example, if you had a traditional IRA worth $100,000 last year and it’s worth $65,000 now and you’re in the 28% tax bracket, converting it now would only cost you $18,200 in federal income taxes vs. the $28,000 it would have cost you a year ago — a savings of almost $10,000. There are some nuances to this strategy and it’s not right for everyone, so make sure you research the details or talk with a financial planner (preferably me) before moving forward.
Using Losses to Offset Capital Gains
The third opportunity is to “harvest losses” to offset capital gains. If you have long-term property you’ve held that’s appreciated in value and you plan to sell it in the future, you may want to consider acting now because of potential tax savings. If you sell the capital-gain property along with investments that have significant losses, they could offset each other and you would avoid paying capital gains taxes on the property that increased in value. There’s also a significant chance that capital gains tax rates may be higher in the future. Again, there are nuances to this strategy as well … so do your homework before jumping in.
Opportunity to Re-Examine
The last opportunity really applies to everyone. We go through life every day and it’s very easy to get into routines and habits where we basically stop thinking. But then something major happens that makes us feel less secure and makes us more willing to re-examine our lives and consider making changes. I believe this economic downturn is one of those things. The positive that can come out of this loss of a sense of security is that we may be willing to make that hard choice that we weren’t willing to make before.
It could be something small like committing to only 1 Starbucks a week instead of 5 and saving the other $14 — over a year that would mean $728 in the bank. Earning a 4% interest rate on your Starbucks savings, you would have saved $8,740 in 10 years. Not chump change.
Or it could be something big like really wanting to simplify your life. Downsizing a house. Making a decision to get out of credit card debt once and for all. Driving a car you can pay cash for. Big actions with big pay-offs.
So if you’re so inclined, I encourage you to take a moment and use this economic insecurity to do something positive for yourself. If you’ve already done this, I’d love to hear about it. You can post a comment to my website if you want it to be public, or just send me an e-mail.