Planning Options in a Down Market 

Now that we’re in a bear market, there are a few techniques advisors can use to alleviate the burden on clients. Roth conversions are going to be particularly valuable because the funds will  recover tax-free. Doing Roth conversions can spread out the tax liability earlier in retirement. Right now, there are no required minimum distributions under current rules for Roth IRAs, so it’s a good time to consider accelerating off Roth IRA and Roth conversions. Learn more about the best tax techniques for down markets in our FinPlan Friday discussion with Joe.

FinPlanFriday_tax techniques for down markets

FinPlan Fridays

In our video blog series, FinPlan Fridays, Covisum® Founder and President, Joe Elsasser, CFP®, offers his take on the issues financial advisors see every day. Joe is a practicing financial planner with a unique perspective into the challenges for which Covisum provides technology solutions. Join us on the first Friday of every month for FinPlan Fridays, and get helpful tips to grow your financial planning practice. 


Hi, this is Joe Elsasser, CFP®, President and Founder of Covisum, and welcome to another FinPlan Friday. I wish I could say that it is just a normal Friday, but as I look around my city, it's anything but normal. I imagine that's the case for you, too.

Of course, these are the times that we as financial advisors are incredibly important to our clients. These are the times when the plans that we've put in place over the last 8-10 years are actually paying off, and the recommendations that along the way we may have had to say, “that's not performing as well as the headline numbers on the market.” I imagine that there isn't one of you watching who had a 29% increase in your clients’ portfolios last year. And why not? Because as advisors, we were all diversified. We were all putting our clients in a position where the portfolio risk that was in their particular portfolio was better aligned with their goals. And for most of our clients, an all-stock allocation just isn't it, particularly if we're focused in the retirement income space. And yet here we are in a situation where there’s been a significant market decline. And as a result, we have a lot of opportunities, opportunities to be out there in front of our clients, exercising techniques that we only get to exercise really effectively during down markets. So today, I’m going to talk about some down market techniques. In fact, bear market techniques that we can employ to position our clients better as we eventually do come out of this.

Tax Loss Harvesting

The first is tax loss harvesting. If you haven't already harvested tax losses in client accounts in those non-qualified accounts, that's something to be considering right now. Of course, the S&P was down over 30%, and we've recovered some. There's no way we'll know until it's all said and done, and we're looking in the rear view mirror whether it was a dead cat bounce or a bounce off the bottom. But identifying those positions that have lost, where we have a suitable replacement position, that is not substantially identical. Of course, we want to avoid wash sale rules in doing this tax loss harvesting, but we also don't want to miss out on the gains that an asset class might deliver in a recovery if we end up in a recovery.

And so understanding those tax loss harvesting mechanics and avoiding those wash sale rules right now can pay big dividends in a couple of ways. The first way tax loss harvesting can be beneficial is it can help you get stuck positions unstuck. In other words, if I have a client who's had a position in a certain stock that has really grown and grown and grown over the years, and now that stock represents far too much of their overall portfolio, I have the opportunity to harvest losses on other positions and then recognize capital gains in that position, knowing that I can offset that capital gain, and I won't face a big tax bill.

So, getting unstuck positions or getting stuck positions unstuck is a really good opportunity during market times like today. A second key is that we're going to have very clean tax returns as we get towards the end of this year. So, if you do tax loss harvesting, you know that you're likely going to be able to offset any gains that the client might achieve by the end of the year. Now, what does that mean? It means that you have an opportunity to pursue the second technique. And the second technique is Roth conversions.

Roth Conversions

So normally in our practice, we wait until the end of the year, November or December, to do Roth conversions. And the reason we do that is we want to make sure that we don't accidentally kick a client into a higher tax bracket or have them pay a Medicare premium based on income that arrives late in the year, such as ordinary dividends that might get passed through mutual funds or capital gains that might get passed through mutual funds or even a rebalance that occurs middle to end of the year that we need to be careful for. So, we don't usually do those Roth conversions until the very end of the year. But if we tax loss harvest early this year, then we know we are unlikely to have any capital gains on the return at the end of the year, which means we can do those Roth conversions earlier in the year. That's advantageous in its own right as well, because as the assets recover, we want them to recover in the Roth as opposed to recover in the traditional IRA. Of course, that way all of that growth then comes back tax free. So that's the second technique, Roth conversions.


Now, the third thing that you really should be paying attention to is the ability to skip required minimum distributions. This was introduced as part of the CARES Act that was just passed. The ability to skip required minimum distributions applies to any required minimum distribution for this year. That includes first distributions which may have been held over from last year, but were effectively due as of April 1st of this year. Those can even be postponed until next year. It also includes those from inherited IRAs.

  • First RMD
  • Regular RMDs
  • RMDs from inherited accounts

Now, when you don't have those, you actually have a higher ability to do Roth conversions. You can effectively convert what the client would have done in an RMD. The ability to skip the RMD is nice.

  1. It allows the asset to recover if you don't have a real need for Roth conversions.
  2. It allows you to convert more.
  3. For those clients who need income and maybe don't need the Roth conversions if they have non-qualified accounts you really want to consider stopping those required minimum distributions if you've got them setup on, for example, a systematic withdrawal, because you could take the money from a non-qualified account.

I'll give you one example of why that might be beneficial. Here in Nebraska, we have what's called a homestead exemption. It may vary county by county, but in Omaha, the homestead exemption allows someone with lower income to not pay property tax. Sometimes you have clients who are just over the threshold because of their required minimum distributions, and there's really not much you can do about it. Now, doing a Roth conversion might bring down the required minimum distributions for future years and allow them to qualify. The other possibility is getting them to qualify this year by skipping that required minimum distribution and instead using non-qualified money, home equity, buffer assets, such as cash value from life insurance, or other assets. So exploring whether or not you've got a homestead exemption and whether or not you have any clients that fall into that range is yet another planning technique for down markets.

So hopefully those are three things you can do today to put your clients in a better position coming out of this situation than they were coming into it.

How Can Covisum Help?

Our Tax Clarity® software can help you quickly identify sub-optimal tax situations and show clients how to make retirement decisions in the most tax-efficient way. Tax Clarity can show the tax impact of a Roth conversion in the current year and help you identify how much to convert without stepping into an unexpected effective marginal rate. Try Tax Clarity for free for 10 days.

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