Smart Money Decisions When Markets Decline

Many investors wonder what actions they could take when the market is down—but many only think of getting out of the market during a decline. While it may be difficult to see a decline in your account balance, in the short run, there are some actions to consider during this time that could put your money to work at potentially attractive prices. It could also be an opportunity to reach your long-term financial goals faster.

Goal: Lower 2022 Tax Bill

If you have losing positions in your portfolio, you may want to consider tax-loss harvesting in a taxable investment account. A tax-loss harvesting strategy involves selling a security at a loss to offset the amount of realized capital gains tax due on another security. Not only can you potentially offset your gains, you can also use any excess loss to offset $3,000 of ordinary income in the current or future year. For example, if you purchased $10,000 in a mutual fund in 2020 and it’s worth $8,000 today, you could sell the position to realize a $2,000 loss. Then you could offset realized capital gains in the portfolio and reduce your Federal tax bill for 2022. Sometimes it’s tax smart to realize a loss and reinvest the proceeds in another investment and still have substantially the same portfolio allocation.

Goal: Save for Retirement

If you haven’t yet made your 2023 contribution to your Roth or Traditional IRA, now may be an opportune time to put that money to work given the market’s decline. With the annual contribution limit of $6,500, or $7,700 if you’re age 50 or older, you could invest the entire amount at once or set up an automatic withdrawal from a checking or savings account to invest a specific amount on a monthly or quarterly basis.

Goal: Invest for Future Health-Care Expenses

Health-care expenses will likely climb in retirement, and the market decline may be an opportune time to set aside money today at attractive prices to help pay for these future expenses with a Health Savings Account (HSA). An HSA is a savings account that can be used for out-of-pocket medical, dental and vision expenses. For those with a high-deductible health plan, an HSA can be a powerful savings tool offering triple tax-free benefits: Contributions are made on a pretax or tax-deductible basis, savings grow tax free over time, and withdrawals for eligible medical expenses are tax free. In 2023, you can contribute up to $3,850; families can contribute up to $7,500 and an additional $1,000 for those 55 years old or older.

Depending on your situation, a Jemma Financial Advisor can help determine the best course of action to take while markets are at lower levels, whether it’s harvesting a tax loss, saving for retirement or setting aside money for health-care expenses. Your future self may thank you.

Call us at 855.662.2121 or click here to start the conversation.