Retirement expert: This tax strategy is ‘one of the great silver linings’ of a down market

Even though there is talk of a recession and the stock market has been in the red for most of 2022, some financial experts say the news isn’t all bad for those who are planning for retirement.

Christine Benz, director of personal finance and retirement planning for Morningstar, offered some strategies investors can use to find upside in a volatile stock market.

Tax-loss harvesting is a strategy that offers “one of the great silver linings in a down market,” Benz told Yahoo Finance (video above).

“This strategy would apply to your taxable account — so not to your retirement account, not to your 401(k) or your IRA,” Benz said. “If you have taxable holdings in a brokerage account, the idea is that you can sell them. If they are trading below what you paid for them, sell them, realize a loss, and then you can use that loss to offset gains elsewhere in your portfolio.”

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While tax-loss harvesting can help investors save money, Benz said investors should consult a financial adviser and be mindful of the “wash rule” when selling their securities.

“You can’t rebuy that same security within 30 days of having sold it,” she explained, “otherwise you’ll negate the tax loss. You can’t sell the same security or what the IRS considers a substantially identical security.”

In other words, investors wouldn’t be able to sell an S&P 500 index fund (^GSPC) and swap into an S&P 500 ETF (SPY), she added.

Benz also recommended investors convert their traditional IRA plans to Roth ones to save money on taxes since taxes on portfolio conversions aren’t as high in a down market. She noted there are a couple of benefits of doing so.

“One is tax-free withdrawals in retirement, no required minimum distributions,” Benz said. “That’s why people like the idea of getting money over into the Roth IRA column. The advantage of doing so when the market has dropped is that your balance has dropped. And the taxes due upon making these conversions would be less than when the market was higher.”

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In addition to tax strategies, Benz pointed out that lower stock prices can help investors who are dollar-cost averaging the same amount of money at regular intervals into their retirement plans.

This constitutes another “silver lining” in a stock market downturn, she said.

“Both stock and bond prices are down, so if [you] dollar-cost average or if you’re someone who just is moving money into your plan on an ongoing basis through your 401(k) plan, for example, keep doing that because lower prices are your friend when you’re in accumulation mode,” Benz continued.

Lastly, Benz advised investors who are starting to save for retirement not to pay too much attention to the daily ups and downs of their portfolios.

“For people who are in the accumulation phase, I always say a policy of benign neglect,” Benz said. “The less you’re paying attention to your portfolio, the better. A good once-yearly or twice-yearly check-in on that portfolio is plenty for most people.”

Ella Vincent is the personal finance reporter for Yahoo Money. Follow her on Twitter @bookgirlchicago.

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