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Playing Offense Instead of Defense When the Market Drops | Waymark Wealth Management

When the market drops, most people think it’s time to play defense. But what if you played offense instead? Brendan presents three opportunities available during a market drop - if you’re willing to take advantage of them.

Topics Discussed:

  • Considering the stocks on your watch list “on-sale”

  • Triggering a tax loss as a potential tax savings

  • Converting traditional IRA assets to Roth IRA assets


Welcome to another coffee with Brendon, Today is January 27. And two things are happening one, stock markets down about 10% from its while year to date. So over a month timeframe. And the other thing is its playoff season for football. So today's topic is playing offense when everyone else is playing defense. And so what I'm going to do is give you three ideas that you can consider when it comes to you know, getting into the market, or taking action during a time when the market has a big drop.

So the first thing is pretty simple. Let's say that you had a stock that you had your eye on for some time, but it was just too expensive to have gotten into well, guess what, you know, now the market is down 10%, you could make the argument that you're the stock that was on your watch list is now on sale. And you could purchase it at this point, you know, the markets down 10%. But there are some pretty big names out there that are fortune 500 companies that are down, you know, 2550, even 70% that you could take a look at that just a few short months ago, you'd be paying a pretty significant premium to purchase those. So that's, that's suggesting number one is just simply buy something that that was that that's on sale right now.

Number two is going to take a little bit more explaining, explaining. So let me open up a spreadsheet here, let's say and this is an actual, pretty big stock that's in a lot of people's portfolios. Let's say that at the peak of the market, you purchased 100 shares of this specific stock. And that stock was trading at $700 per share. So you pretty much purchased $70,000 of that stock back in November 2021. Well, fast forward to this week on the 24th. And that share price is actually taken a 50% hit. But you still have that 100 shares. And so now your the value of your investment is gone from $70,000 down to $35,000. So obviously no one likes it when you lose $35,000. But one thing that you could do, especially if you're one of the top tax brackets, is you could artificially trigger a tax loss, which ultimately leads to a tax deduction for most people and sell it, you sell it today on January 24, you book this $35,000 short term loss because it's less than a year. And for 40% For a person in the 40% tax bracket, that could ultimately lead to a $14,000 tax savings. Now, this is just a temporary thing, you have to be out of the investment for a certain period of time for the IRS rules. But let's say that you get back into this thing back in February. So you get in February, when the share price is even lower at $300 per share, and you buy back those 100 shares. So again, just the timeline of this, you bought 100 shares in November, you sold those 100 shares in January, and you bought them back in February.

Now the whole reason for this is to book this loss and get that on your tax return for the upcoming year. In addition to that, if the share price keeps going down from 350, down to 300. Well guess what? Now, you're repurchasing that back at $30,000, you sold it for 35. So you made another $5,000 in that transaction. So total impact to you could be almost $19,000 in that case. So you're using that tax loss as a potential benefit to you. Now, of course, the opposite is true as well. So let's say that instead of the share price going from 350 for 350 down to 300 instead goes from 350 to 400. Now you're buying it back at $40,000. And you lose $5,000 in that situation. So now your tax savings are a little bit more muted, you know you had the $14,000 of tax savings minus the loss of having to buy back at a higher price, but still a net benefit to you. So that's That's option number two.

Option number three is something that that some of my more wealthy clients have always thought about, but it cost them money to do and that is Converting traditional IRA assets to Roth IRA assets. So real, real quick, traditional IRA, you typically get a tax deduction up front, and it grows tax deferred. And then at age 72, or whenever you take that money out, you have to pay tax on whatever money you take out of it. So you have a $50,000, traditional IRA grows to $100,000. And you take out 10,000, from there, but you have to pay tax on that $10,000 can contrast that with a Roth IRA, Roth IRA, you don't get a tax deduction up front. But that $50,000, if it grows to $100,000, and then you take that $10,000, out, no tax. Now, again, there are some rules here that you need to take into consideration, we'll have that disclaimer to disclaim that, and obviously, when you're talking about any kind of tax situation, you want to make sure that you, you, you speak with a qualified tax advisor. But with all that out of the way. So let's say that you wanted to convert some of your tax deferred money to tax free money convert from traditional IRA to Roth IRA.

Now, there's a good news, bad news situation with this, the good news is that, again, you're converting money from tax deferred to tax free, so you wipe out any future taxes on appreciation. So going back to our other example, let's say that that 100 shares that you had goes from 350, back up to the 700,000 in a Roth IRA, that extra $35,000, a growth is tax free, that's great. So really good. A really good pro to the Roth IRA. However, the con to doing this is that whatever you convert over, you actually have to pay tax on and it's considered income. So again, let's go back to our old example here, that one that we just used. And let's say that, you know, on the purchase date, on November 17, you decide that you want to convert $70,000, of traditional IRA money to Roth IRA, well, guess what, you actually have to add $70,000 to your income for that year and pay tax on it or whatever your tax rate is. For a lot of people, that's that's a pretty high hurdle. But let's say again, share price has gone down 50%, you could convert that same 100 shares at half the cost, because again, the the Roth IRA conversion would happen on January 24, when the value of the account is 35,000. The day that you live, the day that you make the conversion is when you lock in that dollar amount that you convert it over. So in this case, you're saving, again, a ton of tax money to do this Roth IRA conversion that you always wanted to do, but you never could do because the value of your accounts were too high.

So those are three quick ideas that you can think about, you know, obviously, a couple of these are tax related. So again, I'll reiterate, you always want to speak with a tax advisor on all this. And the other piece of it is we're always here. So feel free to pick up the phone, shoot us an email, and we can help you want to help walk you through this as well. So hopefully this was helpful and we'll talk soon. Thank you


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