4 Ways Retirees Can Take Advantage of a Bad Market

The investing landscape can feel pretty gloomy these days. Inflation is up, stock and bond prices are down, central banks are aggressively raising interest rates, and talk of recession seems to be everywhere. Investors looking for silver linings among all the clouds overhead could feel hard-pressed to find one. 

Often, the best way to approach a daunting environment is to remain focused on your goals. If you don't have to sell anything, you won't necessarily have to suffer any real losses. And if you can stick to an investing plan, you might be able to pick up some assets at prices better than we've seen in a while—so long as they fit with your strategy and goals.

However, patience isn't the only response. In fact, certain moves could make more sense during a bad market than during a good one. To be clear: This isn't a call for investors to try to time the market by jumping in when they think asset prices are at their lowest or out when they're at their highest. Rather, the moves we'll cover here focus more on tax planning and portfolio maintenance for the longer-term investor.

So, what silver-lining moves do we see?

• Look for opportunities for tax-loss harvesting. Investors often want to avoid selling anything at a loss, but selling a losing position can mean significant tax benefits if you have capital gains or income to offset. Why? You can use your losses to lower your capital gains all the way to zero. And if you have more losses than gains, you can offset up to $3,000 of your ordinary income each year. Tax-loss harvesting can also be an opportunity to sell underperforming investments or to re-diversify overly concentrated stock positions (just be aware of wash sale rules).
• Contribute to a 529 plan. Similar arguments apply to funding a 529 college saving plan. You can boost an account's value by bundling five years of annual gift tax exclusion amounts—totaling up to $80,000 (or $160,000 per couple) in 2022—without reducing your lifetime gift tax exclusion amount ($12,060,000 in 2022).
• Consider a Roth conversion. Converting assets from a tax-deferred IRA to an after-tax Roth account while your account balance is down could help lower the resulting taxes. If the assets recoup their losses later, they could provide additional tax-free growth and withdrawals over time—potentially even enough to offset the tax hit from the conversion.
• Consider estate planning strategies. Wealthy individuals and families looking to lighten the burden of gift and estate taxes could consider transferring depressed assets to a trust. For example, one sophisticated estate-planning strategy would involve shifting assets you believe will appreciate substantially in your lifetime into a grantor retained annuity trust (GRATs). A GRAT allows you to move some of that potential future appreciation out of your estate, thereby reducing its overall size. It works like this: The GRAT's creator transfers assets into a fixed-term, irrevocable trust. During the term (of at least two years), the creator receives annuity payments that pay the value of the assets back to them in their entirety—plus a fixed interest (or "hurdle") rate set by the IRS. When the term expires, any growth in the invested assets over and above the hurdle rate passes to the trust's beneficiaries tax-free.¹ 

Again, if you're sticking with your plans and can handle seeing a smaller number on your account value, you may not need to do anything when the market falls. It's never a good idea to act for action's sake, especially if there's a chance doing so amid the turbulence of a rough market will make it harder for you to participate in any future recovery or accomplish your most important financial goals.

Sometimes, though, a bad market can actually be an opportunity to set yourself up for something better later on.