Volatile times require smart financial planning moves

With the return of inflation, continuing COVID-19 shocks and geopolitical instability, many investors have girded themselves for volatility. Fortunately, you can help to protect your assets from sudden, unpredictable moves in the markets and the economy. Here are a few ideas.

1 Convert to a Roth IRA

Many investors have seen significant drops in value for their portfolio recently. If those values rebound, one way to shelter the recovery from income tax is by converting from a traditional individual retirement account (IRA) to a Roth IRA. When a traditional IRA is converted to a Roth IRA, income tax is assessed on the value of the asset on the date of the transfer, which in today’s market can potentially result in a lower taxable transaction. If you are interested in an IRA conversion, note that dollar-cost-averaging can also help protect your assets from volatility, so you might want to make this a cornerstone of your retirement strategy.

2 Refinance Your Debt

With inflation increasing and the Federal Reserve already planning future rate hikes, interest rates may be due to follow. If you have been considering a refinance of your mortgage — whether for your home or your medical practice — this might be a good time to lock in a lower rate before they start edging upward. But be mindful of the costs that can accompany it, such as appraisal and application fees, and try to balance your monthly savings against any up-front costs. This can be especially significant if you have plans to sell your home or practice in the next few years, in which case refinancing may not be worth it.

3 Make Use of Tax-Loss Harvesting

Tax-loss harvesting allows you to sell securities that have declined in value at a loss but then use those losses to offset current and future capital gains. You can apply up to $3,000 of these losses against your ordinary income and carry forward any unused capital losses to use in future years. If you own stocks that have lost value, it is important to keep an eye on how long you have held them, because short-term capital gains are taxed at your marginal tax rate whereas long-term capital gains are taxed at a 15% (or 20% for higher income earners) tax rate. Be careful to avoid using the short-term, and more valuable, loss against any income taxed at the lower 15% or 20% rate.

4 Fund Your HSA

One of the most beneficial tools to prepare you for future medical expenses is a health savings account (HSA), which holds pretax dollars that can be used on qualified medical expenses for yourself, your spouse and/or other family members tax and penalty free. Any funds not used by the end of the year can be rolled to the following year and continue to grow tax free. To be eligible for an HSA, you must be enrolled in a high-deductible health plan with a minimum annual deductible before health care costs are covered. Although The American Journal of Managed Care® reports that physicians typically opt out of high-deductible health plans, HSAs can offer significant benefits through pretax contributions, tax-deferred growth and tax-free withdrawals. You also have a one-time opportunity to convert a portion of your traditional IRA to an HSA, limited to the annual contribution limit. Taking advantage of this strategy changes the funds from tax deferred to tax free, assuming the HSA funds are eventually used for qualified medical expenses.

5 Give to Your Heirs

If you have heirs who are feeling the economic pinch now and could benefit from getting their inheritance early, this could be an excellent time to use a gifting strategy. Individuals have an exemption against gift, estate and generation-skipping taxes of $12.04 million per person ($24.08 million for a married couple). This historically high exclusion is scheduled to decrease to about $6 million on January 1, 2026, when the Tax Cuts and Jobs Act sunsets. This exemption can be used throughout your lifetime via gifts or at death via bequests from your estate. Currently, the annual gift exemption is $16,000 per year per recipient (or $32,000 annually per recipient for a married couple), so only gifts above the $16,000 (or $32,000) annual limit per recipient would reduce your lifetime gift and estate tax exclusion.

Several of these strategies require the guidance of tax and legal professionals and can be complicated to execute, so tread carefully. A certified financial planner can partner with your certified public accountant and/or attorney to help ensure you are on the right track to weather whatever volatility we may see.

Anthony Moffa, CFP, is with The Smith Group at Baird, and has worked exclusively with clients in Private Wealth Management. Anthony works with medical professionals and business owners who want peace of mind when it comes to their portfolios and financial plan, and views both aspects as integral parts for successful wealth management. To discuss your personal or business financial planning goals, please contact Anthony at (704) 571-7395 or amoffa@rwbaird.com. For more information on Baird, visit BairdWealth.com.