“The lowest prices are your friends”

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Christine Benz, director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast, joins Yahoo Finance Live to discuss retirement planning amid stock market declines, harvesting tax losses and tips for accumulating wealth during recessions.

Video transcript

Welcome to “Yahoo Finance Live”. We see all three majors in the green today. But the major averages remain deep in the red for 2022. And our next guest says this could be a good time to check the portfolio. Joining us now is Morningstar’s Director of Retirement and Personal Finance, Christine Benz. She has a few tax strategies that investors could take advantage of in a downturn.

Christine, I think people all ask, like, is now a good time to take a look at my portfolio? Because it’s been very scary the last few weeks. What is the silver lining?

CHRISTINE BENZ: The silver lining is, first, that stock prices are falling. Stock and bond prices are falling. So if you have an average dollar cost or you’re someone who just rolls money into your plan continuously through your 401(k) plan, for example, keep doing that because prices lower are your friend when you’re in accumulation mode. Stock prices look cheap relative to our team of equity analysts. That doesn’t necessarily mean they’ve hit rock bottom. But definitely sticking to this addition plan in a depressed stock market.

And Christine, not necessarily passive investors, you have shares in your portfolio. More than likely, many of them are going to be in the red. Can you talk about the tax loss harvesting strategy and how investors can use it to save a few dollars on their tax bill?

CHRISTINE BENZ: Absolutely. This is one of the bright sides of a bear market. This strategy would apply to your taxable account, so not your retirement account, 401(k) or IRA. If you have taxable assets in a brokerage account, the idea is that you can sell them. If they are trading below what you paid for them, sell them, make a loss. And then you can use that loss to offset gains elsewhere in your portfolio.

So many investors need to do a bit of repositioning. Maybe they want to reduce their positioning in something that has risen a lot. The fact that these losses help offset the capital gains burden associated with alleviating those positions you might otherwise want to sell. There are a few things to keep in mind, however.

One is what is called the wash sale rule. You cannot therefore redeem this same security within 30 days of its sale. Otherwise, you will reverse the tax loss. You want to be aware of this. You cannot sell the same security or what the IRS considers to be a substantially identical security. So you cannot sell an S&P 500 index fund and exchange it for an S&P 500 ETF.

Christine, what about IRA conversions? What should be considered here?

CHRISTINE BENZ: Right. Another terrific strategy to consider. The idea is that if you want to convert your traditional IRA to Roth, there are a few key benefits to doing so. One is tax-free retirement withdrawals, no minimum distributions required. That’s why people love the idea of ​​funneling money into the Roth IRA column.

The benefit of doing this when the market has dropped is that your balance has dropped. And the taxes due on those conversions would be less than when the market was higher. You want to consider your personal tax situation. So if for some reason, even though your balance is down, you find yourself in a high tax year, you’ll want to watch out for those conversions.

Ask a tax advisor, get advice. Often a series of conversions over a period of years can make sense for people who convert just enough to avoid getting into a higher tax bracket. It can also be a great strategy to consider if you are retired and your income is at a low point right now. You have a lot of control over your income. This can be a great time to consider conversions, before Social Security begins, perhaps before you are subject to the required minimum distributions. That’s sort of the sweet spot to think about some of these IRA conversions.

And Christine, we talk to a lot of advisors and fund managers on this show. And their phones start ringing non-stop when you have one of those bad days of 3%, 4% downtime. Haven’t had one in a while it seems. It may only be a few weeks. I’m just wondering what conversations you have with some of your clients at Morningstar, what are they like right now.

CHRISTINE BENZ: Well, one thing that we always talk about, you know, the things that I’m working on at morningstar.com is the virtue of retirees, retired people, holding cash all the time to help them with their expenses of subsistence. This gives them peace of mind with their long-term portfolios. And of course, you don’t want to go overboard with money, especially with high inflation, given the opportunity cost of that.

But it’s a strategy – we sometimes call it the bucket strategy – that can help people make peace with their long-term plans. For people who are in the accumulation phase, I always say a mild negligence policy. The less you pay attention to your wallet, the better. A good annual or semi-annual audit of this portfolio is sufficient for most people. Simply keeping this hands-off policy is the way to go.

Benign negligence… I agree with that. And hey, I’m in the news business. Thanks for coming here. Christine Benz, Director of Retirement Planning and Personal Finance at Morningstar, thank you and good luck to your Cubs tonight.


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