Planning Through Uncertainty and Volatility
By Jeanne Blackmore
A CONSEQUENCE OF THE POLICY changes being implemented by the current federal administration is uncertainty and volatility in the economy and the stock market. It may seem impossible to do mindful estate or retirement planning in this unsettled environment. However, every environment presents planning considerations and opportunities, and this environment is no different. Indeed, it is possible that the planning strategies we routinely recommend may in this environment be more effective in the long term. To help reframe your thinking, let us revisit those planning strategies.
Roth Conversion and Roth Retirement Account Planning
Roth conversions of tax-deferred retirement accounts continue to make sense in most instances because we remain in a historically low income-tax rate environment. Accordingly, for clients who have assets in a regular IRA, 401(k), 403(b) or other type of tax-deferred retirement account, it remains a powerful long term planning tool to convert that tax-deferred account (either partially or fully) to a tax-free Roth retirement account by prepaying the income tax. For clients with tax-deferred retirement accounts at Trust Company of Vermont, we often spread Roth conversions over the course of a calendar year and, when possible, take advantage of dips in the market. A Roth conversion made at lower stock prices results in lower income taxes, thus maximizing the long-term benefit of the conversion.
When considering Roth planning, don’t forget to grab low hanging fruit. For example, if your child or grandchild works, consider annually funding a Roth IRA on his or her behalf. The benefit of tax-free growth of a Roth account over that child or grandchild’s lifetime is tremendous. It is often possible to fund a Roth for a child or grandchild even if he or she also contributes to a retirement account at work. Similarly, consider funding other tax-free accounts for yourself or family members, such as an HSA (health savings account) or a 529 plan account. An HSA is a tax-efficient tool to save for your end-of-life care in lieu of paying for long-term care insurance. A 529 plan account that is not exhausted by a child’s education expenses can continue to grow tax-free for the benefit of grandchildren and even great-grandchildren.
Gift Planning
With federal estate tax and generation skipping transfer tax exemptions at almost $14 million per person, we also remain in a historically low estate tax environment. As such, gifting to SLATs (spousal limited access trusts) and other types of irrevocable trusts remains a valuable planning tool for protecting assets from estate tax and preserving wealth over multiple generations. As with Roth planning, gifting financial (and other) assets at low values minimizes estate tax exemption utilization (you can remove more assets from your estate when the value is lower) and maximizes the sheltering of post-gift appreciation (post-gift appreciation is removed from your estate and thus protected from estate taxes). In most instances, gift planning can be structured to preserve your ability to access the gifted assets should the need arise. In addition, for those who reside in a state with an estate tax, such as Vermont, New York or Massachusetts, gift planning can often eliminate state estate tax exposure.
Cash Flow Planning
Retirement planning requires you to determine whether and when you will have adequate financial assets to support your lifestyle once you stop working. Once retired, you should periodically confirm that you have sufficient cash/cash equivalents set aside to cover anticipated spending needs over an extended period of time. This planning protects from the need to sell equities at an inopportune time to raise cash to cover spending needs. During periods of market volatility, it is important to pay special attention to these retirement planning issues, especially if you are considering Roth conversions and/or gift planning.
Loss Harvesting and Rebalancing Portfolios
It is not uncommon for clients to hold assets with significant built-in gains, either outright or in an irrevocable trust. In this circumstance, it can be difficult to maintain a balanced portfolio because capital gains taxes due on the sale of appreciated stocks can be significant, even at currently low capital gains tax rates. During periods of market volatility, however, it is possible to take advantage of dips in the market to rebalance portfolios when stocks temporarily have smaller built-in gains or even built-in losses.
As noted above, estate and retirement planning remains as valuable as ever in the current environment, and we encourage you not to forgo planning opportunities that would benefit you and/or your heirs. Please be in touch if you would like to discuss any or all of the above planning strategies in view of your long term goals and objectives.