Strategies for High-Income Earners and Retirees: Turning Market Volatility Into Opportunity

Strategies for High-Income Earners and Retirees: Turning Market Volatility Into Opportunity

Instead of fearing downturns, strategic investors can use them to reduce taxes, enhance long-term returns, and may be able to position their portfolios for future growth. Here are three key strategies to consider taking advantage of a market decline, along with real-world examples of how they work.

1. Roth Conversions – Pay Less in Taxes Now, Enjoy Tax-Free Growth Later

A market downturn may be the perfect time to convert a portion of your Traditional IRA into a Roth IRA. Since account values are lower during a sell-off, converting now means paying taxes on a reduced balance. As the market recovers, all future growth in your Roth IRA will be tax-free, and withdrawals in retirement won’t be subject to income taxes.

Example:

Imagine you have $100,000 in a Traditional IRA, and during a market downturn, the value drops 20% to $80,000. If you convert the full amount to a Roth IRA now, you will only owe taxes on $80,000 instead of $100,000, reducing your upfront tax bill. When the market rebounds, and your Roth IRA grows to $150,000 or more, all that growth is tax-free, making this a powerful wealth-building strategy.

This approach may be particularly effective if:

• You expect to be in a higher tax bracket in the future.

• You have cash available to cover the taxes from the conversion.

• You don’t need to access the funds for at least five years (to avoid early withdrawal penalties).

  
  

2. Tax-Loss Harvesting – Use Market Declines to Lower Your Tax Bill

Tax-loss harvesting is a strategy that allows investors to sell investments at a loss to offset taxable gains, helping to reduce the amount of taxes owed. This strategy is especially useful for high-income earners who may be facing capital gains taxes on other investments.

Example:

Suppose you own a technology stock that you bought for $10,000, but during a sell-off, it drops to $7,000. You could sell the stock and realize a $3,000 loss, which can be used to offset capital gains from other investments. If you have no capital gains, you can use up to $3,000 in losses to offset ordinary income each year and carry forward any remaining losses for future tax years.

To stay invested, you can use the proceeds to buy a similar stock or ETF, ensuring that your portfolio remains aligned with your long-term goals. Just be aware of the wash-sale rule, which occurs if you buy the same or substantially identical security within 30 days before or after the sale.

This strategy may work well if:

• You have taxable investments with unrealized losses.

• You want to reduce your tax bill in the current year or carry forward losses for future tax savings.

• You plan to stay invested but want to swap underperforming assets for better alternatives.

3. Rebalance Your Portfolio – Buy Low, Sell High

Market downturns often cause shifts in your portfolio’s asset allocation, meaning certain investments may have lost more value than others. Rebalancing allows you to sell assets that have held up well and reinvest in those that are undervalued, helping you maintain proper diversification while capitalizing on lower prices.

Example:

Let’s say your target asset allocation is 60% stocks and 40% bonds. After a market sell-off, your stocks have dropped in value, shifting your allocation to 50% stocks and 50% bonds. Rebalancing involves selling some bonds (which held their value better) and buying more stocks at a discount to restore your original 60/40 mix.

This disciplined approach can help you buy low and sell high over time rather than letting emotions drive investment decisions.

Rebalancing may be a good move if:

• Your asset allocation has drifted significantly from your target.

• You have cash or bonds that can be used to buy discounted stocks.

• You want to take advantage of market recovery without increasing your overall risk.

Market sell-offs can feel unsettling, but they also create opportunities for proactive investors to strengthen their financial position. Whether it’s converting to a Roth IRA at a lower tax cost, harvesting losses to reduce your tax bill, or rebalancing your portfolio to take advantage of undervalued assets, downturns can be used strategically to build long-term wealth.

If you’d like to explore how these strategies can benefit your specific financial situation, schedule a meeting with me to discuss your options and create a plan tailored to your goals.