Planning Tips for Today’s Bear Markets

Recent stock market weakness is presenting some additional financial planning opportunities. If markets continue to trade in a sideways trend at historically depressed levels, you may want to consider some of the following planning techniques:

• Convert to a ROTH IRA: If you have considered converting from a traditional to a ROTH IRA, compressed valuations make this an opportune time to do so. ROTH conversion results in taxable income for the current year, but any future distributions from the converted account are completely tax free. If you expect equity valuations will be higher when future distributions occur, this technique can provide substantial tax savings over the long term. (Note: conversions are allowed only for taxpayers with Adjusted Gross Income below $100,000).
• Fund a 529 College Savings Plan: These plans allow withdrawal of all funds, including any gains, completely tax free if the funds are used to pay qualified higher education costs. If you have young children or grandchildren, depositing funds when markets are low can result in gaining thousands of tax-free dollars for college expenses. Where else can you take equity gains tax free?
• Complete annual gifting: If you utilize the $12,000 per person annual gift exclusion to gift securities to family members, it may make sense to complete your 2008 gifting now, while valuations are low, rather than waiting until year end. (note that the annual figure increases to $13,000 in 2009)

So, while down markets are discouraging for overall wealth creation, proper planning can create wealth even in difficult market periods.