Smart Financial Planning in a Down Market

At the beginning of each new year, many of us find ourselves with bright hopes for the months ahead. Whether it is a resolution to become healthier or improve our work-life balance, somehow we generate a renewed sense of optimism. Yet it usually only takes a few weeks before reality sets in, and our best-laid plans are tested. The same can be said for the recent movements of the equity markets. While we remain cautiously optimistic about the equity markets in the year ahead, the recent volatility and subsequent media coverage thereof cast a shadow in many investors’ minds. As we have recently communicated to you via e-mail, the recent market declines only reinforce Truepoint’s philosophy – that of a disciplined adherence to a well-developed investment plan despite the high emotions provoked by recent market activity.

It is important to realize, however, that a declining equity market enables investors to implement certain non-portfolio specific strategies that can have a favorable impact on their long-term financial security. We have highlighted several of these strategies below.

Roth IRA Conversion

In some circumstances, it may make sense to convert a portion of your traditional IRA to a Roth IRA. In 2008, this opportunity is only available to taxpayers with a modified adjusted gross income of less than $100,000. Roth IRA conversions enable investors to move funds from a tax-deferred environment to a tax-free environment. Because taxes are paid at the time of conversion, executing a conversion during a market downturn can be favorable. Converting specific assets that have decreased significantly in value but whose long-term expectations are high can minimize the immediate tax bite while potentially giving a jump-start to the amount of appreciation that will be tax-free in the Roth IRA.

If you are not eligible for a Roth IRA conversion in 2008, don’t despair! Current tax law removes the income threshold for Roth IRA conversions in 2010 so that all taxpayers will be able to take advantage of this opportunity, with the additional potential benefit of spreading the tax over the two subsequent tax years.

Cash to Invest? Consider IRA Contributions or 529 Plan Contributions

Now may be a good time to invest any idle cash you may have on hand. Market declines present great opportunities to make annual contributions to your IRAs or to 529 plans.

If you have not already made your 2007 IRA contributions consider doing so. The maximum allowable contributions for 2007 are $4,000 (under age 50) and $5,000 (age 50 or older during 2007). The deadline for making 2007 contributions is April 15, 2008. In addition, consider making your 2008 IRA contributions as early as possible so your tax-deferred savings can begin! Contribution limits increase in 2008 to $5,000 (under age 50) and $6,000 (age 50 or older during 2008).

Do you make annual contributions to your child’s or grandchild’s 529 account? If so, consider making those contributions now rather than waiting for the next birthday or the holiday season. Allow your contributions to reap the benefit of a market rebound.

Gifting to Adult Children

Some parents choose to make gifts of appreciated securities to their adult children on a semi-regular or annual basis. In 2008, the annual gift exclusion amount is $12,000. In most circumstances a taxpayer can make a $12,000 gift to any recipient free of gift tax consequences.

You can gift $12,000 of securities that have decreased in value to your adult child with the hope that after the market rebounds, your gift will be worth substantially more. In essence, you have removed the additional appreciation of these assets from your estate and have given it away without additional gift tax ramifications. Current capital gains tax rates may also be more valuable to your children should they sell the gifted securities. In the years 2008-2010, taxpayers in the 15% marginal income tax bracket or lower are subject to a 0% tax rate on recognized long-term capital gains.

For purposes of this gifting strategy, adult children are considered those over the age of 24. Gifts to children below this age may cause unwanted kiddie tax implications for your family.

Successful investors recognize that stocks carry risk. Market environments such as we’re currently experiencing can be unsettling, but we believe that a disciplined investment process coupled with strategic financial planning opportunities can significantly enhance your long-term financial security.

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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