Tax Reduction Strategies To Help Your Portfolio During A Crisis

tax reduction in crisis

When events such as COVID-19 occur, investors often feel at the mercy of wildly fluctuating portfolios. Investing in the market involves risk — your portfolio will go down. And according to the math of percentages, the more significant your losses, the more returns you’ll need to break even.

If you lose 10%, you’ll need to gain 11% to recover, for example. Once those losses reach 50%, you’ll need a 100% gain to get you back to square one. While there’s considerable risk in investing in the market, there can also be great rewards (why else would anyone do it?).

Rather than panic when the market fluctuates, you should focus on things you can control, like how to minimize taxes. Taxes and fees may not have been your first consideration when making portfolio management and investment decisions. However, they can have a significant impact on returns and give you a sense of control during uncertain times.

Now more than ever, it’s essential to look at the elements you can control to minimize your losses and make it to the other side in solid financial standing. Writer, motivational speaker, and businessman Stephen Covey calls this tactic operating within your “Circle of Influence.”

When you focus on solutions, you have the power to enact; you can avoid the frustration and fear that comes with feeling a lack of control. You can’t control how the market affects your investments, but you can control your tax reduction strategies and portfolio decisions.

Tax Reduction Strategies to Use During a Crisis

You may be wondering, “What should I do with my investments now?” Even when the market is doing well, it’s good to review the tax implications of your investment decisions.

There are a lot of factors affecting investment decisions in portfolio management, especially when it comes to taxes. But if you want to know how to minimize taxes, focus on what’s in your control. Below are some tax reduction strategies you can implement in your portfolio decisions:

1. Place rebalancing trades inside a retirement account. Whenever you shift stocks or bonds back to their intended targets after a market movement, pay attention to whether you’re trading inside a taxable or retirement account. This can make a significant difference in your tax reduction strategies.

Your financial plan may have you investing 70% in stocks and 30% in bonds, for example. But the current market decline may mean your allocation is now closer to 60% stocks and 40% bonds. To keep your risk level consistent, you will need to rebalance. In this case, that means you would sell bonds and buy stocks.

If those bonds’ values have appreciated since you first purchased them, then you would incur a capital gain upon selling. If you place these trades inside a taxable account, you must report that gain on the current year’s tax return. However, if you can conduct the rebalancing trades inside a retirement account — an IRA, 401(k), or Roth IRA — you would avoid a tax bill.

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