Gina Parissi, CFP®
Senior Financial Planner
The news headlines in the first quarter of 2022 may have us asking ourselves, “Where do we go from here?” and “How will this impact my financial future?” In turbulent times we often check our portfolios and wonder what changes could be made to position ourselves better. With increased market volatility and geopolitical events, it can be worrisome not having an immediate answer to these questions.
At times like this it feels prudent to revisit financial goals for the near-term and for years to come. Knowing there are adequate reserves of cash to meet spending needs or investment opportunities, or confirming that legacy plans are not disrupted, can provide the peace of mind to comfortably deflect fears that headline-capturing news may impact our financial future. The process of planning provides an opportunity to revisit financial goals and how successful they may be, and explore what strategies could maximize success regardless of the market environment.
So, when is a good time to review your goals and financial plan? Life events such as marriage, divorce, family changes, and retirement are all natural points in time for a review. Economic events such as updates or changes to tax law as well as geopolitical events are also good times to reflect on how your strategy may be impacted. When we review financial plans from a holistic perspective, we look at scenarios of past volatility to determine how your assets will fair in various market conditions. When Haverford Trust has these discussions with clients prior to volatile markets, they are often better prepared for when events happen and can maintain confidence.
While investors may typically view disruption in the market in a negative way, it provides opportunities to re-position or consider new strategies.
Two strategies that seek to take advantage of market volatility are Roth conversions and Grantor Retained Annuity Trusts (GRAT). A Roth conversion takes assets held in an individual retirement account (IRA) and converts them to tax-free assets by paying the ordinary income tax due on the amount of the conversion. After the conversion of the account, future distributions will be tax-free, including any increased value attributed to the growth of the account. When asset values are depressed in volatile markets, the tax implications can be lower and therefore allow the rebound to occur in this investment vehicle. You may decide to convert your full account or a portion of assets over time. When converting a portion of the account in a down market, the same dollar amount can allow you to buy more shares and, in time, grow the portfolio as asset values increase.
If you have a taxable estate, a GRAT can be an easy way to shift appreciation outside of your estate to future generations. With this strategy, a portion of assets are put in trust for a period of time (2, 5, 10 years) and at the end of the trust, growth is transferred to the beneficiaries free of estate tax, while the Grantor takes back all principal through a series of annuity payments. This can be an ideal strategy when asset values are lower since we expect future growth of the underlying assets. As always, check with your advisors to determine if these strategies may be right for you.
Taking a proactive approach to your financial strategy is ideal, and it’s never too late to start the process. The planning process is a full review of cash flow, taxation, trust and estate planning, philanthropy, and risk management. If you have not gone through the financial planning process and are wondering if it’s right for you, contact any member of your team at Haverford to start a discussion.
The information provided herein is not intended to be, and should not be construed as, legal or tax advice or a legal opinion. Haverford does not provide legal or tax advice. You should contact your legal or tax advisor regarding your specific tax situation prior to taking any action based upon this information.
Investments in securities are not FDIC insured · Not bank guaranteed · May lose value.
