4 Ways to Ease the Bear Market’s Pain

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But don’t buy clunker stocks on sale. Instead, buy shares of companies that are number one or number two in market share in their line of business and have pricing power that enables healthy profits to keep rolling in, Hoernicke adds.

2. Consider a Roth IRA conversion

With stock prices depressed, now could also be a good time to convert a traditional IRA or qualified employer-sponsored retirement account. Those accounts were funded with pretax dollars and require you to pay taxes on withdrawals. The benefit of the Roth is you’ll pay zero taxes on withdrawals for life, provided you don’t tap the account for five years. You’ll also avoid having to pay required minimum distributions (RMDs) during your lifetime (regular IRAs make you take RMDs starting at age 72). Another plus is you will be able to pass on tax-free assets to heirs.

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The catch? You’ll have to pay taxes at your ordinary income rate on the dollar amount you convert to the Roth IRA.

Doing a conversion in a down market can make sense, mainly because the dollar value of the IRA is now lower due to the stock market decline, which means you’ll pay less taxes on the conversion than you would when stock prices were higher at the market peak.

Let’s say, for example, you want to convert your entire IRA balance — now valued at $100,000, down from a pre-bear value of $125,000 — to a Roth. You’ll benefit in two ways. First, your tax hit will be lower because your account will be $25,000 lower. Second, you’ll be moving the same number of shares despite the loss in the IRA’s value, which means you’ll be better able to take advantage of the market rebound. “When the recovery comes, all your shares will be inside a tax-free account,” says Tim Steffen, director of tax planning at Baird, a money-management firm. And the more shares you convert now into the tax-free Roth IRA, the bigger potential payday you can get years down the road when those share prices appreciate under the Roth umbrella.

A Roth conversion works best, according to Wells Fargo, if you won’t need the money for at least five years, as IRS rules forbid tax-free withdrawals until at least five years after you first contributed to the account. A Roth makes most sense if you expect to be in the same or higher tax bracket during retirement. It’s also better if you have available cash to pay the tax bill without using the IRA funds, as you want as many shares as possible in the IRA to benefit from future growth.

Wells Fargo says a Roth IRA conversion makes less sense if the dollar amount being converted pushes you into a higher tax bracket in the tax year that you do the conversion, or if you think you will be in a much lower tax bracket when you retire. The tax benefits of a Roth IRA are also less impressive if you live in or plan to relocate to a state with no or lower state income tax.