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Steven Martin, CPA, CFF, CGFM, CFE, CGMA, CIGI, RTSBA

Steven Martin, CPA, CFF, CGFM, CFE, CGMA, CIGI, RTSBA

How to Win Whether the Stock Market Goes Up or Down

The stock market is always going up and down, usually a little but sometimes a lot.  People are often elated when the stock market goes up and concerned when it goes down, but they shouldn’t be.  It depends on whether you are buying or selling. 

If you are still saving for retirement, the market going up is a bad thing because then you are paying more for individual shares than you would when the market is down.  Regardless, you should still buy some each month whether the market is high or low.  This is called dollar-cost averaging.  Very few people do well trying to time the market.  Better to put in some month after month, year after year, and be happy when the market goes up, and happy when it goes down because then you are getting bargains. 

If you are in retirement and selling stock to get by, the trick is to sell some for cash when the market is high and set it aside.  What you do not want to do is steadily sell some each month.  If the market drops precipitously, you will have to sell your stock cheaply, which in some cases may be less than you paid for it. 

Then there is the question as to whether you should be putting your money in a Roth or Traditional IRA or 401K.  Generally, the rule is if you think you will pay a lower tax rate when you retire than when you are earing wages, then you put it in a tax-deferred account, meaning a traditional IRA or 401K. 

But, if you think you may pay a higher tax rate in the future when you retire, then some advocate investing now in Roth IRAs or 401ks.  The nice thing about the Roth accounts is there are no Required Minimum Distributions (RMDs) at age 72 as there are with traditional IRAs and 401ks.  These RMDs start at about 4% per year and increase as time goes by.  

Something else that can be done is making a conversion from a traditional IRA or 401k to a Roth IRA.  There is no limit on how much can be transferred but the amount transferred is added to your taxable income for that year, and consequently increases your income tax.  Tax planners advise only transferring whatever amount you can pay the tax on without dipping into your tax-deferred accounts (traditional IRA or 401k).  This is because if you take out tax-deferred funds to pay income tax, then you have to pay income tax on those funds as well. 

The best way to do this is with a direct broker to broker exchange.  If you get a check made out to you and keep it over sixty days, the withdrawal becomes taxable.  The other trick to a Roth conversion is to do it when the stock market is down because then you will pay less tax on the stocks converted.  

However, a Roth has to be in existence five years before you can make a withdrawal from it.  If you want to leave open the option of using a Roth in the future, open a Roth IRA if you can (not everybody can), even with only a little bit of money, just to satisfy the five-year rule. And if you convert too much and owe too much tax, you are stuck, because you cannot undo a Roth conversion. 

So, if the market goes down, be happy because you are getting bargains, and it is a good time to make a Roth conversion.  If it goes up and you are retired, it is a good time to sell some stock for cash and set it aside.  You can leave the cash in your tax-deferred or Roth account, but have it ready should you need it. 

Like everything else in tax law, there are a lot of requirements to do anything. What is written here is general and not specific advice.  If unsure, check with your CPA.  

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