What is a Stock Market Correction, and How Can It Help Save on Taxes?

Last week, the S&P 500-stock index closed in correction territory after a sell-off. When there is a large dip in stock prices, it indicates that investors are selling stock so quickly that prices drop as low as 10 percent. This 10 percent drop is also known as a stock market correction. On average, stock market corrections occur about every 8 to 12 months and last for about 54 days.

 

In the past two decades, there have been 10 recorded corrections in the S&P 500, with the most recent dating in December of 2018. Of these 10, only two have resulted in a bear market. A bear market is more severe than a standard market correction, where the price of stocks falls by at least 20 percent. During the last recorded bear market, stock prices fell almost 60 percent, lasting 517 days. This was during the financial crisis that ended in 2009. 

 

How can the stock market correction help save on taxes? 

A falling stock market can actually help you save on taxes when it comes to retirement planning. When the market is down, converting a traditional IRA to a Roth IRA will allow you to pay income taxes on a lower portfolio value. So if your traditional individual retirement account fell in value, it may be time to think about converting to a Roth IRA. With a Roth IRA, you can benefit from future tax-free growth and withdrawals in retirement.

 

It is important to consult with an expert before making these changes. Now that the Tax Cuts and Jobs Act has taken away the ability to switch back from a Roth to a traditional IRA, if you change your mind, you cannot undo the transaction, and your conversion to a Roth IRA is permanent. 

 

Even though falling markets generally cause fear, on the positive side, they can open the door for retirement planning. By exploring the possibility of a Roth conversion, you can take advantage of low stock prices and buy yourself a cheaper future tax break.

 

 To learn more about retirement planning, reach out to our team at Hall & Company! We are a trusted CPA firm that provides expert financial and business advice. At Hall & Company, we are an Orange County CPA firm based in Irvine committed to providing quality tax and accounting services along with sound financial direction to clients throughout Orange County, California. We offer business development consulting, audit, tax preparation, IRS Audit, retirement planning, business roundtables, estate planning, QuickBooks consulting, Interim Chief Financial Officers, and a full range of traditional public accounting services.