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If you have a lemon…

December 13, 2018

The stock market has dropped recently pretty much giving up all of its 2018 gains. Many investors are not too happy, but there are some that should be happy. Here is a brief list:

    • If you need to take your required minimum distribution from your retirement account in 2019, the amount will be based on the December 31, 2018 balance. If it is lower, then your RMD will be lower.
    • If you are continuously investing in the market such as with your 401k, 403b or excess funds, then you have an opportunity to buy some stocks at a discount. When you go to the butcher I doubt that you hope the price went up. So why do you hope the prices of stocks get higher just before you buy them?
    • If you haven’t as yet fully funded your 2018 IRA or retirement plan, now would be a good time to do it before stocks go back up.
    • If you sell covered call options, I am sure you are glad stock prices dropped. Likewise with short sellers.
    • If you will be going through a divorce then lower values will reduce the equitable distribution payments.
    • If you or your child are applying for tuition assistance, lower stock values will reduce your assets possibly making it easier to get the assistance you are seeking.
    • If stocks drop, you might feel crummy, but the drop will not affect the dividends you are receiving and if you are reinvesting them, then you are buying at lower prices. If you are systemically withdrawing principal to live on or spend, then you are affected by the price declines, otherwise, there is no real detriment.
    • If you bought stocks this year that declined, there is still time to sell them to realize a 2018 tax loss. If you immediately repurchase similar securities or an exchange traded fund in the same sectors, then you are pretty much maintaining the same market risk. You could then wait 31 days and reverse the transaction ending up where you were, but with the tax loss and minus some transaction costs.
    • With an IRA at a lower value you can do a Roth IRA conversion and pay less tax on it.
    • If you need to or can exercise stock options, the lower prices will reduce your cost and/or tax.

So, with the stock market, having a lemon might just give you a chance to make lemonade.

My partner Brian Lovett, CPA, JD blovett@withum.com assisted in preparing this listing.

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