Stock Market Losses Can Be Good For You – Here’s Why

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It’s not easy to sit through a stock-market selloff, but investors often enjoy advantages they might not appreciate related to tax benefits, corporate sweeteners and more.

You see a lot of the same tips trotted out each time the stock market slips and falls on a banana peel: Stay focused on the long haul. Don’t panic. Stick to your investment game plan, and so on.

These and other platitudes do contain nuggets of wisdom, but you’ve heard them before. Here are some less-obvious observations that might make it easier to hang in there, especially now that we could be in for a span of heightened market volatility:

You could get a tax break

It’s best to generate investment profits, even if it means paying taxes on the profits. But one consolation prize to downturns is that you can harvest capital losses from unsheltered accounts and possibly get a tax deduction. If your setbacks exceed your profits, up to $3,000 in losses can be used to reduce ordinary income each year.

If you invest in an Individual Retirement Account, your contributions are tax-deductible, which is another type of incentive. In a workplace 401(k) program, you get this benefit and, possibly, employer matching funds, too. All of these breaks provide cushions against market setbacks. It’s easier to stomach losses if you view Uncle Sam and employers as members of your team.

You could be in a better position to make a Roth conversion

In addition, market setbacks provide an opportunity to switch into a Roth IRA from a deductible IRA, if you were considering that move. Roths are desirable accounts, because they let you withdraw money tax free in retirement. In addition, earnings on investments within the Roth are tax free. The main impediment is that you must pay income taxes when you convert.

Taxes apply on investment earnings and any deductible contributions made along the way. For most traditional IRA investors, the full account value will be taxable. To the extent your account declines in a market slide, your tax bill upon converting from a traditional IRA to a Roth also will be smaller.

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Source: USA Today | Russ Wiles, The Arizona Republic

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