Three financial strategies for down markets
Nobody likes falling stock prices, but they present opportunities when it comes to tax and estate planning.
Summary
- Market downturns can create strategic tax-planning opportunities, including the chance to convert traditional IRAs to Roth IRAs at a lower tax cost while allowing future growth and withdrawals to remain tax-free.
- Tax-loss harvesting in taxable accounts allows you to sell underperforming investments and use those losses to offset capital gains or up to $3,000 in regular income, with the ability to carry unused losses forward to future years.
- For high-net-worth investors, setting up a grantor retained annuity trust (GRAT) during market downturns can be an effective way to transfer potentially undervalued assets to heirs while minimizing gift and estate taxes.
Silver linings
It’s hard to be Mr. Brightside when your retirement dreams appear to be in peril.
However, even when markets are down, there are strategic moves you can make to give your tax planning and estate planning a leg up. Here are three favorite strategies from our silver-linings playbook:
1. Convert to a Roth IRA.1
The advantages of
One of the hitches with Roth IRAs is not everyone can contribute to them. If you are not working and don’t have income—or if you are working but your income is
Markets go up. Markets go down. It’s what they do. But if you can time a Roth conversion to a market downswing, the cost of the conversion will be lower. That’s because converting requires paying income taxes on the amount accumulated in the pretax IRA. Consider the example of Jason, who has $200,000 in a pretax IRA he wants to convert to a Roth. Jason is in the 32% federal tax bracket, so he would owe $64,000 in taxes if he converts to a Roth. However, if Jason does the conversion during a down market—one that cuts his IRA balance to $180,000—his tax bill would be $57,600 instead.
“If your traditional retirement account has decreased in value, you may have a window of opportunity to minimize the income taxes due on a conversion,” explains Theresa Malmstrom, director of wealth planning strategies with TIAA Wealth Management. “If markets rebound, the future growth within the Roth account will be income tax free.”
2. Tax-loss harvesting.2
Nobody likes seeing red when checking their portfolios. But sometimes, the holdings that declined the most present the biggest opportunities when it comes to tax planning.
Tax-loss harvesting within a taxable portfolio (the strategy doesn’t apply to IRAs or workplace retirement accounts) involves selling investments that have decreased in value since being purchased. “Selling those investments,” says Malmstrom, “enables you to realize that loss, which can be used to offset realized gains for tax purposes.”
Say, for example, you anticipate a sizable capital gains tax bill this year because you sold a big winner in your taxable stock-trading account. You could reduce or eliminate capital gains taxes by selling some money-losing stocks, replacing them with other investments (though not identical ones—see
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Personalized strategies for market downturns
Speak with a TIAA Wealth Management advisor about tax-smart strategies for your unique situation. We’ll work with your tax professionals and other advisors to identify the right opportunities.
3. Set up a grantor retained annuity trust (GRAT).3
If you plan to transfer significant wealth to your family—especially if you expect your taxable estate to be above federal and/or state estate-tax exemption levels—setting up a GRAT during down markets is worth considering. A GRAT is an irrevocable trust you fund by gifting assets to it during your lifetime. You, as the grantor, receive an annuity payment from the GRAT every year for a fixed period of time. At the end of this period, your heirs become the beneficiaries of the trust. (In this instance, the word “annuity” simply refers to a fixed sum of money paid every year and not to annuity products sold by TIAA and other financial companies.)
The assets used to fund the GRAT count against your lifetime gift and estate tax exemption—which, for 2025, is $13.99 million per person. For gift and estate tax purposes, the value of the assets is frozen at the time they’re transferred to the GRAT. So, if you believe those assets are now undervalued, this may be good time to get them out of your taxable estate and into a GRAT. “If the trust assets appreciate,” says Malmstrom, “the GRAT strategy may allow the appreciated assets to pass to your heirs with a reduced use of your lifetime exemption from the federal gift and estate tax.”
We're here to advise you.
Rules governing GRATs, tax-loss harvesting and Roth conversions are complicated, which is why we recommend talking to your tax advisor and TIAA Wealth Management advisor about them first. Don’t yet have an advisor?
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1Withdrawals of earnings prior to age 59½ are subject to ordinary income tax and a 10% penalty may apply. Earnings can be distributed tax free if distribution is no earlier than five years after contributions were first made and you meet at least one of the following conditions: age 59½ or older or permanently disabled. Beneficiaries may receive a distribution in the event of your death. Conversions may increase your income, potentially affecting Medicare premiums and other income-based programs. This strategy is most beneficial if future tax rates will be higher than current rates; if tax rates decrease, the conversion may not be advantageous. Markets could continue to decline after conversion, potentially resulting in paying taxes on a higher value than what the investments are ultimately worth. Tax laws may change, potentially affecting Roth account benefits., While TIAA Wealth Management advisors can suggest potential tax strategies, their suitability and effectiveness depend on your individual financial circumstances, goals, and risk tolerance. Tax strategies that work well for some clients may not be appropriate for others. Implementation of tax strategies may involve additional costs and risks. TIAA does not guarantee that any particular tax strategy will result in tax savings or improved financial outcomes.
2Tax-loss harvesting may increase risks, including potential disruption to your investment strategy and asset allocation. Transaction costs from selling and buying replacement investments may reduce benefits. The wash sale rule prohibits claiming losses when substantially identical securities are purchased within 30 days before or after the sale. Benefits may be limited based on your tax situation, and portfolio changes may affect overall risk exposure. There is no guarantee that harvested losses will provide the anticipated tax benefits.
3GRATs involve significant risks and limitations. If you die during the GRAT term, some or all assets may be included in your taxable estate. GRATs require assets to appreciate above the IRS Section 7520 interest rate to be effective; if assets fail to outperform this rate, little or no value may pass to beneficiaries. Setting up and administering a GRAT involves costs and complexity, including legal and accounting fees. Tax laws may change, potentially eliminating or reducing GRAT benefits. This strategy is not suitable for all assets or situations and should be evaluated as part of a comprehensive estate plan.
4 Kate Dore, CFP®, EA , “IRS Announces Bigger Estate and Gift Tax Exemption for 2025,” CNBC, October 22, 2024,
The TIAA group of companies does not provide tax or legal advice. Tax and other laws are subject to change, either prospectively or retroactively. Individuals should consult with a qualified independent tax advisor and/or attorney for specific advice based on the individual’s personal circumstances.
The views expressed in this material may change in response to changing economic and market conditions. Past performance is not indicative of future returns.
This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances, which should be the basis of any investment decision.
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