Smart Planning Strategies for Market Pullbacks

Many investors are struggling to cope with today’s turbulent markets, after the S&P 500’s peak-to-trough decline of 10.1% in the first quarter of 2025. And unfortunately, the policy uncertainty that has dominated headlines may not be going away soon. We think investors should gird for more market turbulence and policy uncertainty—particularly around the pace, level, and industries affected by tariffs. But there is a silver lining in this year’s cloudy market: today’s pullback has created a fertile ground for some savvy strategic planning techniques.

Tax-Loss Harvesting

Market downturns offer prime opportunities for tax-loss harvesting, a strategy that involves selling underperforming investments to realize capital losses. These losses can offset capital gains realized on other investments, reducing your overall tax liability and keeping more capital invested for future growth—and for a potential rebound.

Historically, such loss harvesting was often an afterthought, typically considered only at year-end. Few investment managers prioritized maximizing after-tax returns over pretax gains. But today, astute investors embrace proactive loss harvesting as a key component of their overall investment strategy.

How does it work? To fully benefit from this strategy, it is crucial to reinvest the proceeds from sold securities rather than holding them in cash or using them to de-risk your portfolio. However, the wash-sale rule prevents repurchasing the same or a substantially identical securities within 30 days before or after the sale. That makes finding suitable replacement securities essential. These replacements often come from the same industry or have similar technical characteristics, ensuring a high correlation to the sold security. Tax savvy managers handle this systematically, with tax-efficient solutions that offer a bright spot amid market declines.

Roth Conversions

No one likes seeing their portfolio drop, but a market downturn does offer a unique advantage: the chance to perform Roth conversions at reduced market values. When the market dips, your traditional IRA’s value typically decreases, enabling you to convert a larger portion to a Roth IRA for the same tax cost. By paying taxes on the conversion at a lower value, you set the stage for tax-free future growth in your Roth IRA. This strategy can be a game-changer for long-term tax planning and wealth accumulation, turning market volatility into a strategic opportunity.

Plus, by taking advantage of a market drawdown, the subsequent gains when the recovery takes hold can be sheltered in a tax-free environment. Consider the three major market pullbacks that have occurred over the last 15 years—the Global Financial Crisis (GFC) in 2008, the onset of the pandemic in 2020, and when the Fed began raising interest rates in 2022. Investors who had the fortitude to convert a traditional IRA to a Roth at each of those market bottoms would have ultimately been rewarded.

For instance, an investor who converted $1.0 million at the bottom of the GFC would have seen their Roth IRA grow to a staggering $9.41 million by the end of 2023. By paying $350,000 of federal income taxes on the $1.0 million conversion, they now sheltered $8.41 million of growth from taxes, achieving $3.11 million in tax savings (Display). A similar pattern played out during each of the other downturns, demonstrating the potential benefits of timing a Roth conversion to coincide with market lows.

 

 

Wealth Transfer Planning

Transfers to loved ones, whether during life or at death, face transfer taxes—gift, estate, and GST—currently at a rate of 40%. The enhanced basic exclusion and GST exemption both stand at $13.99 million. For those with taxable estates or concerns about future tax liabilities, lifetime wealth transfer planning should be a significant focus.

Many lifetime wealth transfer strategies rely on transferring future appreciation rather than the principal value of the asset itself. Initiating these strategies after a market downturn can be particularly effective, as they allow future gains to be transferred tax-free as the market recovers. For instance, strategies like Grantor Retained Annuity Trusts (GRATs), gifts, and installment sales enable asset transfers to heirs at a lower tax cost, leveraging reduced valuations to minimize gift and estate taxes.

• Gifts: During a market downturn, making gifts can be a strategic way to transfer assets. You can give up to $19,000 per recipient annually (the annual gift tax exclusion) or utilize the lifetime gift tax exemption of $13.99 million. These assets have the potential to appreciate in value during a market recovery, maximizing the benefit of your gift.
• GRATs: Funding a GRAT with lower-valued assets positions it to capitalize on market recovery, transferring more appreciation to heirs with minimal tax impact.
• Installment Sales: Lower asset values reduce the initial sale price, and any post-sale appreciation accrues to the buyer, often your heir, outside your taxable estate.

Transform Market Lows into Wealth-Building Opportunities

Market downturns can be unsettling, but they also present unique opportunities for savvy strategic planning. By taking proactive steps such as executing Roth conversions, engaging in tax-loss harvesting, and implementing wealth transfer strategies at lower valuation levels, you can effectively capitalize on market downturns to strengthen your financial position.

Which planning strategies are right for you? Your Bernstein Advisor can provide a personal consultation.