The Silver Lining: How to Look at Declining Financial Assets for Settlement Purposes

Authored by Abbie Niehoff, MPS, CFP®, CDFA®

Market volatility is often unsettling. It can be even more unsettling when going through a divorce. However, there are several ways to take advantage of down markets for settlement purposes in the divorce process. These include (1) Roth IRA conversions, (2) tax-loss harvesting, and (3) investing excess cash.

1. Roth Conversions. Two side-effects of volatility include a potential, temporary decline in one’s taxable income and tax rate, and a potential decline in one’s retirement asset value. In such periods, one should consider taking advantage of such decreases by considering converting pre-tax traditional retirement assets to after-tax ‘Roth’ retirement assets. Such conversion will generally result in one paying tax on the converted amount today, instead of years down the line when one’s tax bracket may creep back up. As markets and asset values recover, this benefit is even further compounded.  

When considering, one should consider their current and future tax rates, the timeframe before retirement distributions may be needed, market volatility, and beneficiary concerns/estate taxes. You should have a conversation with a Certified Divorce Financial Analyst ® to determine if now is a good time to consider such conversion.  

1. Tax-Loss Harvesting. Sometimes an investment that has lost money can still have a silver lining. The strategy one may implement to take advantage of such loss is known as tax-loss harvesting – it involves selling investments that decreased in value relative to their cost basis, replacing them with reasonably similar (or different) investments, and then offsetting realized investment gains with those losses. In effect, a “tax asset” is created. The losses can be used to offset investment gains and can offset up to $3,000 of income (if married filing jointly or single) or $1,500 (if married filing separate), unused losses can be carried forward indefinitely. The result is a reduction in your tax burden while still making your money work for you. When working with divorcing spouses, all parties should consider the tax asset (and liabilities) created by investments and capital assets.
2. Investing Excess Cash. Investments are cheaper when markets are down. Divorcing couples can take advantage of this to set themselves up for brighter horizons once assets are divided. When there is excess cash in a down market, it can be beneficial to take advantage of the decreased cost of investments. When the market grows, investments will follow.

Abbie Niehoff, MPS, CFP®, CDFA® is a collaborative financial neutral and expert, Councilor, Buchanan & Mitchell servicing the D.C., Virginia, and Maryland regions and beyond. Her expertise lies in assisting attorneys, spouses, and other divorce related professionals make well- informed financial decisions that impact today, tomorrow, and beyond.