When it comes to the gloomy economic forecast, you probably feel like you've heard and read it all. After a while, all the bad news becomes paralyzing. But remember, forecasts are meant to help us decide what to do, not keep us from taking action. And believe it or not, there really can be a bright side to falling stock prices, declining portfolios and lower home values, depending on your circumstances.
So instead of looking only at the negative, here are a few positive things you can do to shed a bit of sunshine on your own financial situation.
Cut Your Tax Bill By Converting To A Roth IRA.
Has your traditional IRA been hit by market losses? If you're like most people, you may be looking at a double-digit decline in your retirement savings. Can you turn this into a plus? Possibly -- by converting your traditional IRA into a Roth IRA.
With a Roth IRA, there are generally no taxes on withdrawals. And there's no Required Minimum Distribution at age 70 1/2. So converting now can save you money on future income taxes, plus give you the ability to take advantage of tax-free growth for a longer period of time.
When you convert to a Roth, you do pay income taxes on the current value of your IRA. However, with today's lower values -- and relatively low income tax rates -- now could be the ideal time to do it. Your tax bill today may be less, and your future tax savings more.
There are income qualifications for opening a Roth. In 2008 and 2009, you must make under $100,000 a year to be eligible. That income limitation will be removed in 2010, and at that time you'll be able to spread your tax payments over two years. You could consider waiting, but who knows what market values and tax rates will be in 2010? If the benefits of a Roth IRA make sense for you, taking positive action now can turn your reduced retirement savings into greater tax savings.
Turn Lower Stock Values Into Bigger Gifts.
If you're hanging on to stocks that have lost value, your loss could be your family's gain. In 2009, you can give as much as $13,000 (or $26,000 for married couples electing to split gifts) to any number of individuals -- your kids, other family members, anyone you please -- without paying gift taxes. To make the most of this opportunity, consider giving appreciated stocks or mutual funds instead of cash. With values down, you can give more shares. Ideally, when the market turns around, those shares will be worth more, which will increase the value of your gift.
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