Market downturns can offer unique financial and tax planning opportunities, particularly through strategies like tax-loss harvesting and Roth conversions.
Tax-Loss Harvesting
Rather than limiting tax-loss harvesting to year-end planning, consider opportunities throughout the year. During market declines, investors can reduce their tax liability by selling investments at a loss to offset capital gains. They can then reinvest in similar assets at a reduced cost, setting up potential gains when markets recover.
This strategy can significantly boost overall equity returns. A study from George Mason University estimated that when the market is negative, tax-loss harvesting could add up to 4.5% to annual returns for investors in the 35% tax bracket.*
Roth Conversions
A declining market can also present an ideal time to convert traditional retirement accounts to Roth IRAs.
When account values are down, investors can convert more shares for the same tax bill. Once converted, assets grow tax-free within the Roth account, which is especially advantageous if the market recovers. (Ideally, taxes should be paid from separate cash reserves rather than the converted assets, to optimize the potential for growth within the Roth account.)
This strategy comes with a caveat: predicting the market “bottom” in any one year is nearly impossible. One can never know if the market will continue to decline. There's also an opportunity cost, that of purchasing additional shares at reduced prices.
Bottom Line
Incorporating tax-loss harvesting and Roth conversions as part of a regular financial strategy — perhaps especially during market downturns — can help optimize long-term returns and tax efficiency. However, it’s crucial to assess your individual circumstances and consult with a financial advisor before acting.
* “Just How Valuable is Tax Loss Harvesting?” The Wall Street Journal, December 4, 2021, accessed March 14, 2025.