Article By: Jeffrey Skolnick, CPA, M.S. Taxation

We are currently in a situation where the stock market has taken a substantial dip, or correction, mainly based on the outbreak of the Coronavirus. While it is difficult to determine what the final overall impact this situation will have on the market (will it be short term or long term and how far will the market fall?), we may be able to use the correction to our advantage.

How can the stock market falling help my retirement account?

Let me start by saying that if we had the ability to control the stock market, which we unfortunately do not, we would obviously all like to see it continue to rise and have our investments increase in value. The silver lining that I am referring to has to do with your retirement contributions, not the overall value of your account.

If you make a retirement plan contribution you may be able to maximize the effectiveness of your contribution by taking advantage of a down market. In other words, let’s say you are contributing a set amount of money to a retirement plan. In my example I am going to use $10,000, although this theory will work with any amount of money. If you were to contribute the $10,000 to your retirement plan when the market is down, you would have higher purchasing power then if your contribution occurred when the market was more expensive. Put another way, if stock prices and mutual fund prices are down you are able to purchase more securities then if the market was at its height. If the market improves you would be rewarded because you would have purchased while the price was low, and you would watch your value increase.

How can I take advantage of the down market?

I am currently instructing my clients to discuss with their financial advisors (more on that momentarily) when would be the best time to make their retirement plan contributions. At this time individuals are considering when to make their retirement plan contributions. Retirement plan contributions are due by the due date (including extensions) of your business entity. These dates are different depending on your entity. S corporations and partnerships, for example, have a due date of March 15^th unless they are extended in which case the due date becomes September 15^th. Calendar year C corporations, by contrast have a due date of April15th unless extended in which case the due date becomes October 15^th.

The dates just listed are the last day that contributions can be made, however taxpayers have the option of making plan contributions earlier. 

This brings us back to when contributions should be made. If you are making a contribution for your 2019 S corporation income tax return and let’s say you can make the contribution by March 15^th (or September 15^thif you extend the return) you might consider making it earlier rather than waiting until September if you feel the market is at a low right now. Additionally, you may want to consider making all or part of your 2020 contribution as well.

What factors should I consider when making the decision on when to fund my retirement account?

There are a number of factors that should be considered, some of the more important ones are as follows:

• When you believe the stock market is at its low point. Here’s where your financial advisor comes in. No one has a crystal ball, however discussing your situation with a financial advisor that you trust and follows the markets more closely than you do can help you at least make an informed decision and hopefully increase your odds of predicting when would be the best time to act.

• If you are considering prepaying your 2020 contribution you must take into account what you think your business profit will look like in 2020. Keep in mind that you do not have to prepay your entire contribution. If you are a company that typically contributes $150,000 per year to the retirement plans of you and your employees but you’re not sure how your company will perform in 2020, then maybe you would contribute a lesser figure, such as $100,000. You can always contribute more at a later date when your situation becomes clearer.

• Do you have the cash available to make the contribution? While it is a great idea to take advantage of a market correction, if you do not have the funds to make a contribution it may not make sense. I would not want to see a company, or individual put themselves in a situation where even though they are taking advantage of a down market they are giving it all back by paying interest on a loan they needed to secure in order to make a contribution.

Conclusion

This article explains using the stock market correction to your advantage.  This strategy will work with any type of retirement plan, including 401k, pension profit sharing, SEP or IRAs. This strategy will also work with any entity type (S corps, C corps, partnerships, sole proprietorships or LLCs. This strategy is not an exact science as it involves predicting the stock market and for that reason I strongly recommend that you work with both a financial advisor that has his/her eyes on the market every day, a tax professional and a retirement specialist.  

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