Let’s face it… the financial markets have been ugly lately. Nobody likes to see their account balances down, but there are some tax-saving opportunities that can help reduce the pain in a down market. Let’s take a look at a few.
Consider a Roth conversion
Roth conversions are a blog for another day. However, in short, a Roth conversion involves moving money from a pre-tax retirement account such as a traditional IRA to a post-tax retirement account referred to as a Roth IRA. When you perform a Roth conversion, the converted amount is taxable income. Roth conversions can often trigger significant tax liabilities. However, it has the long-term benefits of distributions being tax-free during retirement.
Market downturns present a tax saving opportunity for Roth conversions. Since account values are down, the amount you have available to convert is less than it had been when the market was higher. In this situation, if you convert to a Roth IRA, you will end up including a lesser amount as income on your tax return, resulting in paying less tax on the conversion.
Offset capital gains with capital losses
Have you incurred a capital gain this year? Capital gains can be offset with capital losses. By selling a few positions in the red, you could harvest capital losses to offset a capital gain you have for the year. Don’t go to crazy selling investments for a loss. A net capital loss is only deductible up to $3,000 per year with any losses more than $3,000 carried forward indefinitely.
An opportunity to rebalance
An important consideration for any investment portfolio is diversification. This requires your portfolio to be rebalanced periodically after certain positions have increased or decreased in value. Rebalancing can be challenging when your investments have increased in value. Rebalancing would require selling the investment which would trigger taxable income. When your investments are down the tax consequences are less of a concern.
To further discuss these tax strategies, contact ClarkSilva today.