With the pending tariffs and turbulent markets, the last thing on most taxpayers minds is tax planning. But in the midst of all this turmoil is the potential for tax saving activity available to those willing to plan accordingly. Here is what you need to know.
In a turbulent market, transferring securities during a dip in the market can save a bunch in taxes. So if part of your retirement plan is to balance your funds between pre-tax and after-tax obligations, now might be time to act.
- Recall that traditional IRA accounts, 401(k) and similar accounts must pay income tax upon fund withdrawal. Whereas Roth IRA and Roth 401(k) accounts use pre-tax dollars and there is no tax on future earnings as long as the funds are in the account for five years.
- There’s no limit to the amount you can convert from a traditional IRA, or 401(k) into a Roth IRA.
- Remember that unless Congress acts, the tax rates are going up next year.
- And the old ability to reconvert stocks from a Roth back into a traditional IRA or 401(k) is no longer possible.
So a set of stocks once worth $100,000 but are now valued at $70,000 can be converted now with $30,000 less in taxable income. If you are planning on holding the stock and you believe it will recover in the long run, you have a tax savings opportunity. Plus the future appreciation will no longer be taxed!
This tax savings idea is not for everyone. The stocks could decline further, creating an opportunity cost. So if considering this tax tip, it should be managed in conjunction with the appropriate planning and investment expertise. But if you were considering a balance of your retirement funds between taxable and tax-free sources, you may have a tax planning opportunity at the door step.