3 Tax-Saving Strategies in This Market Sell-Off | Personal Finance

Market downturns present an interesting opportunity for Roth conversions. Because account values ​​are down, the amount you have available to convert is less than it had been when the market was performing well. In these circumstances, if you do choose to convert money to a Roth account, you’ll end up including a smaller amount as ordinary income on your tax return, thereby paying less tax on the conversion.

Imagine that you have $100,000 sitting in a traditional IRA and all of the money is considered “pre-tax” (ie, you haven’t yet paid tax on the money). If the market were to crash 40%, you’d be left with $60,000 in the account.

If you were to perform a Roth conversion after your account had declined, you’d add $60,000 to your ordinary income for the year — rather than the $100,000 you’d add if you initiated the conversion when the market was higher. The big benefit here is that you only need to pay tax on $60,000 and you can keep the same number of shares that you had in your pre-tax account. When the market recovers, all of the money is tax-free forever.

2. Offset capital gains with capital losses

If you’ve been meaning to sell a stock for some time and the market has turned south, you might be looking at a good opportunity to finally do it — all while lowering your tax bill at the same time.


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