Market downturns present an attractive opportunity for Roth conversions. Since account values are falling, the amount you have available to convert is less than it was when the market was doing well. In these circumstances, if you choose to convert money to a Roth account, you will end up including a lower amount as ordinary income on your tax return, thus paying less tax on the conversion.
Imagine you have $100,000 sitting in a traditional IRA, and all of the money is considered “pre-tax” (meaning you haven’t paid any taxes on the money yet). If the market crashed 40%, you would have $60,000 left in the account.
If you were to make a Roth conversion after your account declined, you would add $60,000 to your ordinary income for the year, rather than the $100,000 you would add if you initiated the conversion when the market was higher. The big advantage here is that you only have to pay tax on $60,000 and you can keep the same number of shares you had in your account before tax. When the market recovers, all the money is tax-free forever.
2. Offset capital gains with capital losses
If you’ve been meaning to sell a stock for a while and the market has headed south, you may be looking for a good opportunity to finally do so, while lowering your tax bill at the same time. .
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