Year-End Tax Optimization

Key Takeaways

In a bear market, it’s more important than ever to make sure you are taking advantage of every tax break available to you. There are three key tax strategies that can be especially beneficial in a down market:

• Tax-loss harvesting

• Converting traditional IRA assets to Roth IRAs

• Using qualified charitable distributions to give to charity

In this blog post, we will explore each of these strategies.

Tax Loss Harvesting

Tax-loss harvesting is a strategy that can be used to offset capital gains and reduce your overall tax bill. To do this, you simply sell investments that have lost value since you purchased them and use the losses to offset any gains you have realized elsewhere in your portfolio. This can be an especially valuable strategy in a bear market, when many investments are likely to be down in value. To find candidates for tax-loss selling, look for stocks that you no longer want to own or that have underperformed the market. It’s important to remember that you can only deduct up to $3,000 in capital losses each year, so you may want to consider selling multiple investments to maximize the benefit.

IRA to Roth IRA Conversions

Another strategy to consider in a bear market is converting traditional IRA assets to Roth IRAs. This can be a good idea for two reasons. First, when you convert, you are essentially taking money out of your account and paying taxes on it now. This can be beneficial if you expect to be in a higher tax bracket in retirement than you are currently. Second, because your balance is likely to be lower in a bear market, you will pay less in taxes on the conversion than you would if you waited until later. When you’re converting, you want to look for two key factors to line up: that your IRA / 401(k) balance is down and that you’re personally experiencing a low-tax year. For example, if you’re in between jobs or taking some time off work, you may be in a lower tax bracket than usual. This can make conversion an especially attractive option.

Gifting to Charity via Qualified Charitable Distributions (QCDs)

The third strategy to consider is using qualified charitable distributions (QCDs) to give to charity. A QCD is a distribution from your IRA that is made directly to a qualified charity. Because the distribution goes directly to the charity, it is not included in your taxable income. This can be a valuable way to reduce your tax bill and support a cause you care about. To take advantage of this strategy, simply contact your IRA custodian and request a distribution be made directly to the charity of your choice. Be sure to check with the charity beforehand to make sure they are qualified to receive QCDs.

All three of these strategies can be valuable in a bear market. By taking advantage of them, you can lower your tax bill and keep more of your hard-earned money.