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Consider Roth IRA conversions

With the S&P 500 down more than 20% in 2022, many investors are looking at Roth IRA conversions, which move pre-tax IRA funds into a Roth IRA for future tax-free growth. The compromise is to pay the advance tax.

However, smaller account balances can provide two opportunities: the chance to buy more shares for the same dollar amount and possible tax savings, depending on how much you transfer. Experts say the tax savings can be extra for investors in low-income years.

We regularly discuss Roth conversions for retired clients who have not yet started receiving Social Security because their incomes are temporarily low.

Matt Stevens

Financial advisor at AdvicePoint

“We regularly discuss Roth conversions for retired clients who haven’t started receiving Social Security because their incomes are temporarily low,” said Matt Stevens, a certified financial planner with AdvicePoint in Wilmington, North Carolina. “Job changes can also provide a unique Roth conversion opportunity.”

One of his clients lost her job at the end of 2021 and only started working in April, leaving her income in 2022 well below normal and her portfolio shrinking. “By doing the Roth conversion this year, she’ll be able to turn a tough situation into a big tax savings,” he said.

Consider “Tax Collection”

When the stock market falls, investors also consider “tax loss harvesting,” or selling losing positions to offset gains. But depending on your taxable income, you may also benefit from a lesser-known step known as “tax benefit harvesting”.

Here’s how it works: If your taxable income in 2022 is below $41,675 for single filers or $83,350 for married couples filing jointly, you’ll fall into the 0% capital gains bracket, meaning you can avoid taxes when selling profitable assets.

For some investors, it’s a chance to earn income or diversify a taxable portfolio without incurring the bills, explained Edward Jastrom, CFP and director of financial planning at Heritage Financial Services in Westwood, Massachusetts.

According to the retired client, he was below the income threshold and was able to reduce their large one-stock position, achieving their goals of “providing liquidity and reducing concentrated exposure,” he said.

Evaluate your charitable giving strategy

Instead of being considered an itemized deduction, QCD can reduce adjusted gross income and can satisfy minimum annual distributions.

He recently met with a couple who paid more than $30,000 in required minimum distributions, who separately donated the money to their church rather than rollover tax-free funds from their IRA.

“They claimed thousands more in taxable income than necessary,” Wren said.

If you are 70 1/2 years of age or older, you can use QCD to donate up to $100,000 per year. And transfers at age 72 or older may be considered required minimum distributions. “Clients over 70 and a half really need to pay close attention to their personal circumstances,” Wren added.

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