Broker Check

Tax Strategies in a Down Market

  • Sell Loser Stocks To Offset Gains - With the roller coaster ride the stock market often provides, you may have a mix of winners and losers in your investment portfolio. If you have a net gain for the year, you should consider selling enough of the losers to offset the gain and produce a net loss of at least $3,000. This will erase your tax liability from the gains and allow you to deduct $3,000 against ordinary income. Don’t worry about having exactly a $3,000 net loss; any unused losses will carry over to future years. This strategy also works for capital gain dividends from mutual funds. Be careful not to repurchase any of the stocks you sold at a loss for 31 days. If you do, the loss will not be allowed because of the “wash sale” rules. 
  • Check Your Mutual Fund's Capital Gain Distribution Dates - Don’t end the year to find your mutual fund is down, but has still distributed large capital gain dividends that you must pay taxes on. If you sell before the fund's distribution date, you can avoid paying tax on those capital gain distributions. If you plan on reacquiring the same fund, you will need to wait 31 days to avoid the wash sale rules. However, you can buy a similar fund of another fund family immediately. 
  • Convert Your Traditional IRA To A Roth IRA - When you convert a Traditional IRA to a Roth IRA, you generally pay taxes on the value of the Traditional IRA converted. Therefore, the lower the value, the less it will cost to convert it to a Roth IRA. If you have one or more IRA accounts invested in stocks or mutual funds that have declined in value, this might be a good time to convert it to a Roth IRA.

It generally makes sense to convert to a Roth if you have many years to go before you plan on withdrawing your funds. Another reason to convert to a Roth is to pass on money to your heirs. Unlike a Regular IRA, there are no mandatory withdrawals while you are alive (so there would be more money left in the Roth account to pass to your heirs than if you'd kept the Traditional IRA), and your heirs will not be liable for income taxes.

To convert, you must pay taxes on contributions and accumulated earnings in the same year. However, for 2010 conversions, a special rule permits the taxes to be paid in 2010 or deferred until 2011 and 2012.  Prior to 2010, conversions were not allowed if your income in the conversion year was over $100,000; this cap was removed as of 2010, so more taxpayers are eligible to make conversions.

The conversion tax can be a very hefty bill, so if you need to take money out of your IRA to pay the taxes and you are under age 59 ½, you will be subject to a penalty on the amount withdrawn to pay the taxes.

It is recommended to call this office before making a conversion to avoid any unpleasant surprises.