Retirement Planning: Roth IRA and Tax Tactics


Instead of passively waiting for a market recovery, you can take action and avoid investing apathy with retirement planning and tax tactics.


Financial advisors say Roth IRA the investment is “for sale” this year and will provide you with non-taxable gains in the future. And they say “harvesting” tax losses will allow investors to reinvest while reaping rewards.

Who would have thought that taxes could ever be a beacon of hope? But investors beware: tax strategies always require a thorough study of IRS rules.

“Market downturns create favorable fiscal opportunities,” said Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan.

Retirement planning with Roth IRA

Roth IRAs allow after-tax contributions to grow over time without tax on the withdrawal. Traditional IRAs allow you to save money before taxes, but then you have to pay taxes on the growth of the IRA when you withdraw the money. However, when you convert money from a regular IRA to a Roth IRA “you recognize the amount you convert as income and pay taxes on that money,” Watson said. If your income is low this year, so your tax rate is low, now might be the time to strike.

Why? Because your IRA investments have probably fallen in value from the top of the market. So you’ll pay less now to convert those investments into a Roth IRA. “Not only are you transferring the conversion amount into an account that’s still tax-free, but the potential future growth of those conversion dollars will also be tax-free,” Watson said.

Additionally, tax rates are currently “historically low,” said Scott Butler, a retirement income planner with Klauenberg Retirement Solutions in Laurel, Maryland. “We will probably see tax rates go back up in 2025.” Again, this makes the conversion now wiser.

Beware of IRS rules: But that doesn’t mean you have to convert your entire IRA to a Roth IRA. For planning your retirement, it may be wise to do only part of it. If you are already retired and have Medicare or Social Security, you will need to consider the tax impact the conversion income will have on those benefits. Health insurance premiums are based on income and a conversion could increase your premium. And increasing your income with a conversion can also increase “the portion of your Social Security that’s taxed at your tax rate,” Butler said.

Timing of tax collection

Another downturn strategy is to sell index securities, take capital losses for tax deductions, and then reinvest in funds with similar risk profiles. “So the investment moves from one general index to another,” Watson said. It does this for some clients using ETFs, which often trade commission-free today.

The loss incurred on the sale allows married couples to amortize up to $3,000 this year ($1,500 for an individual) and potentially carry a loss forward.

Harvesting also allows retirees to rebalance part of their portfolio and get a tax deduction, Watson says. “As you approach retirement, you want to start de-risking the portfolio,” he said. So a potential retiree may want to get out of an individual stock or higher risk fund. “So we can reposition the taxable portfolio,” Watson said, in addition to getting a tax deduction.

Beware of IRS Rules. The IRS does not allow harvested losses that violate its “wash sale rule.” This means that you cannot incur a tax loss by selling stocks or fund units in a taxable account if you quickly sell and buy “substantially identical securities” within 30 days.

To avoid this restriction and possible verification, buy, for example, “an index fund that tracks a slightly different index,” Watson said. So you could sell an index fund like Vanguard Total Stock Market Index ETF (TIV), which tracks the CRSP US Total Market Index with perhaps a loss. You could then buy Vanguard’s S&P 500 ETF (VOO), which invests in stocks of the S&P 500 index. These two funds are not essentially identical, but they have similar risk profiles.

“We look at the tax harvest every year,” Butler said. “But now is a better time to consider it because asset values ​​are falling.”

ETFs with buffers

ETFs with cushions are another tool some investors might consider in these volatile times, Butler says. The FT Cboe Vest US Equity Buffer ETF (FMAI) is an example. “It has a 10% buffer on the S&P index,” Butler said. “The ETF uses option spreads…so when the market goes down, those options will take away some of that loss that you would otherwise have had.”

ETFs never promise any loss. But the buffered ones will absorb some of the losses, say 8%, 10% or more. The price? You will have to give up some of the upside if the market rallies.

Butler says these funds are useful for “people who would let their emotions take over if an account goes down a lot.”

And they are a tool for synchronizing investments to follow the needs of a retiree or other investor. “Anyone who is going to need money in a short period of time, say for a real estate investment, you wouldn’t want to take the same risk with that money” as they would with money that won’t be needed for a decade or so. more, Butler said.

He added: “Synchronization risk is something retirees don’t necessarily think about as much as they should.” It helps its clients plan for retirement by segmenting assets based on when they will need the money.

“The right investment for the money you’ll need five years from now is not the same as 20 years from now,” he said.


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