January 26, 2016 – Most investment advisors will tell you that a down stock market presents a buying “opportunity”. While that may be true, a down market definitely provides a tax savings opportunity. Here are some strategies to consider:
Contributing to a Retirement Plan
Taxpayers’ can contribute fixed dollar amounts to retirement accounts, including IRAs, Roth IRAs, 401(k)s and Roth 401(k)s. As a result, taxpayers who put money in when values are lower can reap tax-free growth when markets rebound. Now is a good time to contribute to 2015 IRAs and Roth IRAs, as contributions can be made up to this April’s tax-filing date.
Converting to a Roth IRA
Roth IRA’s provide the ultimate benefit in tax-favored retirement plans: Both asset growth and withdrawals are tax-free, and the owner doesn’t have to take required payouts starting at age 70½.
The law now allows all IRA owners to convert accounts to Roth IRAs—but income taxes are due on the switch. Converting to a Roth when asset values are down can lower the tax bill.
What if markets drop further? Unusually, the law allows owners to reverse a Roth conversion up to the October tax-filing date of the year after the conversion. So, taxpayers who convert this year have until Oct. 16, 2017 to undo it.
Reversing a Roth Conversion
Are values lower than when you did a Roth conversion last year? You have until Oct. 17, 2016 to reverse it and avoid paying more tax than necessary.
Tax Loss Harvesting
Investors who sell losing positions held in taxable accounts receive capital losses they can use to offset capital gains on the sales of other assets, reducing future taxes on their winners. Although such losses can’t offset gains from sales in earlier years, they do carry forward indefinitely for future use. Investors can also deduct up to $3,000 of capital losses against ordinary income (such as wages) annually.
Investors can also capture losses from holdings that the investor still wants to own. Here the investor sells shares to book a loss and immediately repurchases a similar security so as not to miss out on a rebound. Investors can’t repurchase shares in the original investment for 30 days, or the benefit of the loss will be postponed.
Gifts of Assets
For people who want to gift investment assets, a market decline means the ability to transfer more for the same gift tax cost, which could be zero.
Sorting it Out
We know your probably focused on your 2015 tax filing, but given the current market conditions, it’s a good time to start planning for 2016. Contact Al Nigro at firstname.lastname@example.org or your Dopkins Tax Advisor to discuss how we can find a silver lining in the clouds of a down market.
About the Author
Albert A. Nigro CPA, CVA
Al provides accounting, tax and consulting services for privately held companies and their owners. He consults on income tax planning, financial and operational management and business valuation.