Getting a Grip on Taxes: Part 1

By Britta Ferguson, CFP CDFA Vice President, Financial Advisor Wealth Enhancement Group

Tis the season… As we quickly approach the end of the year, it’s easy to get caught up in the holiday madness. We all know that it tends to be a more expensive time of year for most. And with the current market environment, it can feel even more painful.

My goal is to help make this season a little less expensive with two different strategies that can help keep more in your pocket even in a down market.

As a financial planner, I educate people on how the decisions that they make today impact their tomorrow. It’s common for people to think that they’ll be in a lower tax bracket later in life, when that’s not always the case. You pay taxes regardless, so the real question becomes do you pay the taxes now or later? In the last article, we focused on ways to maximize your savings for 2022 and the possible tax deductions that you’d receive based on how you save. This article I’ll focus on two of the Pay the Taxes Now strategies with investments that you already own to manage your taxes moving forward.

1. Tax Loss Harvesting

2. Roth Conversions

1. Tax Loss Harvesting

In this type of market, change can be a good thing. For those buy and hold investors that feel stuck with their investments due to large capital gains, this is a good time to reevaluate your holdings and risk tolerance. Tax loss harvesting is a way to take advantage of a down market and use the capital losses to offset capital gains. Some people even view a capital loss as a tax credit. But remember, you must sell the investment to realize either a gain or a loss.

If there are more losses than gains, you can report an additional $3,000 of losses on your taxes and carry forward any unused losses to once again offset gains in the future. The goal is to reset the cost basis for your holdings, thus creating flexibility to change your investments, diversify your risk, all while being more tax efficient. There are two caveats… this strategy only applies to non-retirement accounts, and you want to make sure to avoid the wash sale rule. The wash sale rule simply put is if you sell an investment at a loss, you have to wait 30 days to repurchase the same or substantially the same investment to be able to claim the loss. Because this can be tricky, we recommend consulting your tax advisor.

2. Roth Conversions

In a nutshell, it’s taking money from a pretax IRA and moving it into a Roth IRA. You’ll pay taxes on the amount converted with the benefit of tax-free growth moving forward. The taxes paid will be on the total amount converted in that calendar year.

In a down market, this tends to be a popular strategy because you’re able to do this with either cash or convert the investment(s) in-kind. The thought

process is to convert an underperforming investment that you feel has a long-term positive growth outlook. By allowing the underperforming investment to rebound in your Roth, it will maximize the amount of tax-free growth in your account. A Roth conversion tends to be more impactful for investors that have a longer time horizon before needing the money and for investors that are comfortable paying the taxes now to get the benefit of tax-free growth moving forward.

These aren’t just seasonal strategies, but something to consider throughout the year moving forward. To figure out what makes sense for you, talk to a tax advisor and financial planner to do a comprehensive analysis of your financial situation, risk tolerance, and goals so that you understand the implications of paying the taxes now vs. paying the taxes later. In the next article, we’ll focus on common year end gifting strategies and the best way to maximize those gifts.

Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor and affiliate of Wealth Enhancement Group®. Wealth Enhancement Group is a registered trademark of Wealth Enhancement Group, LLC.