By Kate Dore, CNBC featuring Nick Strain, CFP®, CPWA®, AIF®, Senior Wealth Advisor at Halbert Hargrove
After several months of soaring inflation, stock market volatility and interest rate hikes, many investors are feeling weary about their finances. But the prolonged stock market downturn offers a silver lining for some investors: opportunities to reduce their tax bill.
Here are some of the most popular year-end moves to consider, according to top financial advisors.
‘Once in a multiple-decade opportunity’ with fixed-income losses
With the S&P 500 Index down more than 20% this year, many advisors have explored so-called tax-loss harvesting, using losses from brokerage accounts to offset other profits. Once losses exceed gains, you can subtract $3,000 from regular income and carry the rest forward for future years.
While many focus on stock market losses, there’s also a “once in a multiple-decade opportunity” to harvest declining fixed-income assets, such as bonds, said certified financial planner Devin Pope, partner and senior wealth advisor at Albion Financial Group in Salt Lake City. The firm ranked No. 3 on CNBC’s 2022 FA 100 list.
However, you need a “game plan” before selling assets if you’re hoping to maintain portfolio exposure, said Pope, because the “wash sale rule” blocks the tax write-off for buying a “substantially identical” asset within a 30-day window before or after the sale.
Roth IRA conversions may pay off in a down market
Another popular strategy when the stock market dips is a Roth individual retirement account conversion, said Nick Strain, a CFP and senior wealth advisor at Halbert Hargrove, in Long Beach, California. The advisory firm ranked No. 8 on the FA 100 list.
You can use Roth conversions to transfer pre-tax IRA money to an after-tax Roth IRA, for tax-free future growth. The downside is you must pay upfront taxes on the converted balance.
