There are three strategies that may work for high earners right now. Click here for video.
The first is tax loss harvesting. Many of us have losses in our account since stocks have declined this year. In tax loss harvesting, we sell these assets while they are low to create a loss in the account that can be used to offset gains from earlier in the year or carried forward. Now I know I have shared that we should stick to our asset allocation, so you don’t want those funds to stay in cash, but instead go to a very similar investment so that when the market recovers, your account recovers. For example, if you were in one U.S. stock index fund and exchange to another stock index fund. There are certain rules as well as risks to this strategy so make sure you work closely with your accountant and financial advisor before implementing.
The second strategy is to take advantage of a ROTH IRA conversion. If you are a high earner, you likely can not contribute to a ROTH IRA directly. You can, however, do a ROTH conversion. This means taking assets from a traditional IRA while the account is low and then moving it to a ROTH IRA so when the market recovers, the assets will increase in value. In a ROTH IRA the earnings are tax deferred and you do not pay taxes on the withdrawal. In a traditional IRA the earnings are tax deferred, but when you withdraw funds, you pay tax on ordinary income. So this strategy may benefit some people, but again check with your advisors.
The last one is related to kids coming home from college. If you are like us, you may have received a refund of some room and board from your kid’s university. It would be best to roll these dollars back into the 529 plan so they can grow tax-deferred. You want to make sure you do not use these funds for non-qualified expenses as you could be subject to taxes and penalties.
I hope you found this information helpful. Stay healthy and well. Best, Steph