If 2021 was a low-income year, you might want to consider some last minute moves.
Let’s say you started a business in 2021 and all those start up expenses added up and your showing a loss for 2021.
That could give you a really low taxable income for the year.
And then you got 2 moves you’d be smart to consider.
Roth Conversion
If you’ve got a Rollover IRA that you’ve never paid taxes on, consider paying taxes on it NOW and converting it into a Roth IRA.
The two caveats to this strategy are:
1. You have to pay the taxes out-of-pocket, not from the IRA. Otherwise, the conversion will be considered a distribution and instead of just paying taxes, you’d also pay a 10% penalty (if you’re younger than 59.5)
2. Make sure your tax bracket now would be lower than it would be in retirement. A good rule of thumb is to keep your taxable income less than your current living expenses.
Tax GAIN Harvesting
You’ve probably heard of tax loss harvesting, but you may never heard of tax GAIN harvesting.
This is when you sell an investment that has a GAIN and then buy it right back.
You’ll realize the gain and pay capital gains tax on it, but when you buy it back your cost basis will now be your new purchase price.
In effect, you pay capital gains to reset your cost basis higher, so when you sell it during a “normal” income year, you’ll pay less in taxes.
Neither one of these should be done on your own. Contact your financial planner for help.
