Key Points from 24/7 Wall St.
Given the recent surge in the stock market, now might be a favorable time to consider liquidating a portion of your investment portfolio. For individuals with lower incomes, there is a possibility of paying zero taxes on long-term capital gains. While a Roth IRA conversion could result in higher immediate tax costs, the potential long-term benefits make it a strategy worth exploring.
A sponsored quiz is available to help individuals assess their retirement readiness. Investing in high-quality stocks and holding onto them for an extended period is a reliable method for building wealth. However, for those newly retired, it may be prudent to focus on preserving wealth while minimizing tax obligations.
As of the current writing, the S&P 500 has seen a notable increase of approximately 24% compared to a year ago. This uptrend suggests that now could be an opportune moment to capitalize on some gains by selling a segment of your portfolio. A recent retiree shared their contemplation of cashing out stocks at a favorable tax rate of 0%, which is the rate applicable to long-term capital gains for low to moderate earners this year.
In addition to considering selling stocks, the retiree is also exploring the option of a Roth IRA conversion. The advantages of such a move include tax-free growth of investment, exemption from mandatory distributions, and the ability to make tax-free withdrawals when needed. However, it is essential to acknowledge that a Roth IRA conversion may result in a significant upfront tax burden. Therefore, careful evaluation of both alternatives is imperative.
Opting for a Roth IRA conversion could prove advantageous under certain circumstances. The tax implications of the conversion depend on your income level and tax bracket. While some individuals may pay no taxes on long-term capital gains, moderate earners could face a tax rate of 12% or higher when converting funds to a Roth IRA this year. The primary benefit of a Roth IRA lies in shielding against potential future tax increases, providing a compelling reason to consider this strategy.
If you anticipate moving to a higher tax bracket in the future while currently residing in a lower bracket, undertaking a Roth conversion now could be highly beneficial. Despite the initial tax implications being more substantial compared to harvesting capital gains, the long-term advantages of tax-free growth make it a compelling option. Furthermore, it is crucial to recognize that the tax landscape could undergo significant changes following the expiration of key provisions in 2025, emphasizing the importance of safeguarding against potential negative tax adjustments with a Roth IRA.
Determining whether to harvest capital gains or convert to a Roth IRA involves careful consideration beyond immediate tax considerations. Seeking guidance from a knowledgeable financial advisor is advisable to navigate the complexities and make an informed decision. An advisor can help assess the pros and cons of each option and provide a comprehensive view of the situation.
It is essential to note that the tax implications of long-term capital gains may not always be as straightforward, with even a modest six-figure income pushing individuals into the 15% long-term capital
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