Using a Roth Conversion to offset an Active Income Loss

Last week in our end of the year tax strategies, we spoke of clumping or pushing property taxes in order to maximize your tax deductions. This weeks topic is another handy technique that needs to be completed before year-end to work.

This technique is especially helpful if you are less than 59.5 years young – next week a similar add-on technique if you are over age 59.5 !

Roth Conversion to Offset a Loss

We are not huge fans of the Roth conversion, but for the correct circumstance it can be a valuable tool. (Our lack of fondness to the IRA to Roth conversion is the immediate taxable dollar amount that is created.)

A Roth conversion in our context is the conversion of a part or all of an IRA into a Roth.  While direct Roth contributions are limited by various rules and regulations, a conversion of an IRA into a Roth is open to pretty much anyone.  Converting an IRA into a Roth creates an immediate active taxable income event in the year the conversion occurs.

You may notice we keep mentioning “Active” income — think wages, operating income/loss, medical related expenses (one of the most common reasons for negative incomes) – NOT depreciation from property or losses from most property – or even losses from investments (portfolio income or losses) greater than $3000 – these are not offset from a Roth conversion.

In the event you have negative active income this year, consider a Roth conversion to offset the loss – in many cases the loss will not be carried forward (lost forever) if you do not offset it!Roth Conversion

Quick Example: As of today you have $50k of losses from a qualifying active activity – rather than lose that loss, convert $50k of your IRA, creating an offsetting $50k of income to flatten your income – you might even consider converting your loss plus your deductions.

Since partial conversions are available, you can drive the amount of income you show against your loss —

  1. Flatten your loss – not lose it
  2. Possibly freely convert your taxable IRA into a Roth
  3. Future appreciation in your Roth will be without taxes – tax-free withdrawals too

This is a sophisticated technique and requires estimates, planning and professional council — do not try this without help from your financial planning and tax advisor – a mistake can be costly.  Done correctly, the rewards can be outstanding! Oh — this post is not a recommendation, only  a reminder of what is available –

Have a Great — Less Taxable — Day!

John A. Kvale CFA, CFP
8222 Douglas Ave # 590
Dallas, TX 75225





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