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Strong returns are hard to find in 2022. Three tax savings strategies to sock away a few bucks


In a year when attractive market returns are scarce, investors would do well to squeeze a few bucks from their portfolio through tax savings opportunities. July’s performance helped the markets curtail some of their 2022 losses, as stocks rebounded and bond yields retreated. Still, the S & P 500 is still off about 13% for the year, and balanced portfolios have suffered. The iShares Core Growth Allocation ETF has slipped by 12% so far. Enter the concept of tax alpha, which refers to the additional return you can generate through tax savings strategies. “This is a time when people feel out of control; the way the markets move isn’t something we have in our grasp,” said Brenna McLoughlin, senior advisor and a certified financial planner at Wealthstream Advisors. “It makes it easier to stay invested if you can find other ways to take a control and find a way to take advantage.” These three tax management tips will let you take the wheel on your portfolio at a time when the markets seem to be skidding. 1. Tax loss harvesting — and cleverly grabbing gains This year has given investors no shortage of areas to realize tax losses in their brokerage accounts – that is, dumping a losing position in your portfolio to offset capital gains from other appreciated assets you have sold. If losses exceed gains, you can apply up to $3,000 a year to offset ordinary income. Be aware of the wash-sale rule to ensure you can take the loss and save on taxes. That means, if you sell your investment at a loss and purchase an asset that’s substantially identical to it within 30 days before or after the sale, then that’s known as a wash sale – and the IRS will block you from claiming the tax loss. In some situations, it also makes sense to offload some positions that have a long-term capital gain and buy them back at today’s depressed prices. “You would strategically take some gain now and raise your basis in case you want to sell the asset in the future and have less in taxable gains,” said McLoughlin. Selling winners might also make sense if you happen to be in a lower tax bracket this year but face the prospect of higher taxes in later years, according to Jamie Hopkins, managing partner of wealth solutions at Carson Group. “If you push out too much income into the future, you get future income at higher marginal rates,” he said. “You might have been better off paying lower rates incrementally and taking advantage of offsets that you have.” 2. Be mindful of asset allocation Ideally, investors have a combination of taxable brokerage accounts, tax-deferred accounts like 401(k) plans and tax-free savings, which include Roth individual retirement accounts. Ensure your assets are in the right account based on their tax treatment to optimize your tax liability now and in the future when you draw down income in retirement. Taxable accounts may be ideal for exchange-traded funds and other funds with low portfolio turnover – and thus less likelihood of spinning out surprise taxable capital gains . Muni bonds, which pay interest that’s exempt from state and local taxes if you live where the bond is issued, may also go into brokerage accounts. Consider keeping high-turnover funds and real estate investment trusts in tax-deferred accounts. Meanwhile, high growth assets might be good candidates for Roth accounts, where they can accumulate value tax-free. You can withdraw from Roth accounts free of taxes in retirement, subject to certain rules . “You’ll want those assets to grow substantially, and if you can pay less tax on it, even better,” said Hopkins. 3. Shore up long-term savings Take advantage of fallen portfolios and consider converting some of your traditional IRA amounts into a Roth IRA. Traditional IRAs allow you to invest pretax or tax-deductible amounts over time, but when the time comes to take withdrawals from the account, it’s subject to ordinary income taxes. An additional 10% penalty tax kicks in if you’re under age 59 1/2 . By converting to a Roth IRA, you pay income taxes upfront but enjoy tax-free growth and distributions. That’s where this year’s downturn shines: A lower portfolio value means you’re paying less in taxes compared to what you’d owe if you converted while stocks were faring better. Kick in a few extra dollars into your longer-term accounts so that you’re buying stocks when they’re relatively cheap. “People with traditional IRAs might be in the habit of putting in contributions at year end or before the annual deadline, but if you talk to your accountant and figure out what the picture might be for the year, there’s no reason to wait,” said McLoughlin. “Put the cash in now and take advantage of discounted pricing.”

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