Tax Reduction Strategies To Help Your Portfolio During A Crisis

Let’s say, for example, that your 2020 RMD was $100,000, and you were in the 32% tax bracket. You might now be in the 24% bracket since you don’t have to report that $100,000 of income. You could consider converting enough to your Roth to maximize the 24% bracket, say $50,000. That way, you can take advantage of a lower tax year but still move funds to a vehicle that will grow free of taxes.

5. Contribute to retirement. You may be in a higher tax bracket now than you expect to be when you plan to withdraw money from your retirement accounts. If so, making contributions to a traditional IRA or 401(k) can be a significant tax strategy. When you make this portfolio decision, you get the tax deduction now.

For example, the maximum contribution for a traditional IRA is $6,000 if you’re under 50 years old. For those over 50, it’s $7,000. If you contribute that in 2020, you can deduct $6,000 (or $7,000) from your income on your 2020 tax return. Whenever you do take money out of the IRA later, those distributions will be taxable at ordinary income rates.

On the other hand, you may be in a lower tax bracket now than you expect to be in later. If so, contributions to a Roth IRA may be a better portfolio decision when thinking about how to minimize taxes. Although you’ll miss out on that $6,000 deduction on your 2020 tax return, those funds will grow tax-free. When you withdraw money from the Roth IRA during your retirement, you can also do so tax-free.

No matter what account you contribute to, it’s a good idea to take this step when the market is down. At the lower value, you’re able to purchase more shares with your dollars.

6. Practice charitable gifting. If you’re in a high-income tax bracket, making a larger charitable contribution than usual can net you a tax deduction. Donor-Advised Funds, or DAFs, are a great way to accomplish this. DAFs allow you to contribute several years’ worth of charitable gifts at once. Although the money can be distributed to charity over many years, you receive the tax deduction the year you add to the account.

Now that the standard deduction has increased lumping several years’ worth of charitable contributions into one can be more beneficial. However, that’s only the case if it is enough to itemize your deductions instead of taking the standard deduction.

The CARES Act affects this strategy for 2020, too. It added the ability to take an “above the line” deduction of up to $300 for cash gifts to charity. This is one way to get a small charitable benefit, even if you do take the standard deduction.

6. Add to a 529 plan. Another tax reduction strategy you can leverage right now is to contribute to a 529 plan. A 529 plan is a savings account for education-related expenses, and funds contributed to the account grow tax-free.

Some states even offer a tax deduction for contributions to 529 plans. This portfolio management and investment decision that is particularly advantageous when the market is low. That’s because you can get more bang for your buck.

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