Three Ways to Turn Investment Lemons into Tax Lemonade

October 5, 2022

By:  Clinton Miller, CFP®

Investment returns are bad this year.  Is it frustrating to watch your accounts drop for reasons out of your control?  You’re probably familiar with the common advice to take the long-term view, not make any changes, or even to just ignore account statements.

How’s that working for you right now?

It’s really tough to sit and do nothing!  An ugly account statement feels like a threat to our future well-being, and we’re emotionally hard-wired to act when we perceive threats.  But doing nothing is good advice. Typically, you are better off to leave your investments alone in a major market downturn.

So if you shouldn’t mess with your investments, and you can’t control market conditions, what can you control?  Are there decisions you can make today that improve your finances when this storm passes?

Turns out, the answer is yes- you can control the timing of taxable events on your long-term investments. This is often overlooked, and it can save you a bundle in taxes.

Take a closer look at these three strategies as you close out your year.  You might be able to turn some Investment Lemons into Tax Lemonade.


Tax Lemonade Strategy #1: Roth Conversions

If you have a large retirement account, then you probably have a large tax bill due when you spend those dollars.

A Roth conversion moves money from a qualified retirement account into a Roth account. This is taxable- but you’re triggering taxes when the shares in your account are at a much lower value. In exchange, the money will continue to grow tax-free until you retire, when it becomes available completely tax free. Converting when markets are down can drastically reduce the overall taxes on your retirement income.

Roth Conversions are a fantastic strategy to reduce income taxes for you, your surviving spouse, and any heirs that inherit your retirement accounts. You may even be able to complete a conversion within your workplace retirement plan. Consult with a tax professional before making any decisions: This strategy may not make sense if you’re working & in a very high tax bracket.


Tax Lemonade Strategy #2: In-Kind RMD’s & Distributions

It’s depressing to take Required Minimum Distributions from retirement accounts in a down market. But an In-Kind transfer lets you satisfy your RMD without liquidating the shares in your account.

Why does this matter? Because you decide which shares to transfer out.  If you transfer out the shares whose value likely increases most in a recovery, those expected gains will be taxed at a lower rate.  You’re also reducing taxes for whomever inherits your money.

This doesn’t work if you need all your RMD for income, or if you need to pay the taxes from the distribution itself.


Tax Lemonade Strategy #3: Tax-Loss Harvesting

If you sold assets that have appreciated, you may have high capital gains tax this year. Tax-loss harvesting can help offset those gains and lower your capital gains income taxes.

Here’s the strategy:  If you have a non-retirement portfolio, look for positions that have lost value. Sell them, then use the proceeds to buy investments that will perform identically.

Congratulations! You’ve just realized capital losses to offset against gains, reducing the tax you’ll be paying. Because you bought similar investments to those you sold, the effect on your long-term returns should be minimal.



Are you missing tax-savings opportunities in your investments?

A good financial plan focuses what matters most: Building greater connection between the resources you have, the people around you, and your goals for the future.

Its our fall review season, and we’re having pleasant financial conversations focused on what matters to our clients.  We’re always keeping an eye out for tax opportunities that fit their plans. And we make handling the details easy for our clients, so they have more retirement spending power without any extra hassle.

Want to explore tax opportunities inside your portfolio? We’re happy to review your portfolio and help you find them.

Schedule a free intro call  HERE.



Securities offered through Kestra Investment Services, LLC, (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC, (Kestra AS) an affiliate of Kestra IS. Pleasant Wealth is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: