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Roth IRA Conversions

Damian Gallina, CFA

When any one stock falls to extremely depressed levels, there are things you can do to gain some tax advantages. Unfortunately, when an investment falls sharply inside your IRA, selling it doesn’t result in a tax loss, because transactions inside your IRA are not taxed… just withdrawals from your IRA.  Instead, you could consider converting those beaten down shares to a Roth IRA.  If they recover, any gain that you enjoy after converting to a Roth IRA will be tax free.  

Be mindful that there will be an upfront cost since the conversion is taxed based on the market value of your shares when you convert them.  Although, if you are right and the shares have merit, you’d have paid far lower taxes by converting them at an unflattering market value.  To make a considered decision, you’ll want to evaluate the investment merit of your depressed holding, not simply wishful thinking that since the shares had been priced higher… they will return.  You’ll also want to consider the impact the added taxable income, however large or small, will have on your taxes.  

We can help reason through that.  It isn’t fun to watch investments fall in value, and while we can’t remove that part of investing, we can seize the planning opportunities it creates.