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Weigh a Roth individual retirement account conversion
One strategy that’s more attractive in a lower-income year is Roth individual retirement account conversions, which transfer pretax or nondeductible IRA funds to a Roth IRA, according to CFP Catalina Franco‑Cicero, a wealth advisor with Tobias Financial Advisors in Plantation, Florida.
“It’s not a free lunch,” because you’ll still owe regular income taxes on the converted balance, she said. But your bill could be lower in a smaller tax bracket.
Converting funds to a Roth IRA “can be a great opportunity for tax-free growth and future tax-free distributions,” Franco‑Cicero said.
Of course, you don’t have to decide on the strategy immediately. You could wait until closer to the end of the year when you have a better gauge on your projected income for 2024, she said.
Leverage the 0% capital gains bracket
If your income is low enough, you could leverage the 0% long-term capital gains tax bracket to rebalance a taxable portfolio or save on future taxes, experts say.
For 2024, you may qualify for the 0% long-term capital gains rate with taxable income of $47,025 or less for single filers and $94,050 or less for married couples filing jointly.
“The 0% bracket is actually pretty wide,” especially for married couples, Quinones said. “You could be six-figure earners and still fall into the 0% bracket.”
That’s because the bracket is based on taxable income, which is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
One of the perks of the 0% bracket is a chance to reset an asset’s purchase price, or “basis,” by selling the asset and immediately repurchasing it. By resetting the basis, you can save on future capital gains, experts say.
However, you need to run projections of your 2024 taxable income before harvesting gains.
You also need to consider long-term plans for the asset.
The strategy wouldn’t make sense for taxable assets you’re planning to leave to heirs because the assets will automatically get a stepped up basis when you pass, Quinones explained.
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