Do you have a strategic plan to reduce your Federal income taxes and grow your tax-free income? Here are some ideas to get you started.
When I bought 50 shares of SYF (SYNCHRONY FINANCIAL) on January 24, 2020, my intention was to gradually add shares over the next several months. Enter the coronavirus pandemic and the market, especially financials plunged. I had paid $32.80 per share for SYF, so my cost basis was $1,640. At one point the shares were trading for less than $13 per share, so my investment was now worth $650. You could say I “lost” $1,000. I could have sold, but I didn’t. I saw opportunity on the horizon.
As some of the panic abated, the shares began to recover. Then, on April 7, 2020, I called Fidelity Investments and instructed them to move my 50 shares from my traditional IRA to my ROTH IRA. On that day the cost basis of the investment became $806, and that is the “income” I will realize for our 2020 income tax return. The reason I did this is that I think the shares could easily climb back to $30 per share. They have already gained 14% since I did the move. But there is yet another advantage. The dividends I receive on the 50 shares, based on the current yield, will be $44 per year. Those dividends are no longer taxable income.
This is yet another reason that I don’t keep assets in an employer’s 401(k) plan when I end my employment with that employer. I want to be able to quickly make changes that give me a long-term strategic benefit. So, if you have a traditional 401(k) at a former employer, there are several reasons to move the 401(k) to a traditional IRA you can manage going forward. You might be able to do something similar with those assets during a bear market or market correction.
Think strategically and have a tactical plan.