Pay Taxes and Keep Profits and Dividend Income Tax Free
The best time to move assets from a traditional IRA to a ROTH is when the market is going down. I always look for stocks/ETFs that are down and then move them from my IRA to my ROTH IRA. It has proven to be a very profitable way to gain tax-free income and pay less income tax in the present. Let me review the four reasons why I do this. I moved 200 shares of SCHD to my ROTH on Friday.
Advantage Number One is Income Taxes
When I am obligated to withdraw the government-mandated RMD (Required Minimum Distribution) from my IRA, I will be paying taxes. The larger the account balance, and the more it grows, the higher our taxes will be. I can manage our overall tax burden on an annual basis to keep income taxes reasonable. It often makes sense to pay the tax today, instead of waiting until I have to pay even more taxes as the result of taking my RMDs at age 72 and beyond. So I will be paying taxes on income of about $15,000 because the shares closed on Friday at $74.70. Therefore, my taxes can be calculated and paid as a part of my quarterly estimated taxes.
Advantage Number Two is Investment Appreciation
I believe SCHD will continue to do well in the future. Furthermore, although all of the major indices are down more than 10% in the last six months, SCHD is only down 4.57% during that same time period. There are a couple of reasons for this, not the least of which is that investors tend to buy-and-hold dividend growth investments and don’t sell during market panics.
Advantage Number Three is Tax-Free Dividends
Even if the shares do not grow in value, it is highly likely that SCHD will continue to pay increasing dividends. the 5-year dividend growth rate is 11.98%. In a world where inflation is growing for food, transportation, medical costs and just about everything else, having a growing tax-free income is very appealing. If I keep the shares, I can easily expect to receive $452 in tax-free income during 2022. One of the reasons I did the move on Friday is that I expect a dividend announcement by June 24.
Advantage Number Four is Tax-Free Options Income
While the shares were in my IRA, I traded options on SCDH five times during 2021. Two of the trades were cash-covered puts, and three were covered call options. I earned $227.58 for those trades. All future options trades in my ROTH IRA will be tax-free income.
About SCHD
I like SCHD because of the increasing dividends, the good diversification across several different sectors, and the more focused approach with 104 holdings. Even during the pandemic, SCHD saw increasing dividends. The following images help illustrate the reasons I invest in shares of SCHD.
Schwab Strategic Trust – Schwab U.S. Dividend Equity ETF is an exchange traded fund launched and managed by Charles Schwab Investment Management, Inc. It invests in public equity markets of the United States. It invests in stocks of companies operating across energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, communication services, utilities sectors. It invests in growth and value stocks of companies across diversified market capitalization. It invests in dividend paying stocks of companies. It seeks to track the performance of the Dow Jones U.S. Dividend 100 Index, by using full replication technique. Schwab Strategic Trust – Schwab U.S. Dividend Equity ETF was formed on October 20, 2011 and is domiciled in the United States.
Full Disclosure
Cindie and I own 750 shares of FNF as a long-term investment. Therefore, our combined tax-free income from this investment is $1,695 per year.
The following images show what this conversion looked like on Fidelity’s Active Trader Pro. To do the conversion, I called Fidelity and they finished the conversion in about five minutes while I was on the phone with them.
Know Your Flocks & Herds 
Good advice Wayne. We have been doing some moving to Roth.
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