Take Advantage of Recent Market Crash to Lower Retirement Taxes

CPAs are urging their clients to make lemonade out of lemons with the recent sell-off in the stock market by using a simple tax strategy to reduce their taxes when they retire.  The basic strategy is to put off taxes for later by making good use of IRAs and especially Roth-IRAs.

“Since the market is down, now is a great time to do a Roth conversion,” attorney and CPA James Lange told the Pittsburgh Tribune-Review.  Lange is the author of Retire Secure! Pay Taxes Later, which sold 100,000 copies and reached No. 1 in the retirement planning category at Amazon.com. Lange just finished its second edition, updating tax law changes, which will be published in February.

How can IRAs help in a market where the Dow Jones industrial average dropped from about 11,000 to about 8,000 within three weeks?

A traditional IRA may buy more securities, as the market is down and the investment capital is pre-tax dollars. A Roth IRA might even be better, said Lange.

In a Roth conversion, the person pays taxes on the amount moved to the Roth. The tax liability depends on one’s income-tax bracket. So, it’s better to convert the Roth after retirement, when the person is presumably in a lower tax bracket.

“If the market goes up later, the amount in the new Roth IRA account will grow income-tax free,” he said. “And when you or your heirs make withdrawals from that Roth IRA, it will be income-tax free.”

For example, a traditional IRA that was worth $100,000 a few years ago might have declined in value to $80,000 today, meaning there’s no taxable gain. Then, if that $80,000 is switched into a Roth IRA and increases to $120,000 in two years, the gain is tax-free because those are the rules of a Roth.

Had the money stayed in an IRA and the person in a 25 percent tax bracket withdraws all $120,000 two years from now, he would pay $10,000 in taxes.

One caveat, said Lange, is that those with gross income above $100,000 must wait until 2010 before they can convert a traditional IRA to a Roth IRA.

Lange also allows for the fact he is not an expert money manager. So, what if the market doesn’t recover in the next year or two, but continues to fall in a long, nasty recession?

To learn more, visit James Lange’s website.