When your stocks lose value, taking capital losses can pay off. You can cut your taxes for the current year and position yourself for future tax benefits. Unfortunately, such tax-loss "harvesting" works only in taxable accounts.
If you take losses in a tax-deferred account such as an IRA, there’s no tax advantage. However, if your income this year is $100,000 or less, on a single or joint tax return, there is a way to benefit. You can convert all or part of your traditional IRA to a Roth IRA. If your IRA has lost value because of the bear market in stocks, you’ll owe less tax on the conversion.
After a conversion, Roth IRA withdrawals can be tax-free. Thus, if stocks rebound you’ll be in a position to pocket untaxed stock market profits. To convert a traditional IRA to a Roth IRA, you just tell your IRA custodian what you’d like to do and fill out some simple forms. Subsequently, all Roth IRA distributions will be tax-free after five years and after you reach age 59 1/2.
