Two Money-Saving Tax Tips

Taking IRA Withdrawals During a Bear Market - And A Crypto Tax Advantage

Let’s talk about two important things you need to know about regarding your taxes. I'm going to save you a lot of money.

First, The New York Times had a really wonderful story recently about IRA accounts and RMDs required minimum distributions. I know you're familiar with these things. Once you reach the age of 72, you have to begin making withdrawals on an annual basis from your retirement account. And this article in The New York Times is a really good one that talks about the implication of having to make withdrawals during a bear market.

However, the Times missed a key phrase. Here's what the article says, "The amount account owners have to withdraw varies from year to year based on their account balance, as well as their anticipated lifespan. And the distributions are taxed as ordinary income". That statement is mostly correct, but there's a phrase missing that could cause you a big tax trap. Here's the deal. The New York Times article says that the amount of money you have to withdraw from your IRA each year is based on the account balance. That's not totally true. It's based on the account balance as of the past December 31.

Now, normally, this isn't a big deal if you get it wrong, if you withdraw money based on the current balance, as opposed to last December's balance, because in most years, the current balance is higher than the prior balance, because the stock market and the financial markets keep rising in value.

What If You Overpay Your Taxes?

The IRS never gets upset with you. If you withdraw too much, you'll simply pay more in taxes by withdrawing more than required. But look at what has happened in the financial markets this year. Your account balances are down, aren't they? Your stocks, your bonds, your mutual funds, your ETFs, crypto. They're all down in value. If your IRA account is down in value and you make a withdrawal based on calculating the current balance, you won't withdraw enough money because the balance last December was higher than the value today. And if you get it wrong, you'll withdraw too little. And if you withdraw too little, you will pay too little. In taxes and the punishment, you'll blow a 50% penalty on the amount you were supposed to have withdrawn but didn't.

Now, this tax trap is a big deal, but it only occurs in the rare occasions when the stock market falls. That's what's happening right now. The stock market has fallen a lot. So has the bond market. Therefore, pay attention to this. Be careful when taking financial advice from the media. They and their good efforts (well intentioned) - goal to get it right, missed on a simple little phrase. It's not based on your current account balance, but the account balance as of last December 31.

Get it wrong, you could cost yourself a lot of tax money.

A crypto tax tip: Sell now and re-buy at current lower prices

Here’s another tax tip. Bitcoin and Ethereum are down sharply in value this year. That's probably annoying you like it is anybody who loses money in an investment. But here's some silver lining for you. You can sell your Bitcoin or your Ethereum and immediately buy it right back. Why on earth would you want to do that? Because under tax law, if you sell it, you can claim a loss on your tax return. And by buying it immediately right back, you still maintain the position without having to worry that you'll miss out on any profits if the price begins to recover. You can't do this with stocks or bonds or real estate in those rules when you're dealing with securities. If you sell an asset for purposes of declaring a tax loss, you have to wait 30 days to buy it back. And in those 30 days, anything can happen. But that problem doesn't occur with crypto because Bitcoin and Ethereum, according to the SEC, are not securities and they therefore are not subject to the wash-sale rule that is in place by the IRS.

So whereas I can't tell you to play this game with stocks or bonds or ETFs or mutual funds, it's a great tax strategy for crypto. So you can sell your Bitcoin, sell your Ethereum and immediately rebuy them right back and you'll be able to take the tax loss at the same time. Talk to your tax and financial advisor. They should have already told you this, but if they didn't tell them, I sent you. I'm Ric Edelman. This is the truth about your present.