The Tax Surprises Hidden in Market Ups and Downs
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Here's your Money Briefing for Thursday, April 17th. I'm Julia Carpenter for The Wall Street Journal. Market ups and downs can ripple through so many parts of your financial life, from your home ownership dreams to your college savings plans and beyond.

But they can also affect your taxes. Sometimes, as WSJ readers share, in surprisingly beneficial ways. The ones who've shifted some of their holdings into more conservative investments seem happier. They say they're not looking at market swings but enjoying retirement. We'll talk with Wall Street Journal reporter Ashleya Ebeling about the tax considerations to keep top of mind throughout this period. That's after the break. Data is everywhere.

When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks. As we like to say here at The Wall Street Journal, tax day is April 15th, but tax season is all year long. So even after the big day, reporters like Ashleya Ebeling are still tracking what recent market ups and downs mean for your taxes.

Ashley, we're talking about how this volatility could affect big financial decisions. I know a lot of people probably panicked last week and sold some stock at a loss. In your story, which is linked in our show notes, you mentioned there might be a tax-related silver lining there. So that's true. If you dumped or want to dump poorly performing investments in taxable accounts, you can harvest those losses. And that basically means you use them to offset capital gains or income losses.

You might be able to use up to $3,000 of losses per year to offset ordinary income on your tax return. And the great thing is losses can help you now or in future years. How would that work with something like capital gains, for example?

People looking in these taxable accounts, actually, a lot of people are still sitting on big capital gains and taking those gains. If you sell stocks you bought for $10,000, say, for $8,000, that $2,000 loss can offset those other capital gains. Is there anything else in this volatile market period that you think could take someone by surprise like that? Well, you do have to be careful selling stocks at a loss because...

If you sell a security to buy one and then buy one that's too similar to the one you sold without waiting 30 days, you trigger something called the wash sale rules. And that means you wouldn't be allowed to recognize the loss.

I have to imagine some retirees may be especially worried about taking distributions from their retirement accounts. Can you tell me more about why that in particular can feel so painful to investors right now? So required minimum distributions can be especially painful in down markets because they're set based on the previous year's account balances. And in 2024, markets were booming. So you're looking at your December 31st, 2024 balance, and that's

what you base the 2025 required distribution on. But retirees who've planned well should have some cash reserves in their retirement accounts knowing that these required distributions are coming due. For those who don't, one thing they can do is they can sell in regular increments over the course of the year, and that way you're not locking in losses at market lows. LESLIE KENDRICK

What are you hearing from retired readers about this? The ones who've shifted some of their holdings into more conservative investments seem happier. They say they're not looking at market swings but enjoying retirement. And they seem happier just because they feel that they're protected. Exactly. What about

converting portions of traditional retirement savings into Roth IRAs or Roth 401ks? How does that work? So that's another big move that people have been looking at really because of the Trump tax cuts of 2017. There's been this period of widened tax brackets that lets you

get more money into these Roth accounts at lower rates. So it's this upfront tax bill can be steep because the converted balance counts as taxable income, but the point is they're doing it for the future.

What are the main reasons someone would want to do that? So the main reasons you'd want to convert traditional retirement accounts to Roths are if you think you'll be in a higher tax bracket when you pull the money out than you are now. Another reason would be if you want to leave the money to heirs who would be in a higher tax bracket.

The thing is, with heirs, it's a really good play for legacy planning because most heirs can keep an inherited Roth IRA growing tax-free for another 10 years after they inherit it. And some, if they're close in age to the deceased or if they have a disability, they can keep it for their lifetimes. What are the disadvantages to this?

The real disadvantage is paying that tax bill up front and needing to have the money to pay that tax bill and the uncertainty of taxes. A lot of readers are worried, is Congress going to change the rules around Roths? Is the income tax going to go away and there's going to be a sales tax instead? No one really knows. So some people will hedge and have half their money in Roth and half their money in pre-tax.

So in a market like this one, should you be rushing to do that? Some advisors that Monday when markets were way down, they said they had lots of clients doing conversions that day and they did them themselves so that the tax bill

is a little less. And the idea is you're getting the money in there earlier. The earlier you get it in, the longer it has to grow tax-free. As investors weather this turbulent market time, what tax concerns would you caution them to keep top of mind? Probably the most important thing is just keeping current on your taxes. There's all this noise out there. Oh, the IRS has

layoffs and is cutting staff, maybe I don't have to file my taxes or maybe I can cheat on my taxes. But the system's automated. The notices are still going to go out for people who don't file and people who under report. So keep current. That includes paying in quarterly estimated taxes if you're self-employed or have consulting or gig income. And those first estimated payments were due April 15th. Hopefully you got that done. And if not, you know, get on it.

So as we've been talking to some of our colleagues throughout this week, Ashleya, they have cautioned readers against making any emotional decisions, making any big, sudden decisions. How does that apply to taxes? So that goes back to our original point that taxes are a full-year endeavor.

And shouldn't just be looking to harvest losses if there's a downturn. That's something to consider throughout the year. And tax time is a really good time to look at your tax return and kind of analyze where you are and see maybe you should be making more retirement contributions. Maybe you should have more of the mix between pre-tax and Roth. All those concepts, it's worth looking at with an advisor. That's WSJ reporter Ashleya Ebeling.

And that's it for your Money Briefing. This episode was produced by Ariana Asparu with supervising producer Melanie Roy. I'm Julia Carpenter for The Wall Street Journal. Thanks for listening.