Whether you’re leaving the corporate world to spend time with family, pursuing entrepreneurial activities or just sitting on the beach, here are 5 huge tax savings tips for your investments during a sabbatical year.
1. Capital Gain Harvesting: If you have built up part of your nest egg in a taxable brokerage account, one of the biggest problems you face is long-term capital gains taxes when you sell. For example, if you bought $10,000 of Facebook stock in 2012 and it’s worth $50,000 now, you have to pay capital gains tax on the $40,000 difference when you eventually sell. For most people, the capital gains tax rate is currently 15%, but if your income is below $47,025 in 2024 ($94,050, married filing jointly), the capital gains tax rate is 0%! A sabbatical year can be a great time for some strategic capital gains harvesting!
2. Roth IRA Conversion: If you have a 401K plan with your former employer, or a Traditional IRA, your sabbatical year can be a great time to convert it to a Roth IRA. With 401K plans and Traditional IRAs, you get a tax deduction when you contribute, but then you pay income tax when you withdraw money. However, with a Roth, you don’t get the upfront deduction, but once the money is in the Roth then you never pay taxes on it again. You have to pay income taxes (but no penalties) when you convert money from a 401K or Traditional IRA to a Roth IRA. But if you do it during your sabbatical year—your tax rate is much lower. This can be a great tax savings and wealth building strategy.
3. Health Insurance: If you’re going to purchase health insurance through the ACA marketplace, you may be eligible for a dramatically reduced premium if your income is between 100% and 400% of the poverty level ($15,060 to $60,240 for a single person in 48 states for 2024). But just know recognizing capital gains may count against you in this calculation. So if you’re planning on funding your sabbatical by selling some of your investments, you may want to consider raising that cash before your sabbatical year actually starts. If you do it right, your individual monthly premium for a silver plan can fall from $656 per month to $0, depending on what state you live in.
4. Liquidity Planning: If you’re counting on your investments to fund your sabbatical, remember the market can be extremely volatile. Consider keeping some of your money in less volatile assets for your sabbatical year because you don’t want to get stuck in the unfortunate situation where the market suddenly crashes and you’re forced to sell at the bottom (yuck!). A lot of moving parts on this one (with health care premiums and capital gains harvesting); everyone’s situation is unique.
5. Entrepreneurial Deductions: If you’re taking time off to pursue entrepreneurship, be strategic about how your expenses offset your income. A little strategic planning/spending can keep your tax rate low and your tax benefits high.
A sabbatical can improve your situation and your health. And a little proactive investment planning can save big on taxes!
*Note: This post is for informational purposes only. It is not advice. Contact your financial advisor or tax consultant to discuss your personal situation.