🐢 How to turn a lower-income year into a wealth-building opportunity

From Roth conversions to prepaying expenses, here’s what to do.

☕ Good morning!

Hit a low-income year (or planning to) after years of big paychecks? 

Whether you’re on a sabbatical, between jobs, or launching a new venture, that drop in income can feel like a curveball, but this “setback” might just be part of your best financial move yet.

This week, let’s flip the script on low-income years and turn them into golden opportunities for your wallet.

🎯 A low-income year can be a financial goldmine if you play your cards right.

Most top earners equate less income with anxiety about budgeting and meeting financial goals on ambitious timelines, but it’s actually a perfect time for a few wealth building strategies. 

Instead of seeing a low-income year as a setback, consider it a detour that could lead to perks you'll enjoy in your next high-income year and even into retirement. 

🧠 The Top Strategies for Low-Income Years

💸Roth Money Moves – Take advantage of being in a lower tax bracket to convert traditional IRA funds into a Roth IRA. 

The lower taxes you'll pay now mean tax-free growth and withdrawals later, giving you a financial boost down the road.

We’ll get into this in greater detail below.

📉Capitalize on low capital gains rates – If your income is low enough, you might qualify for a 0% capital gains tax rate. 

Selling appreciated assets in this year can allow you to reset your cost basis without paying any capital gains tax.

If you still want to hold those assets for future growth, consider re-buying them. It’s like tax-loss harvesting but in the opposite direction. 

🏠Strategic real estate investments – Real estate and other passive income sources often fall to the wayside in the hustle and bustle of our daily careers.

If our low-income period coincides with less busy work at the office, it could be a great time to prioritize making some savvy wealth-building and preservation moves. 

Consider a cost segregation study to accelerate depreciation deductions, further reducing your taxable income.

Though this is especially advantageous during low-income years, it’s worth setting the groundwork for when you return into a higher bracket. 

💸 Why your low-income year loves Roth conversions

When your income dips, so does your tax bracket. That’s your cue to make some Roth money moves. 

Here's why.

Converting funds from a traditional IRA to a Roth IRA means you'll pay taxes at your current, lower rate

Once that money is in the Roth, it grows tax-free, and all future withdrawals? 

Also tax-free. 

It’s like paying sale prices on setting yourself up better in retirement. 

Depending on how low your income is, you might be eligible to contribute directly to a Roth IRA. With limits based on your income, a low-income year could be your golden chance to stash money where Uncle Sam can’t touch it later. 

For 2024, you can contribute up to $7,000 (or $8,000 if you're 50 or older), with tax-free growth and withdrawals down the line.

However, you can kick things up a notch with a Roth conversion.

Even if you typically earn too much to contribute directly to a Roth IRA, a low-income year lets you sneak in through the backdoor. 

Convert traditional IRA or 401(k) funds to a Roth without the usual income limits, setting you up for long-term, tax-free growth.

Better yet, if you convert when the market is down, you’ll pay even less in taxes since you’re converting at a lower value. 

When the market rebounds, all that growth happens tax-free in your Roth. 

It’s like buying low and never having to pay tax on the gains.

⚠️ Careful with how much you convert—doing too much at once could bump you into a higher tax bracket. 

That’s where a financial planner and advanced tax software come in handy to find the sweet spot that maximizes your savings.

And if you’re not ready to convert everything at once, you can chunk it over multiple low-income years, spreading out the tax hit while still capitalizing on the lower rates.

❓ Low-Income Year FAQs

1. Should I still contribute to my 401(k) or other retirement accounts if my income is low this year? 

Absolutely. Keeping up with contributions—especially to accounts like Roth IRAs or 401(k)s with an employer match—lets you take advantage of lower tax rates. Plus, if your employer matches contributions, it’s free money on the table. 

Just keep an eye on your cash flow to avoid any liquidity crunches.

2. Pay off debt or play the stock market—what’s the smart move? 

It’s like choosing between kale and cake. If you’ve got high-interest debt (the financial equivalent of junk food), get rid of it fast. 

But if your debt’s low-interest and well-behaved (like a steady mortgage), investing in your future might taste a lot sweeter in the long run.

However, keep liquidity in mind during low income years so you can access your funds when you need them. 

4. Is now the best time to claim your capital gains? 

Think of it as a test drive. 

In a low-income year, you might be able to take some gains out of the garage without paying the usual toll. 

If you sell assets that have appreciated significantly now, you’ll likely end up paying lower capital gains than in higher income years, and you can reset your cost basis for lower taxes in the future. 

Making Cents of Low Income Years

A low-income year might feel like a financial hiccup, but there are so many advantages it even makes sense to plan for a low income year in advance. 

Whether you’re converting to Roth accounts, timing the market, or exercising those stock options, the right moves now can set you up for a financially vibrant future.

Next time your income takes a dip, don’t panic—seize the opportunity to make the most of your tax situation and fortify your future.

After all, financial planning like a pro means turning all the unexpected twists in your favor.

Until next week!

Dan from Tailored Cents

P.S. Follow me on LinkedIn for more tax gems to save you money.