They’re called year-end planning strategies. But you certainly don’t want to wait until the last few days of the year to buff up your financial plan.
Here are some strategies and tactics to consider taking now.
Tax-loss harvesting. Consider offsetting your realized capital gains with, if you have any, realized capital losses you’ve incurred during that tax year, or carried over from a prior tax return. Doing so may help you minimize the income tax consequences of your realized capital gains.
Alexander Koury, a certified financial planner with Hosler Wealth Management, says now might be a good time – whether you take advantage of tax-loss harvesting or not – to pay low capital gains taxes now, especially if there’s an increase in such rates in years to come. “You can always buy your investments back later,” he says.
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Avoid unwanted capital gains. If you own mutual funds in a taxable account, look to see if they will be paying capital gain distributions this year, says Mark Beaver, a certified financial planner with Keeler & Nadler. “In some cases this year, you might be sitting at a loss with the fund, but they could still distribute gains because of activity within the fund,” he says.
What to do? Consider selling the fund to avoid receiving those distributions in that case, especially if they are short-term gains, says Beaver.
Of course, every case is different, he says. And you do need to consider tax implications.
But, for some, he says “this could be a good time to avoid taxable distributions and get into lower-cost and more tax-efficient ETFs or index mutual funds for those nonretirement accounts.”
Rebalance your portfolio. The end of the year is also a good time to review your target asset allocation against your current asset allocation and bring in back to its target. For some, that might mean selling assets that have risen in value and buying assets that have declined in value.
For those who are still saving for retirement, it might mean increasing how much you’re contributing toward some assets (those that have declined in value) and decreasing how much you contribute to other assets (those that have risen in value). And for those who are in retirement, it might mean withdrawing more money from those assets that have risen in value and less from those assets that have fallen in value.
Consider a Roth IRA conversion. It’s almost always a good time to consider converting all or some of your traditional IRA into a Roth IRA.
“At its simplest, a conversion is like prepaying your taxes at today’s comparatively low income tax rates,” says Bruce Colin, a certified financial planner with Bruce Colin & Co. “Moreover, it eliminates required minimum distributions that sometimes push retirees into higher tax brackets and higher rates for Medicare.”
Of course, you might want to talk to a tax professional before doing so. That’s because the distribution from a traditional IRA is taxed as ordinary income. So, typically, you want to convert just enough so that you put yourself in a higher tax bracket. What’s more, you should make sure you have money set aside to pay for the income taxes associated with Roth IRA conversions.
Review your debt. Nearly six in 10 workers say they don’t have a high level of control over their debt, according to a recent Bank of America survey. Year-end planning while in 2020 crisis mode would involve maintaining multiple credit lines that are open, in good standing and positioned with low rates on any outstanding debts.
Jon Ulin, a certified financial planner with Ulin & Co. Wealth Management recommends reviewing credit cards, student loans, mortgage, home equity, auto loan and any other obligations that are either floating or high interest above 6% and consolidating any higher debt obligations into any lower-rate fixed programs to benefit from today’s ultra-low rates – or focus to pay them off within the next six to 12 months.
For larger obligations such as a mortgage or home equity loan, Ulin recommends asking your lender if they are offering any short-term disaster relief assistance. If you qualify due to unemployment or reduction in income, that could result in deferring payment for six to 12 months or a loan modification, neither of which should adversely affect your credit score, he says.
Robert Powell, CFP, is the editor of TheStreet’s Retirement Daily and contributes regularly to USA TODAY. Got questions about money? Email Bob at [email protected].
This article originally appeared on USA TODAY: Retirement planning year-end strategies: Don’t wait for Dec. 31
