The year-end period is an ideal time for investors to review their portfolios, assess tax situations, utilize any remaining annual allowances, and get set up for success in the coming year.
With some thoughtful planning and strategic moves before the calendar resets, you can maximize returns, minimize taxes owed, improve your investment process, and ultimately put yourself in a better position to achieve your financial goals.
This comprehensive guide provides a checklist of 6 essential year-end investment actions to take now before it’s too late.
Tip 1: Harvest Tax Losses
Tax-loss harvesting involves strategically selling investments at a loss to offset realized capital gains and income. This can provide huge tax savings and is easy to implement.
- Review your taxable investment accounts to identify assets currently trading at a loss, especially those down significantly from what you paid. Stocks, bonds, ETFs, and mutual funds are common candidates.
- Ensure the “loss” is truly a loss by excluding any shares held short-term, since gains are taxed at higher ordinary income rates. Focus on assets down from your long-term cost basis.
- Sell losing positions prior to year-end to trigger capital losses that can offset your taxable gains for this year. Losses can be used to offset an unlimited amount of capital gain income above the standard deduction.
- If you have excess losses beyond your gains, you can deduct an additional $3,000 against regular income. Remaining unused losses carry forward indefinitely.
- Consider “tax-gain harvesting” as well – sell winners you’ve held long-term that will face high taxes at your income rate to reset at a higher cost basis.
- Reinvest capital from sold assets into similar but not “substantially identical” assets to avoid “wash sale” penalties disallowing the loss claims.
harvesting is a powerful way to generate tax deductions and improve after-tax returns. Just be careful to avoid triggering unwanted short-term gains.
Tip 2: Fund Retirement Accounts
The end of the year is the final chance to make contributions to retirement accounts like 401(k)s and IRAs before limits reset. Funding them provides major tax savings:
- Max Out Employer Retirement Plan – Contribute enough to get the full company match if you aren’t already. For 2022 the regular 401(k) contribution limit is $20,500 plus a $6,500 catch-up contribution if over 50 years old.
- Fund a Roth or Traditional IRA – You have until the April 2023 tax filing deadline to make 2022 IRA contributions up to $6,000 ($7,000 if over 50). Roth withdrawals are tax-free in retirement while traditional IRAs provide upfront deductions.
- Make a “Backdoor” Roth IRA Contribution – High earners who are phased out of direct Roth IRA contributions can make non-deductible contributions to a traditional IRA and then immediately convert to a Roth IRA to get tax-free growth.
- Contribute to an HSA – If you have a qualifying high-deductible health plan, a health savings account (HSA) allows tax-deductible contributions up to $3,650 for individuals or $7,300 for families in 2022. HSAs have unique “triple tax” benefits and the money never expires.
- Up Saver’s Credit Eligibility – The retirement saver’s tax credit can net you up to $1,000 if you qualify based on AGI limits. Increasing 401(k) contributions can help lift you into the eligibility range.
Maximizing annual retirement contributions generates substantial tax deductions and growth-compounding returns over decades. Don’t leave free money on the table.
Tip 3: Review and Rebalance Investments
The new year is a perfect time to objectively review your investments to ensure your portfolio aligns with your goals and risk profile:
- Reassess Asset Allocation – Rebalance holdings across asset classes like stocks, bonds, real estate, etc. that may have drifted from original targets due to differing returns. Realign to your long-term policy mix.
- Tilt Toward Tax Efficiency – Place highly tax-efficient stock index funds in taxable accounts while using tax-deferred accounts for bonds, REITs, or other assets that generate more taxable income distributions.
- Evaluate Underperformers – Review lagging investments to decide whether to stick with them or sell. Don’t let the sunk cost fallacy affect the decision.
- Reduce Overlap – Consolidate redundant funds with similar underlying holdings to simplify your portfolio.
- Analyze Costs – Minimize expense ratios, which compound over long periods. Passively managed index funds typically have far lower fees than actively managed funds.
- Check Distribution Needs – For retired investors, assess if portfolio withdrawals remain aligned with spending needs and long-term projections.
An annual portfolio review avoids inertia, identifies changes needed, and sets you up to start the year invested optimally.
Tip 4: Develop a Tax-Smart Withdrawal Strategy
Thoughtful asset location and sequencing of portfolio withdrawals can help reduce taxes in retirement:
- Withdraw more heavily from pre-tax traditional IRAs/401(k)s in low-income years to fill up lower brackets. This leaves more Roth assets intact for tax-free growth.
- In higher income years, shift to drawing more from Roth accounts to avoid pushing ordinary income into higher brackets.
- Take just enough from IRAs to avoid Social Security taxation while living on remaining balances.
- Withdraw taxable investment account assets selectively using tax-loss harvesting and favoring long-term holdings for lower rates first.
- Draw down cash reserves and other tax-inefficient assets with low growth like bonds before selling appreciating stocks.
- Consider doing Roth IRA conversions in very low-income years like early retirement to fill brackets and avoid higher taxes later.
Advanced tax planning for retirement cash flow enables you to minimize taxes and optimize returns on savings.
Tip 5: Make Smart Charitable Gifts
Giving to charity can provide meaning along with tax benefits:
- Appreciated Assets – Donating stock held over one year that has grown in value produces a deduction for the full fair market value while avoiding capital gains tax you’d incur from selling the shares.
- IRA Rollover – Those age 70.5+ can transfer up to $100,000 from traditional IRAs directly to charities without including the distribution in taxable income. This satisfies required minimum distributions (RMDs) in a tax-efficient way.
- Bunching – Bunch multiple years of donations together into alternate years to itemize deductions when total gifts exceed the standard deduction threshold. This maximizes deductibility overall.
- Donor-Advised Funds – These charitable accounts allow you to take a deduction immediately while maintaining control over distributing the funds to causes over time.
Reviewing your giving strategy can further amplify the tax advantages of charitable donations.
Tip 6: Set Goals and Refine Strategy for Next Year
Finally, use the fresh start of a new year to set yourself up for success:
- Set Specific Financial Targets – Define measurable money goals like retirement contributions or savings rates along with investment return objectives. Tracking progress instills discipline.
- Schedule Future Reviews – Mark your calendar throughout the year for important financial actions like portfolio rebalancing, IRA contributions, estimated taxes, etc. to stay on top of key items.
- Refine Financial Plans – Revisit retirement and other long-term projections to adjust for any changes in assumptions like life expectancy, inflation, asset returns, taxes, etc. that affect the models.
- Automate Savings – Arrange consistent automatic deductions from your paycheck or bank account to effortlessly build up savings over time through dollar cost averaging.
- Organize Financial Records – Close out the year by organizing digital and paper financial statements, tax documents, and notes to start fresh and simplify future monitoring.
The beginning of a year provides a timely opportunity to correct any past investment shortcomings and adopt improved habits that set you up for a more productive and prosperous future.
The window for most beneficial year-end tax and financial planning closes quickly. By utilizing this checklist to harvest tax losses, fund retirement accounts, review investments, implement tax-smart withdrawals, donate strategically, and set future goals, you can make key moves now to maximize the value of your savings and avoid leaving money on the table.
The savvy investor mindset involves staying vigilant year-round, but laying this strong groundwork leading into the new year will pay dividends by optimizing your tax position and financial strategy for greater returns.
Frequently Asked Questions
How often should a portfolio be rebalanced?
Most experts suggest reviewing portfolio asset allocation at a minimum every 6 or 12 months. More frequent rebalancing can provide marginal improvement but risks incurring higher transaction fees and taxes.
What key factors affect retirement withdrawal strategies?
Major considerations include your portfolio size, tax bracket, life expectancy, income sources like pensions and Social Security, healthcare costs, and whether you prioritize leaving an inheritance or maximizing your own spending flexibility.
When is it better to use taxable vs. tax-deferred/tax-exempt accounts?
Taxable accounts are good for assets generating income taxed at long-term capital gains rates. Tax-deferred accounts allow tax-free growth for assets producing ordinary income. After-tax accounts like Roth IRAs provide completely tax-free growth on contributions.
How can you adjust your portfolio when expecting higher inflation?
Increasing allocation to hard assets like commodities, real estate, and Treasury Inflation-Protected Securities (TIPS) while reducing fixed-income can help insulate long-term purchasing power.
What key documents should investors organize for taxes?
Keep digital and/or paper copies of realized gain/loss reports, Form 1099 statements, dividend and interest summaries, IRA and HSA contributions, and records supporting deductions, credits, or capital improvements.
How often should you reassess if you are saving enough for retirement?
At a minimum every 1-2 years, factoring in portfolio changes, life events like marriage/children/inheritance, revised retirement spending goals, health considerations, and updated projections of Social Security benefits, pensions, taxes, and inflation.