Thanksgiving is behind us and we are in the home stretch of 2013. While your thoughts might be on shopping and getting ready for the holidays, there are a number of financial planning tasks that still need your attention. Here are 7 financial planning tips for the end of the year.
Use appreciated investments for charitable donations
If you would normally contribute to charity why not donate appreciated stocks, mutual funds, ETFs, closed-end funds, etc.? The value of doing this is that you receive credit for the market value of the donated securities and avoid paying the capital gains on the appreciation. A few things to keep in mind:
- This only works with investments held in a taxable account.
- This is not a good strategy for investments in which you have an unrealized loss. Here it is better to sell the investment, realize the loss and donate the cash.
Harvest losses from your portfolio
The thought here is to review investments held in taxable accounts and sell all or some of them with unrealized losses. These may be a bit harder to come by this year given the appreciation in the stock market. Bond funds and other fixed income investments might be your best bet here.
The benefit of this strategy is that realized losses can be offset against capital gains to mitigate the tax due. There are a number of nuances to be aware of here, including the Wash Sale Rules, so be sure you’ve done your research and/or consulted with your tax or financial advisor before proceeding.
Establish a Solo 401(k)
If you are self-employed and haven’t done so already consider opening a Solo 401(k) account. The Solo 401(k) can be an excellent retirement planning vehicle for the self-employed. If you want to contribute for 2013 the account must be opened by December 31. You then have until the date that you file your tax return, including extensions, to make your 2013 contributions.
Rebalance your portfolio
With the tremendous gains in the stock market so far this year, your portfolio might be overly allocated to equities if you haven’t rebalanced lately. The problem with letting your equity allocation just run with the market is that you may be taking more risk than you had intended or more than is appropriate for your situation.
Rebalance with a total portfolio view. Use tax-deferred accounts such as IRAs and 401(k)s to your best advantage. Donating appreciated investments to charity can help. You can also use new money to shore up under allocated portions of your portfolio to reduce the need to sell winners.
Review your 401(k) options
This is the time of the year when many companies update their 401(k) investment menus both by adding new investment options and replacing some funds with new choices. This often coincides with the open enrollment process for employee benefits and is a good time for you to review any changes and update your investment choices if appropriate.
Be careful when buying into mutual funds
Many mutual fund companies issue distributions from the funds for dividends and capital gains around the end of the year. These distributions are based upon owning the fund on the date the distribution is declared. If you are not careful you could be the recipient of a distribution even though you’ve only owned the fund for a short time. You would be fully liable for any taxes due on this distribution. This of course only pertains to mutual fund investments made in taxable accounts.
Required Minimum Distributions
If you are 70 ½ or older you are required to take a minimum distribution from your IRAs and other retirement accounts. The amount required is based upon your account balance as of the end of the prior year and is based on IRS tables. Account custodians are required to calculate your RMD and report this amount to the IRS.
Note beneficiaries of inherited IRAs may also be required to take an RMD if the deceased individual was taking RMDs at the time of his/her death.
If you have multiple accounts with multiple custodians you need to take a total distribution based upon all of these accounts, though you can pick and choose from which accounts you’d like to take the distribution. Make sure to take your distribution by the end of the year otherwise you will be faced with a stiff penalty of 50% of the amount you did not take on top of the income taxes normally due.
If you turned 70 ½ this year you can delay your first distribution to April 1 of next year, but that means that you will need to take two distributions next year with the corresponding tax liability. Also if you are still working and are not a 5% or greater owner of your company you do not need to take a distribution from your 401(k) with that employer. You do, however, need to take the distribution on all remaining retirement accounts.
For those who take required minimum distributions and who are otherwise charitably inclined, you have the option of diverting some or all of your distribution via a provision called the qualified charitable distribution (QCD). The advantage is that this portion of your RMD is not treated as a taxable income and may have a favorable impact on the amount of Social Security that is subject to income taxes for 2014 and other potential benefits. Note that you can’t double dip and also take this as a deductible charitable contribution. Consult with the custodian of your IRA or retirement plan for the logistics of executing this transaction.
With all of the strategies mentioned above I recommend that you consult with a qualified tax or financial advisor to ensure that the strategy is right for your unique situation and if so that you execute it properly.
Certainly year-end is about the holidays, family, friends, food, and football. It is also a great time to take execute some final year-end financial planning moves that can have a big payoff and in the case of RMDs save you from some hefty penalties.
Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.
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Great tips! I plan to sell some high yield junk bond funds to take the capital loss credit and repurchase them in my IRA since the dividends are unqualified.
Thanks for the comment. You will want to make sure that you don’t violate the Wash Sale Rules here. Purchasing the same funds in your IRA might be in violation. Best to do your homework here and consult a financial or tax advisor for guidance.
Solid tips as always Roger! These are all things that require attention and you’re much better served in taking the time now to handle them, as they apply to you, instead of waiting to the last minute. The wash sale rule is a small but very important rule to watch for – I’m glad you pointed it out. I’ve seen way too many investors have great intentions, yet shoot themselves in the foot because they overlooked it.
Thanks John. Too often investors think some of these strategies are easy but get caught when they don’t know all of the details.
It’s very important to be mindful of when you buy a mutual fund or dividend paying stock. If you buy at the wrong time you will have negative financial consequences as you mentioned. Buy a dividend paying stock after the ex dividend date and you don’t get the next dividend but you suffer the loss in price after the dividend is distributed.
Barb thanks for the comment and these are great points for investors to remember, especially the stock piece.
Excellent tips! This time of the year, I sell any hopeless losers and fund my IRA ( I know I have till tax time next year, but this is one thing I like to get out of the way).
Thanks for the comment and this sounds like a decent strategy.
Great tips! Thank you for sharing and what a perfect time to be thinking about this. I’ll definitely be reviewing my portfolio before year’s end.
Chrystal thanks for your comment and glad you found this post useful.