The period between Thanksgiving and the end-of-year holiday season would seen like a sleepy time for financial planners, but in fact it is anything but. You might be surprised at how much activity takes place on behalf of you and your investments in the final month of the year.
For instance? Even though this has been a good year in the markets, not all investments will have gained value. This is the last opportunity to harvest any losses we find in taxable accounts, by selling investments that have gone down and “booking” the loss. Then we can look for investments that have gained value, sell some of those to offset the losses, and thereby save capital gains taxes in the future. Up to $3,000 of ordinary income can be offset by investment losses as well.
This is also the time of year when mutual fund companies post, in advance, the amount of ordinary income and capital gain distributions they will make to their shareholders. Since the value of the shares drops by the amount that is distributed, this would seem like a non-event performance-wise. But in fact some mutual funds are poised to make 20% or even 30% distributions, and this cash is immediately taxable, unlike gains in the share values, which are only realized when you decide to sell. By selling funds before the distributions, and buying them back later, we can reduce your tax bill this year.
For people over age 70 1/2, this is the time to make sure that the required minimum distributions have been made out of IRA accounts, since failing to take that money out of the tax-deferred bucket would result in an IRS penalty. And of course we keep an eye on the various tax reform proposals, and tentatively plan around them. One possibility this year is to make charitable contributions before year-end, in case the deductability of your donations goes away. If we believe tax rates are going down, and especially if itemized deductions are about to be limited, we might consider accelerating expenses into this year and deferring income, where we can, into next year’s lower brackets.
Meanwhile, we hope you enjoy the holiday season, and that you gain a little extra comfort knowing that a lot of issues are being tended on your behalf.
About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years. Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.
Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association.