The next calendar year is coming up fast! The weeks between now and 2022 are going to be filled with holiday planning, celebrating and festivities. You may also want to consider end-of-the-year strategies, including a comprehensive financial plan. A financial advisor in Utah can help you start or refine your financial plan, as well as offer strategies. These strategies may help grow your money optimally and may even help you save money on your taxes and more.
Review Your Portfolio as a Whole
Take the time to review your investment portfolios with a financial advisor. Have any investments done particularly well? Have any performed poorly? Do you need to rethink the portfolios in light of their performance, any change in your own financial goals or macro issues, such as the direction of interest rates or the economy?
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Interest rates are expected to begin to climb next year. Climate change regulations may affect the outlook for companies and sectors. COVID-19 is still affecting many businesses. Do any of these issues, or other issues and factors, make a difference to your portfolio?
Rebalance If Needed
Portfolios should be reviewed periodically to see if rebalancing is required, and the end of the year is a good time to perform this review. If investments have done particularly well, they may now constitute a higher percentage of your asset allocation than they ideally should. Conversely, if any investments have performed poorly, they may constitute less (and may need to be rethought).
Rebalancing generally includes the selling and purchase of investments. If this is planned by the end of the year, you can plan any tax advantages from selling.
Consider a Donor-Advised Fund
Year-end is often a time of charitable giving. It may be time to consider a donor-advised fund rather than your usual form of giving. A donor-advised fund is a fund set up specifically for giving to charitable organizations, and you can contribute a wide range of assets, including stocks, bonds, cash or even cryptocurrencies.
Donors are eligible to take an immediate tax deduction in most cases. Almost any Internal Revenue Service-qualified charity counts: nonprofits, educational institutions, religious institutions and so on.
Make Charitable Donations Directly From Your IRA
When you take required minimum distributions (RMDs) on traditional 401(k) and Individual Retirement Accounts (IRAs), you must pay taxes on the money withdrawn. (RMDs are required beginning at age 72 for folks who turn 70 on July 1, 2019 or later, and at age 70 ½ for folks who turned 70 before that.)
If you don’t need your RMDs and plan to contribute to charity, you may be able to set up charitable donations directly from your IRA. The IRS does not tax these contributions, so it’s a way to minimize your own taxes on money that needs to be withdrawn and help a charitable organization. A charity needs to have the 501©(3) designation to qualify.
Convert Your Traditional IRA to a Roth IRA
Roth IRAs have several advantages over traditional IRAs. When you withdraw money from a Roth IRA in retirement, you will not be taxed on the withdrawals (as long as you’ve held the money for at least five years), while you will be taxed at your ordinary rate for traditional IRA withdrawals.
Plus, you must take RMDs from a traditional account, but not from a Roth account. You can keep a Roth account as long as you wish without tapping into it and even pass it on to your heirs, while RMDs are designed to draw down your traditional accounts completely in your lifetime.
As a result, many people want more money in Roth funds than they have as they get older, or want to increase their Roth funds as they plan for retirement. If that’s the case for you, you can convert traditional IRAs to Roth IRAs.
Be aware that such a conversion does trigger tax of the amount you have in your traditional IRA at your then-current rate, because Roth contributions can only be made with after-tax funds. Year-end can be an advantageous time to convert, depending on your tax situation in the year.
Use Tax Losses to Help Offset Taxable Gains
Gains on investments are ordinarily taxed. However, if your taxable investments lost money this year, you can use those losses to offset your gains. Up to $3,000 of losses can be used in a year, and it is possible to take further losses in subsequent years.
Any investments sold at a loss should be something you want to sell, of course. You can’t sell an investment (such as a stock) at a loss and then purchase it soon after to reap any potential appreciation going forward; a sale and purchase within 30 days triggers IRS wash sale rules, and the loss can’t be used to offset gains on your taxes. For these and other reasons, it’s advisable to consult tax professionals on complex tax strategies such as this.
Set Goals for the New Year
Financial strategies should always be underpinned by specific goals. But goals, of course, change. It’s a very good idea to revisit your goals periodically, and the end of year can be a prime time to sit down and do that.
Review any life changes that occurred during the year, or that might occur next year. These include marriages, birth of a child, divorce, beginning a business, receiving an inheritance, illness and more. Have any of them changed your goals or inaugurated new goals?
Then, review existing goals. Do any of them need to be modified? Has progress changed any goals? Have outside events changed any?
Get a Second Opinion from a Financial Advisor
Investment and life planning is complicated. Not only that, but choices in one area may affect others. You don’t want to make a choice that would increase your taxes or make a charitable deduction to an institution that isn’t qualified under IRS rules! Plus, even decisions about your goals and current plans can benefit from a sympathetic and knowledgeable ear.
As a result of all these factors, it’s always prudent to get a second opinion from a financial advisor. Discuss all of these strategies with them and listen to their advice before making final decisions.
If you’re looking for a financial advisor in Utah or are ready to get a second opinion, schedule a no-obligation conversation with our team.