5 year-end investment tips
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Just what you need, right? One more time-consuming task to be taken care of between now and the end of the year. But taking a little time out from the holiday chores to make some strategic saving and investing decisions before December 31 can affect not only your long-term ability to meet your financial goals but also the amount of taxes you’ll owe next April.
Look at the forest, not just the trees
The first step in your year-end investment planning process should be a review of your overall portfolio. Considering your timeline and goals, that review can tell you whether you need to rebalance. If one type of investment has done well, it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance.
Know when to hold ‘em
When contemplating a change in your portfolio, don’t forget to consider how long you’ve owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, your ordinary income tax rate could be much higher than the long-term capital gains rate, which applies to the sale of assets held for more than a year. By contrast, long-term capital gains are generally taxed at special capital gains tax rates of 0%, 15%, and 20% depending on your taxable income.
Make lemonade from lemons
Now is the time to consider the tax implications of any capital gains or losses you’ve experienced this year. Though tax considerations shouldn’t be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.
If you have realized capital gains from selling securities at a profit (congratulations!) and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as “harvesting your losses.”
Time any trades appropriately
If you’re selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a “wash sale,” and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.
Know where to hold ‘em
Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts. Doing so provides no additional tax advantage to compensate you for tax-free investments’ typically lower returns. And doing so generally turns that tax-free income into income that’s taxable at ordinary income tax rates when you withdraw it from the retirement account.
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Stirling Wealth Management provides long-term family wealth planning to help you protect your assets and leave a legacy of achievement for generations to come. We personally meet to chart your financial goals and understand your needs. Drawing on our industry experience we develop customized portfolio solutions focusing on managing risk and return to address your long and short term objectives.
Our focus is developing a valued, lifelong relationship with our clients who trust and depend on the team to responsibly help to oversee their assets. Our business is assisting individuals, families, small to mid-sized businesses, and physician practices in with managing of their financial resources. Our aim is to be considered a trusted Financial Advisor amongst other professionals who help guide your decision making. Our client relationships are developed on trust, and we look forward to earning yours through hard work, extensive education, and results.
Contact our team to discuss any of the above year-end tips in detail or how you can benefit from a personalized and comprehensive approach to achieving your financial goals.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2022.
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