tax smart portfolio tips

By Hayden Adams, Charles Schwab

Now is a good time to review your investment portfolio and your overall financial plans to ensure you’re doing all you can to maximize your savings and reduce your tax bill. If you wait until after the holidays to reassess your finances, you could miss out on opportunities that disappear at year end.

Here are five end-of-year tax-smart portfolio tips to consider implementing right now: 

1. Maximize your retirement savings

A tax tip you may already know: Contributions to tax-deferred retirement accounts — such as a 401(k) — reduce your taxable income and provide tax-deferred growth until retirement. The end of the year is a good time to re-evaluate your overall savings, do a portfolio checkup, and determine if you can bump up what you’re putting away for retirement.

You can also make lump-sum contributions from an annual bonus to give your savings a boost. And remember, if your employer offers matching contributions, don’t leave free money on the table. It’s a good idea to contribute enough to meet your employer’s full match and take advantage of those additional funds.

If you’re currently in a lower tax bracket and you’re likely to be in a higher tax bracket when you retire (a lot of younger people fall into this category), consider making contributions to a Roth IRA or Roth 401(k).  Though contributions to Roth accounts are made with after-tax dollars, that money can grow tax free. And when you retire, you won’t have to pay taxes on the withdrawals.

A retirement savings tip for those who are self-employed or business owners is to consider making contributions to a tax-deferred retirement account such as a SEP-IRA, SIMPLE IRA or individual 401(k). These contributions will lower your taxable income and could help you stay under the phase-out limitations for the 20% deduction on pass-through income.

2. Consider a Health Savings Account (HSA)

Another option to consider when doing a portfolio checkup is an HSA. If your employer offers an HAS — and you qualify to contribute to one — this can be a tax-smart way of setting aside money for qualified medical expenses. HSAs offer a triple tax advantage: You pay no federal taxes on your contributions, no federal taxes on investment earnings and no taxes on withdrawals as long as the money is used for qualified medical expenses.

If you’re fortunate enough not to have to many medical expenses, are 65 or over and have money left over in your HSA during retirement, you can use that money to pay for living expenses — the only caveat being, you’ll have to pay taxes on the withdrawals when they’re not just for medical expenses.

3. Give to a favorite charity for tax savings

The end of the year is a time when many people think about charitable giving. As with other aspects of your finances, it’s important for charitable giving to be part of a broader financial plan, and it’s a great option you can consider when doing a year-end portfolio review.

One way to maximize the tax benefits of charitable giving is to concentrate your giving into a high-tax year.

By giving a large amount one year and not the next, you could maximize your itemized deductions in that year and take the new increased standard deduction the next year. Giving appreciated assets in this manner is a great way to maximize your charitable giving deduction, and a donor-advised fund (DAF) could be used to facilitate that gift.

If you’re age 70½ or older, you could also consider donating up to $100,000 directly to a charity from your IRA, using a qualified charitable distribution (QCD).  A QCD allows you to take money directly from your IRA and give it to a qualified charity without having to recognize that withdraw as income on your tax return. In addition, if you’re subject to required minimum distributions (RMD), a QCD can be used to cover all or a portion of your annual RMD.

4. Gift assets to your loved ones

Each year you’re allowed to give up to $15,000 to any number of people without having to pay a gift tax. Using this gifting strategy can allow you to transfer a large amount of wealth to your loved ones tax free and without eating into your gift and estate tax exemption. Those gifts can be used for any number of financial goals, including funding a grandchild’s 529 college savings plan or helping a loved one make a down payment on a new house.

5. Rebalance your portfolio in a tax-smart way

When you’re considering a portfolio review, you have to remember that the market is constantly changing, which can skew your asset allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. This can leave you exposed to unintended risk if the market environment should suddenly change. That’s where rebalancing your portfolio comes in — and it can be an especially important task for people nearing or in retirement, who might be more sensitive to market volatility.

Rebalancing involves selling positions that have exceeded your target allocation and moving the proceeds to positions that have become under-represented. Each time you sell a position, a taxable event occurs. That’s where tax planning comes into play.

With a bit of planning, you can help reduce the tax impact of rebalancing by using a strategy called tax-loss harvesting. Investors have a tendency to avoid selling anything at a loss,but there can be a significant tax benefit to selling a losing position if you have capital gains to offset. Those losses can be used to reduce your capital gains all the way to zero and if you have more losses than gains, you can even offset up to $3,000 of your ordinary income each year. Tax-loss harvesting can also serve as a motivation to sell underperforming investments or to re-diversify overly concentrated stock positions.

The end of the year is a good time to take a look at your portfolio allocation and make sure it’s aligned to your goals and risk tolerance.

The bottom line

There are many things to consider in terms of your portfolio as the year comes to an end. If you want to have a strong handle on your finances now and in the future, remember to follow the above year-end tips.

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Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in sustainable investment strategies for retirement plans that incorporate Socially Responsible Investment (SRI) factors and Environmental, Social and Governance (ESG) elements. LRPC currently has contracts in place to provide consulting services on more than a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Additional Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Investing involves risk including loss of principal. Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a nonretirement account, taxable events can be created that may affect your tax liability. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager. A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation. Consult your tax advisor for more information.