Uncle Sam will soon have his hand out. Year-end is a great time to give your portfolio a checkup. Consider these tax-smart strategies to help boost your after-tax returns.
Harvest losses. No one likes a losing investment but at tax time, they can be blessings in disguise. You can use capital losses to offset taxable capital gains, plus up to $3,000 in ordinary income ($1,500 for married couples filing separately). Look in your taxable accounts for investments with relatively large losses where you don’t expect a comeback. Remember, any losses you can’t use to offset gains this year can be carried over into future tax years. One word of caution: Watch out for the wash sale rule, which prohibits taxpayers from recognizing losses on sales of securities that are repurchased within 30 days. Connect with Sustainvest to speak further about your options with harvesting losses.
Take full advantage of your employee retirement plan, at least to the point of any employer match. And if you’re 50 or older, make a catch-up contribution. If you expect to be in a higher tax bracket down the road (for example, if you’re a younger worker who has yet to reach peak earning years) and your employer offers the Roth 401(k), consider it. You won’t get any up-front tax benefits, but after you retire, qualified distributions will be tax-free. The annual limit for 401k’s, 403b’s and 457’s is now at $18,000. IRA contributions are maxed at $5,500 for those under 50.
Be sure to make your annual IRA contribution. Even though you have until next April 15 to make your 2015 contribution, early contributions will give your money more time to benefit from potential long-term compound growth. So consider making your 2015 and your 2016 contribution early next year. If you’re eligible, a Roth IRA might be a good option as well, especially if you’re not eligible for a deductible traditional IRA contribution.
Consider cash flow. If you’re living off your portfolio in retirement, remember to speak with your advisor and set aside any cash you might need for the next 6 to12 months as you rebalance.
Don’t forget about your RMD. If you’re age 70½ or older and have to take required minimum distributions (RMDs) from your retirement accounts, you need to do so before year-end. If you just turned 70½ this year, you have until April 1, 2016 to take your first RMD. However, if you wait until next year to start, you will have two distributions in the same year—which might bump you into a higher marginal tax bracket.
Integrate Sustainable Investing. Most importantly, be sure to make sure your portfolio is being managed by an advisor that integrates sustainability criteria, ESG screening (environmental, social and corporate governance).