Now is the time
to get your finances in order
Your investments and finances will benefit from investing, financial housekeeping and last-minute tax-savings strategies as we move into winter. From retirement distribution tips to deferring capital gains with an opportunity zone fund, there are classic and new ways to improve your finances before the ball drops at midnight on Dec. 31.
Select the appropriate money moves for your situation to get your finances in order during the final months of the year with these eight tips.
Invest in an opportunity zone fund
Opportunity zone investments in economically disadvantaged areas emerged from the
Tax Cuts and Jobs Act of
2017. "Opportunity zone investments allow
investors to roll
into a qualified
fund and defer
the gains until
2026," says Matt
Masterson Jr., a wealth
advisor at RegentAtlantic.
For capital gains invested in opportunity funds, the account owners may receive a 15% step-up in tax basis, further reducing capital gains taxes.
Investors who own the funds for at least 10 years pay no capital gains taxes on their
opportunity fund investment. A few examples of these funds include the Fundrise Opportunity Fund and the Harvest Returns Sustainable
Agriculture Opportunity Zone Fund. When investing, make sure to evaluate the fund on its own merits and not solely on the tax benefits.
to capture gains
and cut volatility
Rebalancing back to the intended asset allocation may be in order given the heady run of the stock market in 2019, says Greg McBride, a chief financial analyst at Bankrate.com. This involves lightening up on stocks, which have rebounded nicely after sinking nearly 20% at the end of 2018, as well as adding bonds—particularly shorter maturity bonds, which haven't had the heady appreciation of longer-term bonds this year.
"Investors that rebalanced portfolios at the end of last year reaped the rewards of doing so, as they bought stocks at the trough in late December and were able to participate in the rebound that kicked into higher gear in early January," McBride says.
Make a qualified
This end-of-year tax planning move can save investors aged 70½ or older from paying taxes on the required minimum distributions from an individual retirement account.
A qualified charitable distribution
known as a QCD, distributes
assets from an IRA
account directly to a
satisfying the required
for the year, Masterson says.
Unlike the typical required minimum distribution, or RMD, no taxes will be due on the qualified charitable distribution. Under the new federal tax law, fewer taxpayers are itemizing, thereby missing the opportunity to deduct charitable contributions.
can save $720 if they are in the 24% federal tax
bracket and donate
$3,000 under the
required minimum distribution to
Review pay stubs, withholding and
maximize retirement savings
Although some individuals like to withhold more taxes than necessary to receive a tax refund, this is a suboptimal financial move. By having too much money withheld from your paycheck, you're giving the government a tax-free loan, says Shelly-Ann Eweka, a wealth management director at TIAA.
You're better off using the additional money to pay off student loans, other debt, or to invest in the financial markets. For example, after adjusting withholding, you might add $1,000 to a 401(k) or Roth IRA. In 20 years, with compounding returns of 7%, a $1,000 investment might grow to nearly $3,900.
more mutual fund shares at
the end of the year
Avoid increasing your tax liability at the end of
the year. Mutual funds typically make end-of-year capital gains and dividend distributions to all shareholders. If you purchase shares in the
security at the end of the year, you'll
be liable for the
tax on the fund's appreciation without having realized the fund's growth during the year, says Urban Adams, Investment Advisor at Dynamic Wealth Advisors.
This suggestion applies to taxable accounts only since tax-deferred
retirement accounts aren't liable for taxes on investments owned within the account.
"It is a wise move to know when your mutual fund company will be making year-end distributions and consider timing a significant purchase in a retirement account until after distributions have posted," Adams says.
Review tax-loss harvesting
"Tax-loss harvesting is a no-brainer but I'm always surprised by how many people wait until Dec. 31 to try it," says Kris Maksimovich, president at Global Wealth Advisors in Dallas. Tax-loss harvesting is a tax reduction strategy implemented in taxable investment accounts. The account owner sells securities at a loss to offset capital gains tax liabilities.
The IRS rule permits $3,000 of additional losses to offset ordinary income.
The IRS rules require short-term losses to be used to offset short-term gains, and long-term losses to be used to offset long-term gains. The IRS rule permits $3,000 of additional losses to offset ordinary income. The remaining losses roll over into subsequent years. But investors must not violate the "wash-sale rule," which disallows the tax-loss harvest when a similar or identical security is bought within 30 days before or after the sale.
Fund your 401(k)
or 403(b) and HSAs
There's an urgency to fund the workplace retirement account by the end of the year. "Take the opportunity to increase 401(k) or other workplace retirement plan contributions with the remaining paychecks of 2019," McBride says. IRAs and health savings accounts can be funded through April 15 of the following year.
For investors in high deductible health insurance plans, opening an HSA can save on taxes for years to come. The funds within the account can be invested and allowed to grow tax-free. An HSA can be used to pay for medical expenses now and in the future. Money may be withdrawn tax-free to pay for qualified medical expenses at any time, says Shobin Uralil, chief operating officer of Lively.
Check if you can harvest taxable gains
Rarely discussed, individuals in a low tax bracket should consider taxable gain harvesting. "Before the end of the year, forecast your taxable income to see if your taxable income is below the income threshold to pay a 0% (tax rate on) capital gains. If so, it might make sense to harvest gains," says Paul Ruedi, CEO of Ruedi Wealth Management in Champaign, Illinois.
For 2019, single filers with adjusted gross income below $39,375 are in the zero capital gains rate tax bracket.
For married individuals, filing jointly, with adjusted gross income less than $78,750, no capital gains taxes are due.
Heads of households
can earn up to $52,750, without tax liability on capital gains.
to make before the year ends
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