The end of the third quarter and the beginning of the fourth quarter often mark a pivotal time to check the pulse of financial and investment plans. Reviewing your year-end financial checklist now provides the “best of both worlds” – allowing you to review and assess progress against goals set at the start of the year, while having three more months before the end of the year to make significant progress. adjustments if necessary.
With that timeline in mind, here are some key considerations before the end of the year to help ensure your financial plans stay on track:
Given the volatility of the market in 2022, many investors may have the opportunity to take advantage of tax loss harvesting (TLH) – selling an investment at a loss and trading for a similar but different asset to maintain the allocation of portfolio assets. Investors have until the end of the year to complete TLH, but it pays to start thinking about strategic portfolio changes earlier rather than making impromptu decisions later.
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Additionally, I always use this time of year to sit down with clients and do a “health check” on their overall investment plans. Does their portfolio still meet short-term and long-term goals? Given the volatility of the markets, are there opportunities to consider to rebalance or diversify further? It is also important to look to 2023 and determine if there are any known liquidity events that could impact overall cash positions.
At Vanguard, we stress to customers the importance of having six to 12 months of expenses available in an emergency fund. If a client needs to raise funds, in addition to adjusting their savings and spending goals, there could also be tax-advantaged compartments, such as, in some cases, selling portfolio holdings to increase their investment positions. cash or take a required minimum distribution (RMD) before the end of the year and reserving it in a taxable account that you can draw on.
I often tell clients to strive to save 12-15% of their salary through retirement savings vehicles. With a few months left in the year, employees need to assess where their 401(k) contributions are and whether they can or should increase deferrals.
For IRAs, investors can contribute until April 15 next year. Given market volatility, these investors might consider contributing now to take advantage of current “lower” prices compared to market prices seen in the previous eight to nine months.
Either way, it’s important to see where these vehicles stand and whether contribution increases can reasonably be made to ultimately support long-term retirement goals.
Depending on their tax bracket, it may also be attractive for some investors who have a traditional IRA to convert to a Roth IRA. (opens in a new tab). The benefit of converting to Roth allows investors to withdraw funds tax-free in retirement, and Roth IRAs do not require RMDs like traditional IRAs do (these investors must have a plan to receive distributions annual after reaching the age of 72). Additionally, a Roth IRA allows investors to leave a tax-free inheritance to heirs.
For investors who prefer to convert, a major decision factor is whether to take on the tax liability in 2022, 2023 or beyond. Dollars converted from a traditional IRA to a Roth IRA will be taxed as ordinary income. For example, if you convert $20,000 from a $100,000 traditional IRA, the $20,000 is taxed in the year of conversion.
decision when to be converted must be based on the year with the most favorable tax bracket. If an investor is planning to retire in 2023, it’s probably more strategic to do a Roth conversion in that year (compared to 2022) because their ordinary income will be lower.
Even with the best of intentions, one of the biggest mistakes investors make every year is waiting until the end of December to make a charitable donation. Beginning in the fall, consider how a charitable donation might fit into a larger financial plan overall. It shouldn’t be a one-time decision or a simple “writing a check”. Rather, charitable giving should fit consistently into the achievement of long-term goals.
For example, consider the best ways to maximize the tax benefits of donations – this year, given the volatility of the market, it may make more sense to donate securities as a means of “shrinking” portfolio holdings and making donation of the assets of these actions.
Another strategy, for investors who are at least 70.5 years old, is to use a qualified charitable distribution (QCD). (opens in a new tab) A QCD allows these investors to withdraw up to $100,000 from a traditional IRA to donate directly to a qualified charity. This charitable donation can also offset your RMD, if desired. The benefit of a QCD is twofold, allowing investors to meet RMD requirements and avoid tax on otherwise taxable distributions while fulfilling charitable purposes.
These decisions should not be made with just a few days left in the year, and certainly not in a silo when they can otherwise have a positive impact on larger long-term financial plans.
With just a few months left until the end of the year, investors should take advantage of this time to simultaneously look back and forward to what you hope to achieve with your financial, investment and retirement goals. This strategic checkpoint provides the ability to perform a health check of plans to date, while allowing plenty of time to pivot, if necessary, to ensure you stay on track for financial success.
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
Any investment is subject to risk, including the possible loss of the money you invest. Diversification does not guarantee a profit or protect against a loss. Harvesting tax losses involves certain risks, including, but not limited to, the risk that the new investment will have higher costs than the original investment and may introduce portfolio tracking error into your accounts. There may also be unforeseen tax implications. We recommend that you read the terms of the consent carefully and consult a tax advisor before acting. Withdrawals from a Roth IRA are tax-free if you are over 59½ and have held the account for at least five years; withdrawals made before age 59½ or age five may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies to each conversion and begins on the first day of the year in which the conversion contribution is made.)
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