Wednesday, December 18, 2013

Investment ideas for the new year / Year-end planning

efore you shut down for the holidays, remember that just a few hours spent reviewing your financial life may help boost your bottom line - and put a dent in your holiday shopping bills! Here are six ideas to consider for your investment accounts before we ring in the new year.

1. Sell winners in taxable accounts. Although capital gains rates increased for individuals earning $400,000 and joint filers who earn more than $450,000, in 2013 married tax filers with taxable income up to $72,500 (singles up to $36,250) still have a zero percent tax rate on long-term capital gains and qualified dividends. If you are at the zero percent capital gains rate now, but expect your income to be higher later, you may want to realize capital gains today at the lower rate. Your taxable income includes the gain, so make sure that you factor that in when you make your decision.

2. Sell losers. If you have investment losses in a taxable account, now is the time to use those losers to your advantage. You can sell losing positions to offset gains that you have taken previously in the year to minimize your tax hit. If you have more losses than gains, you can deduct up to $3,000 of losses against ordinary income. This is particularly useful, since your ordinary income tax rate is higher than your capital gains tax rate. A $3,000 loss against ordinary income could be worth anywhere from $300 to $588 in reduced taxes. If you have more than $3,000 of losses, you can carry over that amount to future years.

3. Avoid getting soaked by a wash sale. If you are starting to clean up your non-retirement accounts to take losses, don't get soaked by the "wash sale" rule. The IRS won't let you deduct a loss if you buy a "substantially identical" investment within 30 days, which is known as a wash sale. To avoid the wash sale, wait 31 days and repurchase the stock or fund you sold, or replace the security with something that is close, but not the same as the one you sold- hopefully something cheaper, like an index fund.

4. Minimize your dividend-paying positions. Dividend income tax rates jumped this year for high wage earners. The net investment income tax levies an additional 3.8 percent on net capital gains, dividends, interest, rents and royalties. If you forgot to make the change last year, or think that your tax bracket could rise next year, consider shifting dividend-paying stocks and mutual funds into retirement accounts, where the increase will not be in effect.

5. Give appreciated stock or fund shares to charity: Get in the holiday spirit, with the help of Uncle Sam. One way to lower your tax bill in April is to donate appreciated securities, like stocks, bonds or mutual funds, to a charity. If you itemize deductions, you'll write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains. The low cost basis does not impact the receiving charity, as long as it is a tax-exempt organization.

One note: For 2013, the overall limit on itemized deductions was reinstated for certain taxpayers. The limitation (known as Pease limit) is applied to single filers who earn more than $250,000 and joint filers who earn more than $300,000. Be sure to factor in the change when accounting for the value of the donation.

6. Rebalance your investment accounts: The suggestions above should be part of a larger analysis of your investment accounts. The soaring stock market has probably thrown your allocation out of whack, so it's time to rebalance and get back on track. One of the best aspects of rebalancing is that it can force you to sell while the asset value is high and buy when other asset values are depressed. Compare that with the usual "buy high-sell low" cycle that can ensnare emotional investors!

Next week, I will have more year-end tips to help you save or make money.

Year-end planning, part 2  writes: Last week I reviewed investment moves to make before year-end -- today, we tackle employee benefit and retirement issues, as well as other savings ideas.

Use your flex account or lose it. Some employers require employees with flexible spending accounts (pretax dollars that pay out-of-pocket medical and childcare expenses) to forfeit contributions that go unused by December 31. If you have an FSA, check your company's rules. If you have cash sitting in the account and your deadline is year-end, spend it to avoid leaving money on the table. Although the IRS has made a change that will allow you to carry over $500 of unused FSA money to the following year, most companies will not change plan documents until 2014.

Fully fund employer-sponsored retirement plan contributions. Unlike IRA's, the deadline for funding 401 (k), 403 (b) or 457 plans is December 31. This year, the limit is $17,500 per employee. If you're over the age of 50, you can make an extra $5,500 as a "catch-up contribution." The dual benefit of maxing out retirement is clear: saving for a future goal and reducing current tax liabilities.

Consider converting Traditional IRA into a Roth IRA. A conversion requires that you pay the tax due on your retirement assets now, instead of in the future. Whether or not a conversion makes sense for you depends on a number of factors, including if you can pay the tax due with non-retirement funds. If you have money available to pay the tax due, some advantages of conversion are: paying the tax at a lower tax rate, if you think that your tax bracket will rise in the future; eliminating the tax on future growth of assets; reducing future Required Minimum Distributions (RMD's); and reducing the taxable amount of Social Security benefits.

Take Required Minimum Distributions. Generally, once you turn 70 ½, you must begin withdrawing a specific amount of money from your retirement assets (there are some exceptions). The reason is that Uncle Sam wants his due! Remember, money that you contributed to these accounts bypassed taxation. RMD's ensure that the government taxes those funds. The penalty for not taking your RMD is steep -- 50 percent on the shortfall. An estimated 255,000 taxpayers failed to take required minimum distributions totaling more than $348 million, according to tax data for 2006 and 2007, cited in a 2010 report by the Treasury Inspector General for Tax Administration.

One way to sidestep the taxation on your RMD is to make a Qualified Charitable Distribution (QCD), which allows you to gift up to $100,000 directly from your IRA to a charity without having to include the distribution in your taxable income. Not only does a QCD help avoid taxation, it also means that the extra income is not included in other tax formulas for Social and Medicare Part B premiums or for the Pease limitation on itemized deductions. If you choose to make a QCD, remember that the money must go directly to the charity, not to a private foundation or a donor-advised fund, and you will NOT get a tax deduction for the charitable contribution.

Mail your checks for deductible purchases. Procrastinator alert! If you're the type of person who waits until the last minute for everything, take note: To qualify for write-offs of charitable contributions and business expenses, your payments must be postmarked by midnight December 31. The IRS says just writing "December 31" on the check does not automatically qualify you for a deduction; and pledges aren't deductible until paid. Donations made with a credit card are deductible as of the date the account is charged.

Fully, fund your college savings 529 plan. With outstanding student loan debt over $1 trillion, now's the time to get a leg up on your education savings with a 529 plan. Money saved in these programs grows tax-free and withdrawals used to pay for college sidestep taxes, too. You can invest up to $14,000 in 2013 without incurring a federal gift tax and many states offer state tax deductions for the contributions.


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