As 2013 draws to a close, you’re probably thinking about the holidays and New Year’s Eve. And you might not be thinking much about April 15, 2014… Seems like a long time away, right?
Well, think again. The calendar year is coming to a close, and this is your last shot to perform year-end tax planning. Here are some things you may want to do to lessen the tax bite.
Your Year-End Tax Planning Should Include Harvesting Losses
You may not have much in the way of tax losses in 2013 – after all, it was a pretty strong year for many investments, with the S&P 500 returning more than 25% for the year thus far.
But what about bonds? Some bond asset classes, particularly longer-dated U.S. Treasuries, have lost money this year as interest rates have trended higher.
If you have fixed rate intermediate- or long-term bonds, you may have some losses to harvest for next April. Check your portfolio to see what might qualify.
At a Loss for Finding Losses? Harvest Gains!
Losses aren’t the only thing you can harvest.
Maybe your tax bill for next year doesn’t look so bad. Perhaps you’ve made the maximum contribution to your 401(k) and IRA accounts and you have a bunch of other deductions that will translate into a tax refund.
It may be a good idea to sell some assets in which you’ve amassed large capital gains. You could offset those gains against your positive balance on Uncle Sam’s books.
If you think your tax bill will be lower-than-normal, you might consider harvesting a few gains to take advantage of your relatively lower marginal tax rate.
Optimize Your Accounts for Tax Planning Efficiency
It’s always a good idea to review your accounts to make sure that you are capitalizing on all the tax advantages available to you.
Of course, you should be using your 401(k) and IRA options to the fullest extent to help with your retirement planning, as well as 529 plans for education expenses.
When it comes to retirement investing, tools like Jemstep Portfolio Manager can help you place your assets into the most advantageous accounts based on – among other factors – the tax structure of each account. If your portfolio contains REITs or municipal bonds, for example, you can use Portfolio Manager to discover which account will help you get the strongest tax advantage.
Maybe you’re thinking about some charitable giving this year. If so, make sure you research and understand the various types of trusts and other vehicles that have particular tax advantages.
Review Your Holdings for Tax Efficiency
Some tax issues can slip under the radar screen and escape our attention.
Do you have taxable accounts with fund managers who have aggressive levels of annual turnover? When your fund manager generates a high level of trading activity, it can trigger short-term capital gains – and those can take a big bite out of your total return.
Also, if your investment goal has a relatively long time horizon, you may want to see if there is an unduly large income component – interest and dividend income – triggering taxes.
Year-End Tax Planning Shouldn’t Drive Your Decisions
Taxes are important, but they shouldn’t be the key driver of your investment strategy.
That key driver should consist of your goals, your desired returns, and your optimum risk levels. Your asset allocation should reflect these. Then, as a secondary process, you can look for opportunities to improve the tax position.
Every dollar counts when you’re investing towards a long-term goal. Use this time to make some intelligent year-end tax planning choices.
What does your tax situation look like for 2014, and what can you do with your portfolio to improve it?
For unbiased recommendations and an easy way to manage all your accounts for your retirement investing goals, visit Jemstep.com and sign up for Portfolio Manager.