As another year slides toward its close, it’s probably a good time for most investors to do a few year-end “tuneups” on portfolios, financial and estate plans, and charitable or philanthropic strategies. In this article, we’ll mention a few items that almost always benefit from some attention, especially at year-end.
Watch your fund distributions.
For much of this year, domestic and global markets have been delivering relatively strong returns. That’s good news, but it also means mutual funds’ capital gain distributions may be on the high side this year. Capital gain distributions typically occur in early December, based on the fund’s underlying year-to-date trading activities through October. For funds in your tax-sheltered accounts, the distributions aren’t taxable in the year incurred, but you’ll owe taxes for funds held in your taxable accounts. With that said, in your taxable accounts only, if you don’t have compelling reasons to buy into a fund just before its distribution date, you may want to wait until afterward. On the flip side, if you are planning to sell a fund anyway—or you were planning to donate a highly appreciated fund to charity—doing so prior to its distribution date might spare you some taxable gains.
Consider tax-loss harvesting.
And speaking of gains, the end of the year is also a good time to examine your portfolio to see if you have some losses on investments that can be used to offset taxable capital gains. This strategy, known as tax-loss harvesting, can save you money next April 15. This is also a situation where a professional, certified financial adviser can be of tremendous assistance. Your adviser can help you analyze your taxable portfolio to look for the best opportunities to put this strategy to work for you.
Max out your 401K or 403B.
This probably sounds like a broken record, but it bears frequent repetition: there’s no substitute for socking away as much as possible in your tax-favored retirement account, especially employer-sponsored plans like a 401K or 403B. It’s impossible to overstate the advantages of tax-free compounding and growth potential when it comes to insuring a comfortable retirement. The 2024 IRS contribution limit for 401Ks and 403Bs is $23,000, with an additional catchup provision of $7,500 available to taxpayers ago 50 and over.
Review your diversification strategy.
Keeping your portfolio properly diversified among different asset classes is one of the most reliable ways to minimize the volatility that is part and parcel of the financial markets. When your portfolio is well-diversified, it includes different types of assets that tend to respond in different ways to various market conditions. Of course, it’s impossible to completely eliminate all risk, but when a portfolio is diversified, it spreads the risk among different asset classes and allows your investments to benefit from a wider range of market conditions. Your financial adviser can help you find the diversification strategy that is best for your specific goals and tolerance for risk.
Rebalance.
If you have a properly diversified portfolio, not all of your investments move in lockstep. Over the course of the year, it’s likely that some assets have grown rapidly, while others have advanced more slowly or perhaps even lost some ground. This means that your asset mix has changed, making you over-weighted in some areas and under-weighted in others. In other words, it’s time to rebalance. The advantages of rebalancing include keeping your asset allocation within the guidelines you established in order to execute your long-term investment strategy. Also, rebalancing can provide opportunities to add assets to your portfolio at relatively lower costs, which can allow for better future growth.
Keep in mind that rebalancing strategies may have tax consequences and transaction costs associated with them. Consult your tax and financial advisor regarding your personal situation.
Review your philanthropic plans.
Especially given the potential sunsetting of higher estate tax exemptions at the end of 2025, you may want to take another look at your charitable giving for the end of this year. By bundling two or more years’ gifts together, some taxpayers are able to generate a sufficient deduction to exceed the amount of the standard deduction ($29,200 for married filing jointly in 2024). Those using a donor-advised fund (DAF) may be able to funnel these deductions into the fund, generating a deduction, and then direct gifts to qualified charities over several years.
What about gifting?
Here’s another situation where the 2025 sunset may create the need to look at ways of reducing your taxable estate. The annual gift tax exclusion is $18,000 for each taxpayer in 2024, and married couples can give away as much as $36,000 to one or more individuals without incurring gift tax liability. The gifted funds reduce the size of the taxable estate, and they can be given directly to family members or deposited in a 529 education plan or a gifted Roth IRA.
Talk to your adviser.
Perhaps the most important thing you can do to make sure you’re maximizing your investments for maximum tax efficiency is to talk to your professional, certified financial adviser. At Mathis Wealth Management, our guidance can help you make sure you are holding the right asset mix, taking advantage of smart tax strategies, and staying on track to meet your most important goals and priorities. If you come to the end of each year wondering if you’re doing the right things to insure a comfortable retirement, or if you’d just like a professional second opinion on your portfolio and long-term strategy, we would love to help you uncover the facts you need to feel secure. Visit our website to learn more or to schedule a meeting.
Disclosure: All investing involves risk, including the potential for loss.
