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Year-End Tax Move Decisions
December can be a hectic month. Whether you are shopping, planning or hosting, there never seems to be enough time to get everything done. But it is important to think about whether you need to make some adjustments to your investments before the end of the tax year, Dec. 31.
Careful tax planning helps you keep more of the money your investments have earned. It should not be all that determines your investment approach, but it can have a major impact on your bottom line. As you review your investment plan, consider these year-end tax-planning options.
First, you can time the sale of investments for the most advantageous tax result. For example, if you plan to sell investments that have unrealized losses, you might want to do so before the end of the year, especially if you need to offset gains from other investments. But if you are planning to sell investments with gains, you might want to wait until after Dec. 31, so the gains won’t be taxable until 2020.
If your mutual funds make distributions at year-end, there are tax considerations. If you plan to sell those funds, it might make sense to sell before the funds make their distributions. Or you may want to sell the funds before the distribution and invest the proceeds in a similar fund without an upcoming distribution. Some people sell mutual funds to avoid distribution and repurchase the funds the next day. If you are selling an investment with an unrealized loss, be wary of wash sale rules, which disallow losses if you re-purchase the same or substantially similar investment within 30 days.
Your tax situation also could affect whether you would benefit from converting a traditional IRA to a Roth IRA. If you expect to be in a lower-than-usual tax bracket in 2019, especially if you expect this situation to be temporary, you could consider making the conversion before year-end. With a Roth IRA, your distributions will be tax-free, although you probably will end up paying taxes on the conversion.
Of course, as always you can consider making a charitable contribution prior to year-end. The contribution may be deductible from ordinary income taxes. Or, you can choose to set up a donor-advised fund. With this fund, you contribute whatever amount you want into a fund maintained and operated by a sponsoring organization. You, as the donor, retain advisory privileges with respect to the distribution of funds and the investment of assets in the account. The main tax benefit is that you can take the charitable deduction when you put the money into the fund, rather than waiting until the future grants are made.
Finally, remember to take a Required Minimum Distribution (RMD) from your qualified retirement plan, if the RMD applies to you. Generally, you must start taking RMDs from most plans when you reach age 70½.
Here at The Bensman Group, we are happy to talk with you about your investment portfolio and strategy, including the tax consequences of the investments you hold. Call your Bensman advisor if you would like to discuss your year-end investment planning needs.