The end of the year is nigh upon us. It’s only a couple of days left before the year comes to a close. While that alone may be grounds to be hopeful about what the future portends, you also need to smart about how to sort your finances, not forgetting tax returns.
True, performing a check on investments before declaring a bill of health isn’t exactly something many people do. Easy as it may be to get lost in the hubbub of merrymaking, it’s wise to slow down the brakes and cross out your investments checklist early.
Why? Well, a close check on the markets will give you an idea on the essence of getting your priorities right.
Many investors are not exactly psyched up because of this. As such, they’re obviously going to tread with caution going into the new year.
Another reason to think about your investments at this time of year is due to the massive tax reforms which were enforced in 2018. Without much ado, here are some important details you need to be conversant with before year end.
Asset Allocation and Periodic Balancing
According to Samuel Wiser, the CEO who also serves as the investment thought guru at Northman Financial, in the last 9 years, many investors’ portfolios have become bloated out with stocks. As a consequence, many don’t reflect the big picture objectives.
He opined that asset allocation was the most fundamental cog when weighing portfolio performance. Wiser also mentioned the importance of periodic balancing on a regular basis since it’s the grounds upon which you can stick to an investment strategy all the way through.
He cited that those with stock-heavy investment portfolios tend to expose themselves to excessive risk. Wiser also shared that experts are predicting a significant slow down in the economy and stock market over the next couple of months.
In light of that, now seems to be the best time to rebalance the books. Especially once you consider that the last couple of months have represented the longest bull market ever recorded.
As revealed by Bill Nelson, the founder of Pacesetter Planning, there are now plenty of opportunities for investors to sell their investments at a loss whilst reinvesting them in like-minded enterprises. Nelson discussed this when focusing on the fact that numerous investments have gone south in the final months of the year.
He opined that his thinking is inspired by a mantra he lives by, which is “tax loss harvesting.” Thanks to the system, capital losses are able to offset other investment monies obtained in the year. By definition, you can comfortably lower the taxes you owe by about April.
With harvesting losses, investors can realize a significant reduction in exposure of individual stocks which have made a killing in the market over the last 5-10 years. Some companies that fall into this category are establishments like Amazon, Netflix, and Apple. Surprisingly, this is quite feasible without necessarily translating to an increment in capital gains taxes.
There’s no better time than the present. Particularly when you’re thinking of changing some of your pretax investments like IRAs (the traditional 401(k)s) into Roth.
The only caveat for you to earn these tax-free funds at a later date, is that tax payments need to be made now. Still, you can take advantage of the recent tax reforms by following through with the temporarily lowered tax brackets. The new provision now allows for ample Roth 401(k) conversions. Amazingly, the temporary notice is set to last to about 2025 before the tax brackets get back to their former levels.
As shared by Bradley Nelson, the top investment adviser at Lyon Park Advisors, the new tax returns have been a boon to married couples. He mentioned that those with joint incomes ranging between $165,000 and $315,00 now stand better odds of being compliant since they fall in the 24% marginal tax bracket. With the rules set to revert back to normal in 2025, the same couple will lie in the 28-33% marginal tax bracket.
Balance Current and Incoming Finances
Bill Nelson cited that making extra investments into retirement accounts can have a massive bumper effect during your later years. Nelson mentioned that those able to, need to chip in about $18,500 this annum in their 401(k). For the elderly who are over 50, he shared that they need top up their contributions with some extra $6,000.
He also pointed out that it’s logical to make the payments before December 31. Not only because it will have a good effect on your retirement savings, but also the fact that you can lower your taxes in April.