Year-End Planning

Question:  

With the market being down this year, are there any strategies to think about and consider taking before year-end?

Answer:

There are a few tactical maneuvers you may want to discuss with your team of financial professionals that could help you out during this volatile year. 

Gifting

If you’re in the position to gift assets, the market decline might be advantageous. If your account values have declined, gifting existing portfolio holdings could result in a lower completed gift now. In addition, appreciation of the gift over the long-term for the recipient may make this an appropriate strategy to shift wealth to heirs if you could be subject to federal estate taxes. 

Taxable accounts with appreciated positions are additional choices for gifting. Gifting or donating appreciated stock or mutual funds to a charity can help you as the donor avoid paying long-term capital gains taxes. By gifting appreciated assets to charitable organizations, they forgo paying taxes if they’re a qualified tax- exempt entity when they sell the gifted securities. In the same light, it’s generally best to avoid donating property to charities that have depreciated. 

Realizing capital losses with tax swaps between mutual funds involves selling one fund and investing in another that is similar. This could allow investors to book a tax loss while retaining essentially equivalent market exposure. If two investments aren’t “substantially identical,” then the IRS wash sale rules that prohibit taxpayers from deducting losses wouldn’t apply. 

Custodial Account or 529 Education Plan

If you have custodial accounts for minors, they could be subject to kiddie tax rules. UGMA and UTMA stand for “Uniform Gift to Minors Account” and “Uniform Transfer to Minor Account.” If these accounts are intended for college expenses, it could be an opportunity to liquidate those accounts using the proceeds to fund a 529 Plan. If the UTMA or UGMA have declined in value, this could lessen potential taxable gains. If the funds are placed in a 529 plan, there may be benefits of tax-free growth, and tax-free withdrawals if funds are used for qualified higher education expenses. Additionally, 529 accounts are generally treated more favorably than custodial accounts for federal financial aid purposes.

Convert Traditional IRA to a Roth IRA

If your Traditional IRA value is lower after market declines, it may be time to think about a Roth IRA conversion. Your age and source of funds to pay the taxes are important factors in evaluating if this is appropriate. This means taking positions from the Traditional IRA, moving them to a Roth IRA and paying taxes on the converted amount now. The assets are moved to the potentially tax-free growth environment of the Roth IRA once certain criteria are met.

IRA Distributions and Appreciated Assets for Gifting

If you’re philanthropically inclined, you could use required minimum distributions (RMD) to donate to charities you support. If you’re subject to an RMD, you may want to use your IRA as a source for donations. This is referred to as a qualified charitable distribution (QCD) allowing some retirees to donate up to $100,000 tax free from their IRA each year. Since you need to satisfy your RMD for tax purposes, and if you don’t need the funds for current income, this may be a way to meet charitable goals and fulfill your RMD. 

Company Stock in a Retirement Plan

This one is a bit more complex and likely only applies to a handful of investors. If you have unrealized long-term capital gains in shares of company stock in a retirement plan, the Net Unrealized Appreciation (NUA) rule allows participants to potentially benefit from preferential tax treatment when distributing shares of company stock from their retirement plan. If executed correctly, the NUA portion of the company shares is taxed as long-term capital gains instead of ordinary income upon a sale of the shares. The greater the market appreciation of the shares held within the plan, the more attractive the NUA option will be. If shares have declined in price, participants may want to consider resetting the cost basis of that stock by selling the stock within the plan and repurchasing it shortly thereafter using the Net Unrealized Depreciation strategy. Unlike stock transactions outside of a retirement plan, the “wash sale” rule does not apply. Because these are more complex approaches, seeking expert advice is recommended to understand the overall impact on your tax-planning strategies. 

These are several strategies to consider when conducting your portfolio reviews. Be sure to work closely with your entire team of financial professionals and qualified tax professionals before implementing any changes to investments that could have tax ramifications. Stay focused and plan accordingly.