It's the holiday season: fruitcake, eggnog, and tax planning. And while it might not be possible to make the first two any more enjoyable, a few minutes spent on your portfolio before the ball drops could pay big dividends long after the Christmas sweater from Aunt Ethel has gone back to Target. Here are a few reminders.
Tax selling. If you got burned in 2021 on meme stocks like DraftKings, Robinhood or Peloton, you can still turn lemons into castor oil (still tastes lousy but good for you.) Remember that realized losses in a tax year can be used to directly offset capital gains on other (hopefully more plentiful) winning positions or to nullify mutual fund capital gain distributions you may have received. Liberate the turkeys and use the opportunity to lighten up on positions that may have grown too large, or just take some chips off the table if your risk has expanded a bit too much.
Even if you believe that GameStop has promise with a PE ratio of minus 70, you can always repurchase the stock after a 30-day period and use the captured loss against present or future gains. Pro tip: if you want to start building losses for 2022, check out the brand-new all-meme stock ETF (MEME).
Required minimum distributions. The tax code changed in 2019 to require minimum annual IRA distributions beginning in the year you turn 72. If this is the year, you have until April 15 of 2022 to get started, but for everyone already taking RMDs the deadline is December 31. Goofing up on this one is costly: the Grinch will swipe a 50% penalty if you miss the date. Humbug.
The tax changes in 2019 also made permanent the ability to make "qualified charitable contributions" of up to $100,000 per year directly from your retirement account to a favorite qualified nonprofit organization. And the QCD counts toward your required annual withdrawal. This is an extremely useful tool if you are over 72 and currently making charitable gifts out of pocket (or from a large red sack).. Consult with your advisor because the transfer must be direct and follow certain rules.
Retirement plan review. Almost without exception, the most powerful tool for retirement saving is your company 401(k) or 403(b) plan if available. Take a minute to review your current deferral arrangement and crank it up if you can. The current maximum employee contribution to a qualified plan is $19,500 for 2021, but anyone age 50 or above can shove in an additional $6,500 "catch-up" deferral as well.
While not everyone is able to max out, making a stretch to get the biggest match is worth the effort. Check with your employer to determine if and how much the company contributes on your behalf and try to fill up the stocking.
While not specifically a year-end task, the turning of the calendar also provides an excellent opportunity to rebalance your retirement fund holdings, especially given the broad outperformance of U.S. stocks over the past three years. A 60/40 stock versus bond portfolio left untouched since 2019 looks more like 70/30 today and may need a little slimming down, like many of us come the 26th.
Look at a Roth conversion. Roth IRA accounts were created in 2006 to accept after-tax contributions that are compounded and distributed tax-free in retirement. Contributions to Roth IRAs are permitted up to April 15, but taxpayers may choose to convert all or a portion of their traditional or rollover IRA accounts into Roth accounts by paying the taxes previously deferred. The deadline for conversions is December 31, when the elves at the IRS return to the workshop.
For some people, 2021 may be an especially opportune time to consider such a move, especially if your income was reduced during the year or you expect to be in a higher tax bracket in the years ahead. Again, your tax advisor can assist in gaming out the tax bite.
A few minutes spent over the holidays can create a gift that continues to give for years to come. Sorry, no suggestions for the fruitcake.
Christopher A. Hopkins is a chartered financial analyst in Chattanooga.