Happy December! I hope you are enjoying the holiday season so far. For this edition of The Bottom Line I will address year-end tax planning ideas and reminders.
Charitable Giving – Many clients make gifts of cash or securities each year to support their favorite charities. There are multiple benefits to this practice. First, the charity receives the full market value of the donation. Additionally, a gift of securities held for over one year, such as stocks or mutual funds, generally generates an income tax deduction at the market value of the securities, regardless of the price paid or basis of the securities, and capital gains tax is avoided through such a gift.
If you want to donate appreciated securities you have until Dec. 29, the last business day of the year, to complete the transaction. Please contact our operations team for assistance, ideally by December 15, and be prepared with the dollar amount you wish to give and transfer information for the organization that will be receiving the donation. We are willing to help with selecting securities as well.
Retirement Accounts: Required Distributions, Roth Conversions & 401(k) Contributions – Clients who are 70 ½ or older are required to make withdrawals (Required Minimum Distributions, or RMD’s) from their individual retirement accounts by April of the year after they turn 70 ½ and by year-end thereafter. At CCM we process distributions on behalf of our clients, working with them to ensure they are completed on time. Our investment team incorporates the RMD process into account rebalancing, using RMD proceeds to fund liquidity needs for clients. We also use this as an opportunity to reduce appreciated securities or make other portfolio adjustments.
Roth IRA conversions must also be completed by year-end to be applied to the 2017 tax year. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) to a Roth 401(k), the converted funds are generally subject to federal income tax in the year that you make the conversion. Whether a conversion is appropriate for you depends on many factors, including current and projected income tax rates. Your tax advisor should have input on this strategy given your unique situation.
Tax-Sensitive Investment Strategies – At CCM we consistently manage portfolios with an eye to tax sensitivity, but at year end we are especially cognizant. This means avoiding unnecessary taxes by waiting until January 2018, if possible, to trade highly appreciated securities, thus postponing tax payments to the following year. Delaying the sale of securities at short-term gains until they are long-term is another timing strategy that can be helpful, as short-term gains are taxed at the ordinary income tax rate and long-term gains are taxed at a more favorable rate (typically 15-20%).
We also track estimates of capital gains distributions on our preferred mutual funds in order to avoid buying funds that are paying large distributions. Finally, we review each portfolio for tax loss harvesting opportunities throughout the year, as losses can be used to offset gains and some ordinary income, or carried forward to future tax years.
Whether affecting your personal assets, investment assets, or both, taxes can represent a major cost; careful tax planning can lessen this burden. Please let us know if you would like to discuss these strategies, and also be sure to consult your tax advisor for additional input.
For those who own individual 401(k) accounts or self-funded retirement plans, contributions must also be made by year-end.