In this week’s post, I explain several more financial planning items to review before the end of the year:

• Tax-loss harvesting

• Contributions to certain accounts

• Portfolio rebalancing

This is the second post in a series discussing different financial planning strategies or areas of your financial life that you may want to review before the end of the year. Last week, we discussed: career planning and compensation, charitable contributions, required minimum distributions (RMDs).

#4 – Tax-loss harvesting

Tax-loss harvesting is the practice of intentionally realizing capital losses by selling security positions. The losses can be used to offset realized capital gains. Losses, to the extent they exceed capital gains, may also be able to offset other (non-capital gain) income of $3,000 (this limit is $1,500 if your filing status is married filing separately). Any unused capital losses can also be carried forward for use in future years.

When selling a position with a loss, the position cannot be replaced (before or after the sale) within 30 days. This is called the “wash sale” rule. If the wash sale rules are violated, the loss will not be counted. Although the exact position or a “substantially identical” position cannot be purchased, positions with similar characteristics can be purchased. The wash sale rules can get a little complicated, and they will likely be the subject of a future post.

For example, Reid has already realized $10,000 of long-term capital gains this year. He has $4,000 of unrealized capital losses that he decides to harvest. This results in his total capital gains for the year being reduced to $6,000 ($10,000 - $4,000 = $6,000). At 15% federal and 5.75% state long-term capital gains rates, this tax-loss harvesting reduces his current year tax liability by $830 ($4,000 * 20.75%). After selling the positions to realize the losses, Reid replaces the securities with other positions that are not “substantially identical” to the securities that were sold, but that still keep his portfolio in line with his goals.

#5 – Contributions to certain accounts

Many popular kinds of accounts have contribution deadlines for the tax-year that are the same as the tax filing deadline. For example, this applies to several different types of accounts we have previously discussed, such as a Traditional IRA, Roth IRA, and Health Savings Account (HSA).

However, there are at least a couple of different types of accounts that have deadlines that are the end of the year (December 31):

• 529 plans - 529 plan contributions must be made by the end of the year in order to qualify for a state tax deduction for that tax-year. This in the case in most states, although there are some exceptions.

• Workplace retirement plans – Contributions to most workplace retirement plans must be made before the end of the year, to “count” for that year. This is especially important if you want to max-out your employer retirement plan for the year. For example, if you make contributions to your workplace 401k plan, any contributions you would like to apply for 2022, must be made by December 31, 2022.

#6 – Portfolio rebalancing

The end of the year is also a good time to examine your investment allocation and see if you need to make any changes and/or rebalance. Especially when the markets are moving a lot, like they have this year, an investment allocation can easily become out-of-balance from its target. Any portfolios that include taxable accounts can also consider tax-loss harvesting opportunities, as mentioned above.

For example, an investor’s target asset allocation for their portfolio is 80% equities (stocks) and 20% bonds. Due to a sharp drop in the equity (stock) market, the investor’s portfolio is now 73% equities and 27% bonds. To return the portfolio to its target, bonds would need to be sold to reduce their allocation to 20% and stocks would need to be purchased to raise their allocation to 80%.

If you do not have a target asset allocation for your portfolio, you need one. You do not want your portfolio to be drifting aimlessly.

If you have any comments, questions, or ideas for future posts, please let me know

I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.