Savvy Tax Moves for Year’s End
If and when your portfolio values rebound from the recent bear market, you could have a new problem: The recovery in value will be fully taxable when it’s eventually withdrawn from your traditional IRA. However, by converting your traditional IRA to a Roth, the tax will be assessed on the value on the date of the conversion, and the rebound can occur tax-free. Just withdraw money from your traditional IRA in a taxable distribution, then roll those funds into a Roth IRA, where all future growth can be tax-free. Doing so while the asset values are down can result in a lower tax impact.
Tax-Loss Harvesting (But Beware Those Wash Sale Rules)
In a year with plenty of stock losses, tax-loss harvesting can be a key tactic. You sell your securities at a loss, then use these losses to offset current and future capital gains. Short-term capital gains are taxed at your ordinary tax rate, while long-term capital gains are taxed at 15% (or 20% for higher income-earners). If you’ve owned the security for one year or less, the gains will be considered short-term, while anything held longer than a year is considered long-term.
Caveat: According to the wash sale rule, if you sell a security for a loss while purchasing something substantially identical to it within 30 days (either before or after the sale), your deduction for the loss will be disallowed. Instead, the loss is added to your basis in the newly acquired security, and will provide a tax benefit when that replacement security is eventually sold. You can avoid this by buying a similar but not substantially identical security, perhaps one in the same industry.
Your Annual Benefits
Most Flexible Spending Accounts for things like health care, child care or parking have traditionally had a “use it or lose it” rule, meaning you needed to spend that money by the end of the year or it would be forfeited. Now, FSA regulations allow employers to offer a carryover or grace period, so if you still have money in an FSA, check with your HR department to see how quickly you need to use it. On the other hand, Health Savings Accounts automatically roll over into the next year, so you don’t need to worry about exhausting them before year’s end.
New Rules for RMDs
At the beginning of 2022, the IRS updated its life expectancy tables, used to calculate Required Minimum Distributions from employer sponsored retirement plans, for the first time in 20 years. Since life expectancy has taken a sizable jump forward, when you calculate how much of your retirement savings you’ll need to withdraw in any one year, you’ll now be allowed to take less than under the old rules. This will leave more money in your account which can earn additional interest and grow tax-deferred, helping to ensure that you don't outlive your assets.
Charitable Giving Strategies
For both tax advantages and for philanthropic reasons, the end of the year is always a popular time for charitable giving. But if the bear market has left you with a little less disposable cash, consider forgoing your gifts this year, in order to bundle them up next year. With the standard deduction for married couples at $25,900 for 2022 ($12,950 for single filers), you’ll need at least that much in a single year for your donations to have a tax impact. Also, rather than writing a check, giving appreciated stock or other securities can provide additional tax benefits as well.
Updated Estate Plans
The end of the year is also a great time to make sure your beneficiary, executor and other designations are still appropriate, accommodate any additions to the family, and incorporate any other necessary updates to your assets or plans. For one thing, the down market may be an opportunity to transfer assets that have declined in value to your heirs or to establish a trust now.
The last few months of the year can be a very busy time in many ways, so it will help to get started on executing these strategies as early as possible. Your Baird Financial Advisor can help you sort through which tactics are most appropriate for your individual situation.
The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
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This holiday season, don’t just write a check to your favorite charity. Consider these tax-advantaged strategies that can give you more bang for your buck.