Year End Strategies
Investors are limping into the fourth quarter battered and bruised from a bumpy market as stocks and bonds continue to trade lower on inflation fears and rising interest rates. Regardless of the chaos, there is still time to make smart year-end moves to shore up your finances.
Buy Stocks. Buy stocks if your time horizon is three to five years or more. The price drop allows you to purchase individual stocks and funds at lower valuations. History shows it pays to buy stocks during bear markets while others sell. If you need proof, review the previous bear markets of 1956, 1961, 1966, 1968, 1973 -1974, 2000 – 2003, 2007-2009, 2018, and 2020.
Buy Bonds. Buy bonds if your time horizon is one to three years. The one-year US T-Bill yields 4%, the highest level in fifteen years, and the rate is guaranteed!
Sell Stocks. If you own a few losers in your taxable account, sell them to realize a loss. You can offset your gains with losses, and if you don't have any gains, you can write off $3,000 from your tax returns and roll over the loss forever until it's gone. You can buy back stocks you sell in thirty-one days to avoid the wash sale rule. For example, if you sell Apple today, you can repurchase it on October 23.
Sell Bonds. If you purchased bonds during the COVID crisis, you have losses because the yields were considerably lower than they are now, and when interest rates rise, bond prices fall. Selling your bonds will trigger a tax loss and allow you to buy new ones with higher yields.
Required Minimum Distribution. If you're 72 or older, it's time for your IRA required minimum distribution. The calculation is a function of your 2021 year-end valuation and your age. If you fail to take your RMD, the IRS will assess a 50% penalty on the projected distribution amount. For example, if your RMD amount is $20,000, the IRS will penalize you $10,000, so don't forget!
Rebalance. It's been a volatile market this year, and your asset allocation might need an adjustment. Your asset allocation is probably too conservative as stocks have fallen. Rebalance your account to return your portfolio to your intended target.
Qualified Charitable Distribution. If you're 70 or older, consider a qualified charitable distribution. The IRS allows you to donate up to $100,000 from your IRA to charities. Why use a QCD? The distribution qualifies as a required minimum distribution, avoids taxes, and benefits groups or organizations you support.
401(k) Contribution. The maximum contribution for 401(k) plans is $20,500 if you're under 50 and $27,000 if you're 50 or older.
Roth 401(k). Take advantage of your Roth 401(k). Plan participants can contribute to the Roth 401(k) regardless of income; at retirement, it can roll over to a Roth IRA.
Roth Conversion. If your IRA is down in value, consider a Roth conversion, especially if you're still working and have significant assets in a taxable account. You can take advantage of lower stock valuations in your new Roth IRA by converting today. As stocks recover, you needn't worry about paying taxes or the required minimum distribution again.
IRA Contribution. The maximum contribution for an IRA is $6,000 if you're under 50 and $7,000 if you're 50 or older. The amounts apply to both traditional and Roth IRAs. However, you can't contribute the maximum amount to both IRAs.
Donate. The giving season is here, and non-profit organizations raise most of their funds during the fourth quarter. Donating to charities benefits you and the groups you support because they get your money, and you receive a tax write-off. Consider donating stocks or funds with significant capital gains because you can write off the security's fair market value and avoid paying the capital gains tax.
Give. You can give away $16,000 per year under the annual exclusion, which is not a taxable event to you or your beneficiary. For example, if you're married and have ten kids, you can give away $320,000.
Get outside. The fall is an excellent time to visit a national or state park as temperatures cool and leaves change color. Hiking in the mountains or walking on the beach is a reminder that all is well in the world.
Look deep into nature, and then you'll understand everything better. ~ Albert Einstein
September 22, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.