5 End-of-Year Tax and Financial Planning Tips for Investors

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As we approach year end, all you probably want to do is soak up the holiday cheer. You’ve earned it, after all! Fisher Investments wishes you the happiest of holidays. But before turning the page on your calendar, understand there are some things you can do now to prepare for the upcoming tax season and potentially boost your retirement savings. Of course, for any specific tax concerns, you should contact your tax advisor—they will know your personal situation and can help recommend what’s right for you.

Here are five tips to set yourself and your family up financially for a happy New Year.

1. RMDs aren’t required in 2020, but it’s not too early to plan for 2021

Thanks to the CARES Act passed in March 2020, required minimum distributions (RMDs) are not required this year.[i] However, it’s never too early to come up with a plan to take your 2021 RMDs. You should ask the brokerage or bank holding your assets to help you estimate your 2021 RMD values based on your year-end account values.

In most years (excluding 2020), the Internal Revenue Service (IRS) requires anyone over a given age (currently 72) to withdraw a certain amount from their tax-deferred accounts, such as 401(k)s or traditional individual retirement accounts (IRAs). If you have one of these accounts funded with pre-tax dollars (money you haven’t already payed income taxes on), failing to take your annual RMD may result in a penalty of up to 50% of the amount you fail to withdraw.

As a reminder, when you withdraw money from a tax-deferred account, you generally pay income tax on the withdrawals or owe it when you file your taxes.  

2. If you can, boost your 2020 retirement contributions

As the year comes to a close, you may find yourself with some extra room in your budget—maybe because you traveled less or otherwise had lower expenses this year. You may consider using that money to contribute more to your retirement accounts.

If you have a retirement plan account—such as a 401(k), 403(b) or Thrift Savings Plan—you can contribute up to $19,500 from your paycheck in 2020 with an additional $6,500 in catch-up contributions if you’re 50 or older.[ii] Your employer may even match your contributions to some degree!

Depending on your income and tax-filing status, you may also be eligible to contribute to an IRA. The contribution limit for a traditional or Roth IRA is $6,000 this year ($7,000 for those 50 and over).[iii] Traditional IRA contributions may be tax-deductible (depending on your filing status and income) and grow tax-deferred, like most 401(k)s. Roth contributions aren’t tax-deductible but they grow tax-free and have no RMDs. Eligibility will also hinge on your filing status and income. While you don’t need to make IRA contributions before year end—you have until April—it never hurts to begin planning now.

3. Consider tax-loss harvesting to offset capital gains

If you sold securities (stocks, bonds or other investments) at a gain in a taxable account this year, you will likely owe capital gains taxes unless you also incurred a similar amount in losses. Strategically selling securities at a loss to offset your capital gains is called tax-loss harvesting. It can be a huge help if you can execute it without drastically altering your investment strategy. Should your realized losses exceed your gains, you can carry those losses into future years and use them to offset future realized gains.

Fisher Investments believes tax-loss harvesting should be done to mitigate taxes and not simply to sell securities you don’t like. Those securities may be playing an important diversification role within your overall portfolio strategy! We think tax-loss harvesting is properly done by selling down stocks purchased more than 30 days ago (due to the wash-sale rule) and using the proceeds to buy replacement securities that maintain your overall investment exposure. After 30 days, you can sell the replacement stock and buy back the original position or, if it makes sense, keep the replacement stock.

4. Donate to charities—and deduct

If you plan to make charitable donations using taxable investments, you may be able to transfer those investments in kind rather than selling them and donating the proceeds. Transferring investments in kind can help you avoid capital gains taxes you may incur from selling them, and you can still claim the charitable deduction on your taxes if you itemize. It’s important to be mindful of higher standard deductions after the 2017 Tax Cut and Jobs Act, but itemizing and donating to charity could still help. Please talk to your tax advisor about your personal circumstances.

5. Be aware of mutual fund capital gains distributions

Finally, toward the end of the year, many mutual fund companies will make capital gains distributions to shareholders. If you own mutual funds in a taxable (non-retirement) account, these capital gains distributions will be a taxable event for you. And this year’s could be particularly significant.

Laws require mutual funds to proportionately distribute most of the fund’s realized gains to shareholders. When many of the fund’s investors sell their shares—which tends to happen during periods of heavy volatility like we saw earlier this year—the fund manager may be forced to sell securities to raise cash to cover the redemptions. Such forced sales may trigger capital gains taxes for the fund’s investors.

It’s possible fund managers at least partially offset gains with losses this year. But after a long bull market run for stocks, fund managers may have to realize big gains for investors. If you own funds in a taxable account, this may be something you want to watch out for—especially since these distributions can mean you owe capital gains taxes even if the fund declined in value this year.

While these financial planning tips just scratch the surface, they should help you think about the right ways to end 2020 and set yourself up for success in the future. Consider whether you can save more for retirement this year and talk to your tax advisor to see what you could be doing to mitigate your 2021 tax bill. Fisher Investments wishes you a happy and healthy 2021!

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return.  This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[i] Internal Revenue Service, as of 11/03/2020. https://www.irs.gov/newsroom/irs-seniors-retirees-not-required-to-take-distributions-from-retirement-accounts-this-year-under-new-law.

[ii] Internal Revenue Service, as of 11/03/2020. https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500#:~:text=%20Here%20are%20the%20phase-out%20ranges%20for%202020%3A,workplace%20retirement%20plan%20and%20is%20married...%20More%20.

[iii] Internal Revenue Service, as of 11/03/2020. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.