Investors typically find it more fun and interesting to focus on their investment portfolio or their stock trades, rather than tax strategies.
While the stock market is certainly more exciting than the tax code, investors who overlook tax planning are leaving money on the table instead of putting more into their own pockets.
[Sign up for stock news with our Invested newsletter.]
As you wrap up tax filing today or apply for an extension for filing your tax return, here are some last-minute tax tips to remember:
— Good investors are good tax planners.
— Maximize your 401(k) contributions.
— Put your money in a 529 education savings plan.
— Don’t forget to take required minimum distributions.
— Look for tax-loss-harvesting opportunities.
— Rebalance your portfolio.
— Review your beneficiaries.
— Make annual charitable contributions.
Good Investors Are Good Tax Planners
Most investors don’t do tax planning all year, instead taking required steps in December to meet year-end deadlines, or when preparing their taxes due in April.
“I would recommend people set up a way to track all events and their tax impact in an ongoing manner,” says Chris Urban, founder of Discovery Wealth Planning in McLean, Virginia.
Throughout the year, investors should keep track of all tax-related events, such as asset sales.
“This will also help expedite proactive, year-end tax planning, as you will be able to see what has already taken place in the year,” Urban says. “Based on this readily available information, you may or may not decide to take an action at year-end. It becomes a much more proactive process and allows you to be in control of your tax outcome, at least to some extent.”
[READ: 5 Best Charles Schwab Money Market Funds]
Maximize Your 401(k) Contributions
By maximizing 401(k) contributions, you can lower taxable income, reduce immediate tax liability and defer taxes on investment gains.
“To optimize your 401(k) contributions effectively, you should prioritize contributing as much as feasible within the limits your plan and your financial circumstances allow,” says Karin Stiles, director of operations at Alix, which helps clients with estate settlements.
“Additionally, leveraging periods of lower tax liability presents a strategic opportunity,” she says. “During such phases, consider working with a tax advisor and determine a portion of your 401(k) to roll over into a Roth IRA. A Roth IRA also allows for tax-free growth of your investments and tax-free distributions upon retirement.”
Put Your Money in a 529 Education Savings Plan
Income generated within a 529 plan is typically exempt from federal taxation and often from state taxes when the funds are used for qualified educational costs including tuition, fees, books and housing. While your contributions aren’t federally deductible, some states offer a tax break for residents contributing to these plans.
“If saving for a child’s college education is an important goal, then contributing to a 529 college savings plan can be an optimal strategy from a tax perspective,” says Ryan Nelson, founder and wealth advisor at RLN Wealth.
“Recent tax law changes have made 529 accounts even more attractive, as the Secure 2.0 Act now allows for unused 529 assets to be rolled into a 529 beneficiary-owned Roth IRA tax- and penalty-free, subject to certain limitations,” Nelson adds.
Don’t Forget to Take Required Minimum Distributions
If you are age 73 or older, you’re required to take distributions from your qualified retirement accounts, such as a traditional individual retirement account or a 401(k), if you haven’t rolled it over to an IRA.
Taking these required minimum distributions, or RMDs, is crucial for avoiding Internal Revenue Service penalties. The thinking goes like this: On accounts where you’ve enjoyed tax-free growth, in some cases for many decades, Uncle Sam wants to finally collect his share. While paying taxes is never a pleasant activity, don’t make it worse by overlooking this retirement to-do item.
Look for Tax-Loss-Harvesting Opportunities
Tax-loss harvesting is the process of selling investments at a loss to offset capital gains in other investments. This can reduce your tax liability. It’s a strategy that’s often used to optimize tax efficiency in investment portfolios and maximize after-tax returns.
While many investors and even financial advisors view tax-loss harvesting as a year-end exercise, you can look for these opportunities throughout the year.
Periods of market volatility are particularly good times to take advantage of tax-loss harvesting, says Jeff DeLarme, president of DeLarme Wealth Management in Palos Verdes Estates, California.
“Take March 2020 as an example; the market was down sharply in a short period of time,” DeLarme says. This allowed investors to sell securities for a loss, shift into similar but not identical investments, and effectively maintain market exposure while generating a tax asset.
“Under current tax law, investors can use those losses to offset certain gains and take a net $3,000 loss in a given tax year,” DeLarme says. “In the event they have additional losses that exceed their gains, they may be able to carry forward those losses into future years.”
[READ: Tax-Loss Harvesting Rules and Strategies for Investors]
Rebalance Your Portfolio
Portfolio rebalancing means adjusting your asset allocations to maintain your desired risk levels and investment objectives.
For example, in the planning process, your time horizon and risk tolerance may show that you should have a portfolio of 60% stocks and 40% bonds. You’ll periodically sell some assets and buy others to be sure you maintain that allocation.
Rebalancing your portfolio in a tax-advantaged account, such as a Roth IRA, can be tax-efficient because it allows you to sell investments that have appreciated inside the account without any tax impact. According to Vanguard, if you want to rebalance within a taxable account, add additional money to underweighted asset classes to reduce your tax burden, without selling current investments.
Review Your Beneficiaries
Remember that IRA you opened a decade ago, perhaps when you were married to a different person than the one you’re married to today? If that former spouse was listed as your account beneficiary and you’ve never changed that designation, guess what? That person is still the beneficiary should you pass away.
“Reviewing your beneficiaries is necessary to ensure your estate is properly distributed according to your wishes,” says Stiles. “Once designated, beneficiaries remain in place even if circumstances change, such as the death of a beneficiary or shifts in relationships.”
Regularly reviewing and updating beneficiary designations helps pass your assets on to the intended recipients, she adds.
Make Annual Charitable Contributions
Investors who itemize their deductions can make contributions to their favorite charities as a way of reducing their tax bills.
“Investors should consider gifting appreciated assets, such as stocks or real estate, rather than cash,” DeLarme says. “This allows them to take the full value as a deduction, whereas if they sold the stock and then contributed cash, the tax due on the appreciation would be borne by the investor.”
For those who take the standard deduction, it may be advisable to hold off on making contributions and instead bunch them into a single year, one in which they may be able to itemize, he adds.
DeLarme noted that another helpful tool for those 70½ or older who take the standard deduction is to make qualified charitable distributions, or QCDs, from their IRA accounts.
“These distributions, if made properly to a qualified charitable organization, may count toward their required minimum distribution and are not taxable as is the case for a normal RMD,” he says.
More from U.S. News
10 of the Best Bank Stocks to Buy for 2024
10 Best Value Stocks to Buy Now
8 Ways to Minimize Taxes in a Taxable Investment Account
8 Smart Tax Strategies for Investors originally appeared on usnews.com
