Valeri: In your investment portfolio, consider tax loss harvesting where appropriate. This is the first year in a long time that clients may be able to actively tax-loss harvest given the brutal year in financial markets. Tax-loss harvesting involves selling an investment whose market value is below its cost basis.
After selling the security that is at a loss, the investor buys a like security to maintain market exposure but also stay clear of wash-sale rules that would negate the tax loss harvest. After 30 days, you buy back the original security. Recognizing a loss can be used to offset capital gains on another investment. By doing so, an investor can lower their tax obligation and helps maintain investment tax efficiency. Please consult with your CPA or tax specialist, as everyone’s situation is different.
Rogers: Focus on other aspects of your financial plan that can put more money in your pocket, such as:
- For employees who likely have one to two paychecks left in 2022, check the retirement savings contribution amount in the year-to-date column on your latest paystub. Many times people think they are maximizing their contribution but they aren’t. Perhaps they miscalculated the max or a portion is being funded by a year-end bonus (which isn’t happening this year or it is smaller than expected). If you are not in a position to maximize your retirement savings, at least ensure you are saving enough to get the employer match.
- For self-employed individuals that don’t have a retirement plan in place yet and are considering a Solo-401k, this type of account has to be set up by Dec. 31 if you want to make elective deferrals. The Solo-401k providers are very busy right now so don’t hesitate to get this going if it is something you are interested in.
- Get clarity on whether you will be itemizing your deductions in 2022 or taking the standard deduction. If you will be itemizing, you have until Dec. 31 to make charitable contributions that may be tax-deductible. You can also look at donor-advised funds to see if that would be of interest rather than giving directly.
- I-Bonds have gotten a lot of attention recently with the uptick in inflation. While purchases are limited to $10,000 in electronic bonds per person, per year, you can purchase another $5,000 in paper I-Bonds with your federal tax refund. Something to consider before year-end is to over-withhold your taxes in 2022, with the goal of purchasing additional I-Bonds with your refund. (I-bonds are inflation protected savings bonds that are bought directly from the U.S. Treasury. The interest rate is 6.89 percent, now through the end of April.)
- Take your required minimum distributions from IRAs and 401(k)s by Dec. 31 if applicable. Failure to do so will result in a tax penalty.
- Review your 2022 spending, set up a budget for 2023, and re-assess your cash reserve amount before going into the New Year.
Mark Kremers, managing director, Merrill Lynch Wealth Management: It can be hard to look beyond the present, but focusing solely on daily market fluctuations or interest rate hikes could mean missing near- and longer-term opportunities. Keep in mind that, historically, periods of market turmoil have been followed by economic revival. Merrill’s Chief Investment Office finds reset periods like this generally produce some of the greatest investment opportunities.
As we close the year, we’re working with clients on estate planning services, tax planning and retirement planning; and of course with each client’s short- and long-term goals in mind, there’s always consideration to rebalance asset allocation as needed in order to stay diversified and balanced.
Now is a good time to check in with your advisor on progress toward your goals and assess next steps. Ask questions such as: Where can I look for potential investment opportunities? How can I help offset the effects of higher inflation on my retirement portfolio? What can I consider doing to be better prepared for unexpected events?
