Year-End Tax Planning Ideas With Your Investments

With just a couple of weeks left in 2023, tax planning is probably not front-and-center on your Holiday to-do list. Nonetheless, the calendar waits for no one, and once New Year Day arrives, the planning part ends.

Tax planning with your retirement and taxable accounts should be tended to throughout the year, but the loose ends maybe can be tied up in a few easy steps if you act quickly and follow the rules.

Here's my short list of four planning tips to hopefully save you some coin come next April with uncle Sam. The first two are for non-retirement accounts, the last two for Qualified Retirement accounts like IRA’s and workplace 401k plans.

MUTUAL FUND DISTRIBUTIONS from non-retirement accounts.

By law, mutual funds must distribute most all of the gains that they have accumulated by investing your money. They need to do this at least once per year. The distributions are then considered taxable to their shareholders. If you own a mutual fund, you should know when they distribute income and capital gains.

You’ll register a gain or loss when you sell your shares on your own, but the mutual fund company doesn’t care when you bought their fund. If you own it on the ‘record date’, they will pay out the gain to you. If you reinvest that in more shares, you still are taxed on that also. If the gain is particularly large, it could affect your taxable income and/or other ‘benefits’ that may be taxed such as social security or you pay more for health services like O’bamacare. Payouts could also nudge your income into the next tax bracket. Not a good place to be.

  Call your advisor if you own mutual funds in a taxable (non-retirement) account, or go to the mutual funds website to find out. Or call the mutual fund company and ask what their 2023 distribution schedule is. When is the record date of the fund? When are the payment date(s)? They usually schedule these dates the last week of December, but other mid-year payouts may be scheduled also. Consider selling the mutual fund if the distribution payout will significantly affect you tax-wise. Be cognizant of your own capital gain or loss when you sell your shares.

TAX LOSS HARVESTING from non-retirement accounts.

You probably know that you can offset a gain with a loss if you sell stocks and bonds during the year. Look at your securities that you own today. Then look at what you sold so far this year. Are there any losses that you can use from existing positions that you can offset against gains taken? Are there any gains that you can realize to offset the losses already realized?

It may save you tax to sell a losing position against a gaining position. You can buy back the stock sold later if you still like it. Beware of the wash-sale rule on this, however. Ask your advisor or broker before selling at a loss as you can get tripped up if not executed properly.

REQUIRED MINIMUM DISTRIBUTIONS, RMD’s

The IRS requires you to take yearly minimum withdrawals from your retirement accounts (think IRA’s, 401(k), 457 plans and the like.

They set a schedule for each age as to how much you need to take in order to avoid a tax penalty. Depending on your birthdate, the requirement can kick in around age 72-73. The schedule is very liberal. A 75 year-old needs to empty the account within 24.6 years, and an 80-year old in 20.2 years.

Use the value of your account on 12/31 of the prior year. Check with your investment company if they have not notified you of your 2023 RMD’s. It's often posted on the website for brokerage accounts or an alert in your in-box. Note: your annuity at your life insurance company also requires RMD’s if it’s an IRA or qualified annuity. To process all the RMD’s timely, some firms require 2-3 weeks notice by you, so look into that ASAP to meet the year-end deadline. One nice rule: you can take your annual RMD's from any retirement account; just add up the RMD's for each account, then decide which account would be best to take it from. This saves time and paperwork for sure.

ROTH IRA’s – Open one TODAY.

Seems like ROTH IRA’s are not in the headlines as much as traditional IRA’s, but they should be. They offer a way to defer the gains on your investments once you move them to the ROTH from your other retirement account(s). You can then NEVER pay tax on the ROTH distributions in later years. You still pay the tax funding the ROTH IRA initially, just like a traditional IRA distribution.

Key point: Your ROTH IRA must be open for 5 years before you can enjoy the tax free gains (or earnings). You can take back your initial investment without a tax.

SO, here’s what to do. OPEN a ROTH IRA now, and fund it with $10.00 in cash. Leave it sit in case you need it after 5 years, or after you are 59-1/2 years old. Then it will qualify. You only need to fund ONE ROTH IRA, any ROTH IRA to set the clock ticking 5 years. And you have until the tax filing deadine, 4/15/2024 to declare 2023 as your first year opened.

Open the account; you may never use it, but you also may need it badly to avoid taxes in your later retirement years.

This is especially important if you have qualified accounts like IRA’s and workplace 401k plans that you may want to use to fund the ROTH IRA. If you are in your 50’s, fund it so the 5 year rule will align with the 59-1/2 rule to avoid the early withdrawal penalty for IRA distributions. The very latest that you SHOULD OPEN a ROTH IRA would be age 54-1/2, five years before age 59-1/2.

So hopefully some of my tips have resonated with you today, and gets you to thinking about your personal taxes as we end 2023.

Do have a joyous upcoming holiday, be it Christmas or other that you observe.

~Barry

The advice above should not be construed as tax advice on an individual basis. Your tax situation should be carefully reviewed by a tax professional, C.P.A., Enrolled Agent, or other trusted source. Barry Unterbrink and Stetson Wealth Management are not licensed tax preparers.