Year End Financial Tips
Capital Gains/Losses
Congress can either extend the Bush era tax rates and the top rate on long – term capital gains will remain at 15% for a year or so OR not extend and on Jan. 1st the top rate on gains goes up to 20%.
The event more grim scenario is if Congress does absolutely nothing and allows the Bush era rates to expire because then the new top tax rate on dividends will be a whopping 39.6%. Smart investors will be mindful of loss harvesting. When selling an investment at a loss, $3,000 per year of the loss can offset ordinary income and you can apply the remainder to protect future investment gains. Just make sure you don’t buy the same holding 30 days before or after the sale, as you won’t get the loss according to the wash/sale rules. (These rules only apply to losses…not gains).
If that isn’t enough to put a sour taste in your mouth, the new 3.8% surtax on investment income starting in 2013 for the wealthiest earners will. Whether to take the losses this year or wait till next is a situation where a case can be made either way. Logic tells us losses would be more valuable next year provided tax rates go up. The caveat here is that waiting could diminish their value. So there is also some good rationale for taking short-term gains this year to use some losses from the 2008 tsunami that dealt devastating blows to so many investor portfolios.
Retirement accounts
You have until December 31st 2010 to make contributions or establish your accounts (non IRA accounts)
You have until April 15th 2011 to fund or establish IRA’s
For those age 70.5 or older, required minimum distributions must be taken out of IRA’s and other retirement accounts by year end to avoid a 50% penalty.
Roth Conversion
You must convert by December 31st 2010 in order to take advantage of the ability to split the taxes owed on the conversion between 2011 & 2012.
Review
Review which investments make sense to have in a tax advantaged account and which ones would be better in a taxable account. For example if you have mutual funds that are traded actively and as a result generate a sizeable amount of short –term capital gains, holding them in a tax –advantaged account to defer taxes may make sense.
Review your beneficiaries to ensure you have it set up correctly.
If you have a company 401K, revisit the percentage being applied and see if you can add more for the upcoming year. This is a great idea especially if the company matches.
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