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By: Yvonne Garand

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A Year End Investment Checklist for Smart Investors

Saving and Budgeting | Investing in the Future

Smart_Investors year end checklistLooking for new ways to save money at tax time? Smart investors know that their portfolio is a powerful tool for balancing their annual income. To help you put your portfolio to work for you, we have created this year-end investment checklist, which is full of great ideas for leveraging your investments to lower your taxes and tune up your portfolio for the coming year.

Submit your required minimum distribution form

If you are over 70.5 years old and have invested in an IRA, SEP IRA, SIIMPLE IRA, or retirement plan account you are responsible for filling out a form for your required minimum distribution (RMD). Your RMD is the minimum amount you must withdraw from your account each year, and those who don’t fill out the form face a 50% penalty on their distribution amount. It is best to get this form to your financial advisor by December 31 to allow plenty of time for processing.




Meet with your advisor about rebalancing your portfolio

The markets are constantly changing and so are you. A bull market can raise your portfolio’s risk level by increasing the value of your stock investments over the course of a year. If, at the same time, you are retiring and becoming less risk tolerant, your portfolio will be completely out of whack with your personal needs. You don’t necessarily have to reallocate your investments annually, but year-end is a good time to check in on the state of the market and determine whether your portfolio still reflects the right level of risk for you.


Determine whether tax harvesting is necessary

Tax harvesting is the offsetting of capital gains with capital losses.


What does tax harvesting look like?


Say you have gained $20,000 through the sale of Stock A. Rather than paying tax on the full $20,000; you can minimize your gains by selling another security at a loss. The equation might look something like this:

                  $20,000 gained through sale of Stock A
                +$20,000 lost when Stock B, originally purchased at $100,000, is sold for $80,000
                =$0 capital gain/loss

Aside from your capital gains, you can use tax harvesting to offset your annual income by up to $3,000.Tweet: Aside from your capital gains, you can use tax harvesting to offset your annual income by up to $3,000.




Understand and accurately report your cost basis

Cost basis is the original value, or purchase price, of an asset and is adjusted when stocks split and when you receive or reinvest dividends.


Because cost basis can change throughout the year and is used to determine your capital gains at the end of the year, it is important to make certain you are working with an updated and accurate number. Otherwise, you can be taxed unfairly. Here is a simple example of why cost basis is so important:


Your initial investment in FAV Stock last year was $2,000
Dividends of FAV Stock distributed to you last year were $400
You reinvest the money immediately, and increase your cost basis to $2,400
Dividends distributed this year were $100

You already paid taxes on the initial $400 distribution, but if you claim last year’s cost basis of $2,000, you will be taxed a second time on the initial $400, along with this year’s dividend of $100. By updating the cost basis to $2,400, you will pay taxes only on the $100 your investments earned this year.


This is a simple example but not all cost basis calculations are so simple. It is wise to work with your financial advisor to determine the best way to calculate and report your cost basis on the 1099-B form.




Don’t time the market

When you engage in market timing, you make investment decisions based on your predictions about where the market is heading.


Market timing often leads to emotional decisions based on perceived trends in an ever-fluctuating market. Because the market is volatile, it is constantly moving up and down. Reacting emotionally to a small dip in stock prices can lead you to sell a stock that is dipping, and miss out on large gains when it recovers. By ignoring the daily fluctuations, you can rise above the daily ups and downs and experience long-term growth in your portfolio.


Maximize your tax-deferred retirement plan contributions

If you have a tax-deferred retirement account, like a 401k or IRA, there is a limit to how much you can contribute in one year. It is wise to invest early and regularly (without exceeding your limit) because every dollar that goes into your retirement account represents a reduction in your year-end taxes.




Take stock of your risk tolerance level

Your risk tolerance changes over the course of your life. Though you may tolerate more or less risk than your neighbor, you will also tolerate more or less risk depending on what is going on in your life (divorce, childbirth, the death of a spouse, kids heading off to college) or even what stage of life you are in. In general, younger people can tolerate greater risk because they have more time to make up for losses. Older people often take fewer risks because they need to get the most out of their life earnings. By taking stock of your risk tolerance each year, you can help your financial advisor keep your portfolio in line with your changing needs.


Make a tax free gift

Charitable organizations often reach out at the end of the year because they know that your gift to them is a tax benefit for you. Of course, money isn’t everything. You can also give away household items, clothing, electronics, etc. This is also a good time to follow through on plans to pass along your estate, securities, fine art, or other high-value items to organizations or to your heirs in order to reduce your tax liability.

Note: If you make a non-cash charitable donation, be sure to request a receipt that states the financial value of your gift.




Convert your Traditional IRA to a Roth IRA

The big difference between a Traditional and a Roth IRA is that Traditional IRAs are tax-deferred (you don’t pay tax on the money until you take it out) and a Roth IRA is not (you pay taxes now, not after retirement).


Deferring taxes may seem like a great idea now, and many people opt for the Traditional IRA for just that reason. However, you will have to pay taxes on the income at some point and it might make more sense for you to pay those taxes now, while you’re making money, rather than later, when you’re not. Another benefit of paying those taxes now is that your money will continue to grow tax-free over the years. You may put $100,000 into the account today but when you retire it may have grown to $200,000. With a Traditional IRA, you’ll pay taxes on all $200,000. With a Roth, you’ve already paid your taxes so you are essentially saving yourself from paying tax on the $100,000 your IRA earned.


Don’t wait to put this checklist to work

Work with your financial advisor to apply the information in this checklist and get the most out of your portfolio this year. If you have traditionally waited until the end of the year to get started, break that habit now. The sooner you talk with your financial advisor, the more time they have to develop an effective strategy for saving you money.


Learn how VSECU can help you strategize for a prosperous New Year. Contact a Member Service Consultant in our Call Center today to be connected to one of our financial advisors.


Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. FR-2163880.1-0618-0720 


Need some tools to organize your financial information and reduce your tax burden this year?


About Yvonne Garand

Yvonne Garand is our guru for visionary strategy, branding, marketing, business and community development, customer experience, and people development.