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Making Pre-Holiday Plans: Three Portfolio Moves to Gift Yourself

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Before the holiday season kicks off, focusing on some year-end portfolio housekeeping will set you up to be positioned for 2022. While the Grinch (or certain senators) came for the Build Back Better Act, the price tag is still well over a trillion dollars. Taxes will likely be going up. However, there are some smart moves you can make, from your portfolio to charitable giving to rethinking your account structure. These can minimize the bite this year and going forward.

It’s Still Harvest Season

While the market turned in record performance and kept notching new highs, the gains weren’t spread equally across the board. There were still winners and losers as the economy bounced around and the recovery coped with the delta surge, labor shortages, and a disrupted supply chain.

As we get into the last quarter, it’s a good idea to take stock (pun intended) of your portfolio allocation. Are you still inside your preferred risk parameters? With a lot of gains in value, you may unintentionally overweight some sectors or even individual positions. This can result in an overconcentrated portfolio and in taking more risk than you are comfortable with. With volatility likely ahead, it’s a good idea to revisit your comfort level and then restack your portfolio as necessary.

You also may want to rethink your tactical allocation, as the likelihood of investments in the economy combined with Fed moves may have greater impacts on some sectors. You also may want to think about your income positioning and shift more assets into dividend stocks. These moves should be made with tax-loss harvesting in mind, to offset any gains.


Charitable Giving

If you have positions that have appreciated a great deal, you may want to think about including them in your giving strategies. There are several ways to accomplish this, but increasingly investors are turning to Donor-Advised Funds. These funds are simple to set up and have the benefit of allowing you to get a tax deduction for the full current market value of the asset this year. Because the asset moves into the fund and is later distributed to charities you select, there is no sale that triggers capital gains. DAFs have the benefit of allowing you to take the deduction, but the asset can continue to grow in value and you can take as much time as you like to determine where you want the funds to ultimately be directed.

If you are over 70 ½, another tax-advantaged strategy for avoiding capital gains taxes is to make a qualified charitable distribution (QCD) from a retirement account. QCDs transfer the asset or the funds directly to a qualified charity from your IRA. Besides removing a highly appreciated asset, which can lower RMDs going forward, QCDs count toward your required minimum distribution for that year – but don’t add to taxable income.

This can keep your income low and help you avoid taxes on social security and the dreaded Medicare Part B premium surcharge. Also – you don’t have to itemize to take a QCD, so you can still take advantage of the higher standard deduction. The maximum amount is $100,000, and the funds need to move before your RMD deadline.


Roth Conversions – A Long-Term Flexible Income Solution

Since we’re talking about lower taxable income, a year in which you both lower the amount of your retirement fund and have low taxable income is a great time to think about a Roth conversion. Paying the taxes on your retirement funds now, at the current rates, can save you money in the long run. It also permanently eliminates RMDs, which means you have maximum income flexibility going forward and you can let your capital grow when the market is expanding, rather than liquidating portions of it. And since you’ve already paid the taxes, Roths are a good estate planning vehicle as they don’t come with the requirements attached to passing on traditional retirement plans.


If you’re not 72 yet, you may be in the sweet spot for a Roth conversion. Since you’ll pay the taxes upfront, it will increase your taxable income for the year. Staggering the conversion will help, but doing it in years when you have otherwise low income is the best way to manage. If you haven’t started taking social security benefits, putting them off will maximize your lifetime benefit and provide you with a window of lower income.


The Bottom Line

There’s a lot to be thankful for this year, and the holiday season is a great time to give back. But paying extra shouldn’t be part of that strategy. There are short-term and long-term moves you can make to keep your portfolio in line with your goals and keep as much of your income under your control as possible. 

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