When it comes to stock market tips, it’s always dangerous to follow—or ignore—the advice. What to do?
Hot stock market tip: Rebalance and take advantage of losses in the stock market. That’s a takeaway from financial planners as they give year-end advice to those examining their financial portfolios in preparation for their future or existing retirement.
With the way the stock market has been doing, a lot of mutual funds are paying out very high capitals gains distributions and dividend distributions this year, says Stephen Wright, a financial planner with The Enrichment Group in Miami. He urges people to be prepared for a higher than normal tax bill due on April 15. “Most people won’t find out how much those are until they go out at the end of the month,” Wright says. “If you’re in mutual funds that invest mostly in US stocks and with them doing so well, they will get more capital gains and income than they might realize.”
If you have mutual funds that have losses, consider selling them and then buying them back in 30 days to offset income in tax returns on capital gains they make, Wright says.
“They definitely want to take advantage of any capital loses that exist,” says Eric Brotman, a financial planner and owner of Brotman Financial Group in Baltimore and author of the book Retire Wealthy. “There aren’t going to be too many right now, which is a nice problem to have. But the reality is you want to time your capital gains as well. In a high-income area where you are a worrying about a Medicare surcharge on capital gain investment income, that’s something you want to do everything you can to avoid.”
If you’re not a very high income bracket, you want to be able to pay capital gains whenever you can at zero or 15 percent, Brotman says.
“If you have an abnormally low year, and you are a married couple and one of the spouses was laid off this year or retired last year and your household income is lower, it’s a great time to take the capital gains and pay the lower rate on them and reinvest,” Brotman says.
Besides taxing losses and reinvesting, Brotman says peoples should avoid any transactions that are going to be taxable in December. It’s a good time to rebalance IRAs, but he says people shouldn’t rebalance anything that’s going to create a capital gains tax unless it’s an “abnormally low” income year, he says.
What is rebalancing?
Let’s say you have a portfolio that’s in 50 percent stocks and 50 percent bonds and cash and the stock market has a big year, Brotman says. By the time the year is over, you might hold 60 or 65 percent in stocks because they have grown that much. That means you are taking on more risk than you intended so it’s a good time to sell some of those stocks and replenish into the fixed income and keep your risk level where you intended it all along, he says.
“You want to do that annually anyway from an investment perspective,” Brotman says of rebalancing IRAs. “It’s a convenient time to do that and it doesn’t matter because there is no tax hit anyway. You know people tell you to change batteries in your smoke detectors every time Daylight Savings hits so you won’t forget. It’s the same idea. If you plan to do that before the end of the year, it is something you get in the habit of doing. If you are making either IRA or Roth contributions, the time would be to do that now or by April 15.”
As for other advice, Brotman says this is a great time for people to make charitable donations from a tax perspective. Whether you’re donating cash or highly appreciated securities or whether it means going through your closets and giving away suits you no longer wear to Goodwill or someone else, this is a great time to make these donations because you can claim them this year on your tax return.”