The best year-end moves an investor can make in a bull market
For most investors, 2016 was a very good year.
And if you’re sitting on some fat gains in your portfolio with the market marching through record after record, you might be tempted to leave well enough alone.
“In a strong bull market, it’s easy to sit back and watch your balance grow,” said Christine Benz, director of personal finance at Morningstar. “But this is actually a very opportune time to look and think about making some changes.”
So before you ring in the New Year, consider making the following moves.
Stocks went wild post-election, and bonds took a nosedive. So chances are that your asset allocation, meaning the percentage you keep in stocks vs. bonds, has gone way off course. For example, if your goal is to have a portfolio with a 60-40 stock-bond mix, you might have a much higher percentage in stocks now. Rebalancing restores your original asset allocation.
“In most cases, a well-diversified portfolio will have grounds for rebalancing right now,” said Tim Maurer, director of personal finance for the independent adviser group BAM Alliance.
HARVEST YOUR GAINS
If your income is in the 15 percent tax bracket (in 2016, that’s up to $75,300 for a couple) or below this year, perhaps because of a job loss, or retirement, you can sell shares of appreciated funds and pay no taxes on the gains. Most other investors will pay a 15 percent rate on long-term capital gains.
If you’ve lost money on any funds or ETFs, you can sell them and use the losses to offset any taxes you may owe on investment gains. And you can write off up to $3,000 of losses per year against your income. Just heed the wash-sale rule, which says that you can’t buy the same or similar securities within 30 days of the sale, or the IRS will disallow the write-off.
DONATE APPRECIATED ASSETS
December is the peak month for charitable donations. If you’re looking to make a gift, you also can get a tax break by making the donation in the form of shares of stocks or mutual funds. In general, you can claim the current market value of those shares, no matter how much they’ve gained since you bought them, without paying a cent in taxes.
This year, that tax-saving move merits some extra attention. President-elect Donald Trump has indicated that he wants to cut tax rates especially for higher earners. That could potentially trim the value of future deductions. “You’ll get a bigger bang for your buck while you’re paying higher rates,” said Benz.
REMEMBER YOUR RETIREMENT
In 2016, you can contribute a maximum of $18,000 to your 401(k) plan – plus an extra $6,000 if you’re 50 or older.
Maxed out your 401(k) and still sitting on some extra cash? Pad your retirement savings further with a Roth or traditional IRA. For 2016, you can put in up to $5,500 ($6,500 if you’re 50 or older). You have until the April tax-filing deadline to make the contribution.