Year-End Tax Moves You Should Make Right Now

With tax season around the corner, the holidays can be a daunting prospect. You’re spending tons of money on gifts and travel and may have to spend a ton more come April 15. If your tax bill is on your mind, consider one of these strategies to shelter your investments.

1. Rebalance Your Portfolio

First consider your ideal asset allocation. How do you want to spread your money between stocks, bonds, and other asset classes? If you’re unsure, consider taking this Vanguard Questionnaire that assesses your ideal asset allocation based on your financial behavior and reaction to market losses. Then compare your ideal asset allocation to your current asset allocation. You can link your investment accounts to web apps such as Personal Capital or FutureAdvisor to get a better picture of where your money is now.

You can then buy and sell stocks to get back to your ideal split. You may also consider using cash from dividends or earned interest to rebalance. Using cash could mean you avoid selling an earning stock and having to pay taxes on those gains.

2. Realize Tax Losses

Tax-loss harvesting allows you to sell investments at a loss to create a tax deduction. You can realize up to $3,000 in losses to lower taxable income or offset gains. Be cautious with your reinvestments, though. If you reinvest the money in a very similar investment 30 days before or after the sale you can no longer count the loss for tax purposes.

3. Shelter Interest in Retirement Accounts

You can move bonds from your investment accounts to tax-deferred retirement accounts such as an IRA or 401(k). Because interest from bonds is taxed at ordinary income tax rates, you could save by waiting to pay on the interest until later in life.

4. Contribute to Your IRA or Roth IRA

Contributing to a tax-deferred retirement account reduces your taxable income. Contributions max out at $5,500 annually or $6,500 if you’re over 60, but you can then also qualify for a Saver’s Credit of up to $2,000 if you’re filing independently or $4,000 if you’re married filing jointly.

5. Consider Converting to a Roth IRA

Converting funds in your employer-sponsored plan or IRA into a Roth IRA makes those earnings taxable now. However, younger investors have time to make up the immediate loss — any earnings or withdrawals made in retirement will be tax-free.

Sources: USA Today, Money Under 30