This has been a year of economic challenges in many ways, from down-trending markets to persistent inflation. An aggressive Federal Reserve and the ripple effects of the midterm election season have added complexity to the financial outlook this year as well. But even challenging conditions can produce opportunities, and there are ways to make the most of the trade-offs that accompany down markets.
Here are seven financial choices you can make between now and the end of the year that can help you start 2023 on the right foot.
1 – Consider Harvesting Tax Losses
Tax loss harvesting is a method for offsetting your tax liability by selling off an underperforming investment at a loss. Up to $3,000 in capital losses can be claimed against your income. These can balance out capital gains from well-performing investments that you sell, but they can also be applied against your income in general.
A good portfolio manager will usually consider this strategy automatically as part of an overall investment rebalancing at the end of the year. But if you’re not sure, you can speak with your financial planner and tax advisor to see if this is a technique that makes sense for your needs this year.
2 – Take the Opportunity to Reduce a Concentrated Position
Have you come into possession of a large holding of stock from an employer or inheritance? If it’s highly concentrated in one company’s stock or even a single industry, it can be smart to break it up and reinvest it across more diversified holdings. But that prospect can seem daunting during a booming market.
Selling and reinvesting now, while the market is subdued, minimizes gains and reduces the tax impact of rebalancing the holdings.
3 – Consider a Roth IRA Conversion
If you currently have shares in a traditional IRA account, you might want to consider moving them into a Roth IRA instead. Roth IRA payouts are not taxed as long as the Roth IRA has been open for more than five years and you are 59 ½ years old when you cash them out. This makes them a good vehicle for investments that are in a position to grow.
A down market allows you to shift over more shares due to their decreased value. Those shares will then be primed to increase in value when the market recovers.
Roth IRA conversions are driven by tax circumstances, so you’ll want to check with a tax advisor when making this choice. But if a conversion makes sense for your circumstances, a down market can be an attractive time to make that change.
4 – Make IRA and Roth IRA Contributions, if Desired
Whether or not you choose to convert a traditional IRA to a Roth IRA, the end of the year is an excellent time to consider making a contribution. The maximum size of your allowable annual contribution is dependent on your age and income as designated by the IRS. Double check with your financial planner to be sure you’re making the contribution that makes sense for your needs and matches your income.
5 – Review Your Quarterly Estimated Tax Payments
If you’re a small business owner or in a position to file quarterly estimated taxes on investments, now is a good time to review your finances for the year and determine whether you’re on track for your annual liability. If you’ve been making estimated income tax payments based on a projected income that’s much higher than you’ve earned, you may have overpaid on the year’s estimated taxes. Your fourth quarter payment may not even be necessary.
Check with your tax preparer or CPA, tax advisor, or certified financial planner to determine what steps you should take next if you have been overestimating your income this year.
6 – Consider Gifting Assets to Family
A down market can be an excellent opportunity for giving stock to family members. Up to $16,000 can be gifted tax-free, per person, per year. That value stretches further when applied to depreciated stocks. And if your recipient wishes to rebalance and diversify their investments, now can be an excellent time to make those changes in anticipation of a market recovery.
7 – Engage a Financial Planner, if You Don’t Have One
Fall is the perfect time to hire a new CPA, tax advisor, or financial planner. Financial professionals will become much busier when the new year rolls around and tax season begins. Searching for a financial advisor now allows you to take the time to be sure you’re choosing one whose principles align with your values. You can also take advantage of their financial advice right away to help you meet your financial goals with the end-of-year-planning techniques we’ve been talking about today.