As 2018 draws to a close, I, Ken, have been reflecting on the year and giving thought to what I want to accomplish in 2019. Personally, 2018 was a good year. My family is healthy, kids are thriving, business is growing, golf game is coming around, and many relationships are strengthening. I will take the last couple weeks of the year to write down goals for 2019, both personally and professionally.
In the meantime, I urge you to have a hard look at two important things – your investment portfolio and your estate plan. In today’s part one of my 2018 wrap up, I will focus on investments.
The first thing to do is have a careful look at every position in your portfolio. Ask yourself if the reasons you bought that security still apply today. If you decide to sell some stocks, consider the following:
Sell stocks that no longer match your investment goals.
Sell stocks that reduce your risk as we head into the final innings of this bull market. Your portfolio doesn't need to be all risky growth stocks. Selling a few risky positions will not only help with taxes, but it also helps build up some dry powder. And you'll be happy you hold cash when the bull market flames out.
Sell stocks in which you have losses. Yes, that’s right, consider taking some losses.
Most of us hate taking losses. In fact, studies show people dislike taking losses twice as much as they enjoy taking gains. However, refusing to take losses and holding onto losing positions can be disastrous to your financial health. Instead of being stubborn, think about the benefits of taking losses, like shedding the burden of a loser and gaining a tax deduction!
You can use losses to offset up to $3000 of earned income, or to offset an unlimited amount of investment gain, or both. This process of selling losers and booking losses to offset gains is known as tax-loss harvesting. You can also sell winners to offset losses over $3000 (remember, your first $3000 of losses can be used to offset up to $3000 of earned income). Just be careful to avoid violating the wash sale rule which states that if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is typically disallowed for current income tax purposes.
For example, let’s say you recognize a gain of $20,000 on a stock you bought less than a year ago (Investment A). Because you held the stock for less than a year, the gain is treated as a short-term capital gain and will be taxed at the higher ordinary income rates rather than the lower long-term capital gain rates, which apply to investments held for more than a year. At the same time, you also sell shares of another stock for a short-term capital loss of $25,000 (Investment B). Your $25,000 loss would offset the full $20,000 gain—you’d owe no taxes on the gain and the remaining $5,000 loss could be used to offset $3,000 of your ordinary income. The leftover $2,000 loss could then be carried forward to offset income in future tax years.
While these strategic tax moves do not apply to your retirement accounts (they have tax-deferred status, so you don’t receive a tax form for them annually), remember to fund them in a timely fashion. The best way is to establish a monthly automatic contribution so that by the end of the year your account is fully funded. This also takes advantage of a concept called dollar-cost averaging - an investment technique which involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. As a result of the approach, the you end up purchasing more shares when prices are low and fewer shares when prices are high.
If you have not yet funded your account, you have until April 15, 2019, to make contributions to your traditional or Roth IRA for 2018. Other types of retirement accounts may have differing funding deadlines.
Getting your portfolio in shape at the end of the year isn't the only way to prepare for 2019. I also urge you to use this time to look at your estate plan which I’ll discuss in my next post.
If you don’t feel comfortable tackling these issues on your own - or simply don’t have the time - we'd love to talk with you.
Ken Armstrong, CEO
Elevate Capital Advisors
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