As we enter the 4th quarter of 2020, uncertainty remains in capital markets related to Covid-19, elections, etc. While much attention is often paid to financial issues outside our control, investors should focus their energy on tax efficiency areas, which are within their control. Additionally, with potential tax increases/changes resulting from the November elections, emphasis on these areas can pay off more than usual. While the below strategies are not for everyone, they may be worth discussing with your financial and tax advisors.
Tax-loss harvesting:
This strategy only applies to taxable brokerage accounts and involves selling portfolio positions with an “unrealized” capital loss and turning them into “realized” capital losses. A few important things to remember when executing this strategy: 1) You must own a position for at least 31 days before the sale and 2) Leave the position sold for at least 31 days after the sale for the losses to be realized for tax purposes. The harvesting of losses allows one to offset realized gains incurred from other areas of a portfolio and deduct up to $3,000 of losses against ordinary income if losses exceed realized capital gains. Lastly, if losses remain after offsetting gains and deducting the $3,000 against ordinary income, those losses can be carried forward to offset realized capital gains and income in future years.
Charitable Gifting:
Instead of fulfilling a charitable intent through the gifting of cash in 2020, look to gift appreciated stock. Despite below-average market performance in 2020, certain market areas, particularly the technology sector, may offer a gifting opportunity. The advantage of this strategy is the fulfillment of a charitable intent, the reduction of overweight positions without the realization of capital gains, and the opportunity to deduct these contributions against ordinary income if itemizing your deductions. Lastly, if you were looking to gift cash, you can repurchase the gifted stock, if you choose, and enjoy a step-up in cost basis.
Roth Conversions:
This strategy involves voluntarily paying taxes early to convert money from a Traditional IRA (Tax-Deferred Account) to a Roth IRA (Tax-Free Account). Because paying taxes before it is necessary to defies most’s natural instinct, let me discuss the advantages. The strategy intends to pay taxes now in a lower tax bracket, and transfer money to the tax-free environment of a Roth IRA to avoid potentially greater taxes in the future. In addition, Roth IRAs have no Required Minimum Distributions (RMDs) later in life. While this strategy requires a more thorough understanding of one’s personal tax bracket, age, etc., there are tremendous advantages here if you find yourself in a lower tax bracket in 2020 and believe higher tax brackets are in your future.
**Note: With all the strategies mentioned above, it is important to consult your financial advisor, or tax professional, before executing. Everyone’s situation is different.**
Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the money Tuesday segment.
Fox 6 Talking Points:
4th Quarter Investment Mindset: Focus on Tax
- Tax Loss Harvesting
- Charitable Gifting
- Roth Conversions
Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC -“Welch”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. Please remember that if you are a Welch client, it remains your responsibility to advise Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.