Year-end investment strategies – NerdWallet
The good news is that there is still time to reduce your tax burden, increase your retirement savings and get a head start on invest wisely in the coming year – all before Auld Lang Syne plays on New Years Eve.
Use this simple checklist to save money and prepare your finances for the New Year.
Maximum contributions of 401 (k)
Perhaps you started the year with the intention of maximizing your 401 (k). If that hasn’t happened yet, you have until December 31st to fund your account.
The IRS imposes strict contribution limits on 401 (k): $ 19,500 for 2021 ($ 26,000 for people 50 or older).
Find out how close you got to the maximum this year, then figure out how much of the difference you can set aside by the end of the year without upsetting other financial goals. Finally, check with your payroll department about the rules for lump sum contributions and the deadlines for plan changes.
Even if you can’t hit the maximum, your contributions will increase over time with compound interest – and they’ll reduce your taxable income. Keep the peak mentality for the New Year and you won’t face a last minute rush anymore.
Anticipate your taxes
Don’t ignore taxes until April, especially if you are a mutual fund investor.
Actively managed mutual funds generally pay out the annual gains made in December, and all shareholders who hold the fund in a taxable account must pay taxes on the distributions, regardless of how long they have held it. If this is your first time investing in a fund, do so after the distribution eligibility date, known as the ex-dividend date, so that you do not pay tax on any gains you do not have. not benefited.
Review your portfolio
Fancy a useful ritual? Spend time reviewing your portfolio. You could complete these basic maintenance tasks by December 31:
Offset gains and losses in taxable brokerage accounts
Also known as the tax loss harvest, this involves selling investments at a loss before December 31st. The goal? Reduce or eliminate taxes on any gains you make in taxable accounts during the year – or even taxes you will pay on ordinary income. Note: Investors can claim a limited amount of tax losses in any given year.
Rebalance your portfolio
Not all assets move in parallel, so over time your portfolio will drift away from its ideal weighting. If a portfolio that was supposed to be 70% stocks has climbed to 80%, you need to sell stocks and buy bonds to restore balance. Some 401 (k) providers offer rebalancing tools, but this is a handy project for other types of accounts.
Now is a good time to check the diversification of your portfolio among assets, such as stocks and bonds, and the categories within each. For example, you want stocks and bonds representing different sizes of companies, sectors and locations. Diversification reduces your investment risk by ensuring that you are not overly exposed to an individual investment.
Plan for next year
Don’t wait until January to strategize for the New Year. You can get ahead of the game with the following:
Define an investment strategy
The changing calendar year provides an opportunity to look at your portfolio and see what has worked over the past 12 months and what hasn’t. And we’re not necessarily talking about performance here. Did you start the year by regularly adding money to your wallet and have you stopped? Did you fill up on one particular area of stocks and neglect others? Did you pay higher fees than you thought?
As you reflect, ask yourself another question: is it time to help? If managing your investments always seems to be on the sidelines instead of, well, life, then working with a financial advisor can help keep you on track.
Don’t dismiss the idea because you assume advisers are expensive: many robo-advisers offer low fees as well as access to human advisers, while fee-only financial planners may be a good option if you need help with something very specific.
Schedule regular check-ins
You know how it is – one minute is January, the next is June. Don’t let the year slip by and find yourself in a last minute race next year. Instead, put appointments on your calendar to check your wallet. No need to block for more than an hour; it’s more about creating a habit that will reduce year-end surprises. The frequency is up to you, but once per quarter should be sufficient.
Fund an IRA
Do you feel overwhelmed by the year-end crisis? Here’s some good news: You have until mid-April to fully contribute to an individual retirement account for the tax year ending December 31. This is especially useful if you need a little more time and money (eg, a bonus) to fully fund that counts up to $ 6,000 in 2021 ($ 7,000 if 50 or older) . Don’t have an IRA yet? Start with our guide to any IRA or go to some tips for maximizing contributions.