Today we are outlining three action steps you can implement as the year ends to get your financial house in order. Let’s begin with number three and work our way back.
The third step you can take as the year comes to a close is tax-loss harvesting, especially during a year when the markets are down. Ideally, your advisor is doing this with you monthly throughout the year, but not everyone has such a committed advisor. Tax-loss harvesting involves evaluating the after-tax accounts in your portfolio (not IRA or Roth IRA), identifying which positions you hold that are at a loss, and capturing the loss by selling them. With this “realized loss,” you can either reinvest into a similar account or offset gains in the future.
Reinvesting into a similar account allows you to work around the “wash sale rule,” which requires you to wait 30 days before investing in the same account without losing your capital loss. Tesla stocks, for example, are down this year. If you sold that account, you could immediately turn around and reinvest into another electric car company, like Lucid, with no waiting period required. After 30 days, you still have the option of selling your stock in Lucid and returning to Tesla.
Alternatively, if you gained in an account like Exxon Mobil, you could sell that at a gain while selling Tesla stock at a loss, offsetting your gain, and eliminating those taxes. Similar options apply to non-qualified variable annuities, which are also at a loss this year.
We consulted with a client recently whose $300,000 Vanguard Variable Annuity had “grown” to $250,000. The client was hesitant to cash out while at a loss, but we shared with him a tax rule unique to variable annuities. Cashing out would create a $50,000 income loss, not a capital gains loss, allowing him the opportunity to convert $50,000 of his IRA into a Roth IRA with no taxes on the conversion.
Redeploying funds in a more intelligent way leads us to our second step: resetting your portfolio. At the end of the year, “big-time” money managers analyze where their portfolio is lacking, consider what may change moving forward, and take time to rearrange their portfolio for the best outcomes in the upcoming year. Why isn’t everyone else taking action in the same way? Especially if you are already implementing tax-loss harvesting, now is the perfect time to ensure your whole portfolio is best situated as you enter the new year.
What is the number one action step we recommend at the end of the year? Review your current advisor, re-evaluate your present stage of life, and decide whether they’re the best fit.
If you are 40 years old and in a stage of growth and accumulation, are you getting the assistance you need to maximize your portfolio? If you are nearing retirement and your growth and accumulation phase is closing, are you paired with an advisor who is focused on retirement planning? Perhaps you’re already retired. Does your advisor still have all your money in a balanced portfolio, putting your retirement at risk? These are all important questions to ask when you are determining if it’s time to transition to an advisor who focuses on your current needs.
A couple of days ago, we spoke to a woman with $1 million in a single IRA at a large brokerage house. Her advisors did not take any action with her account throughout the year and consequently, she’s down significantly. She began the year with $1.5 million and ended with $1.2 million, losing $300,000 while her advisors stood back and watched.
During our consultation with her, we did some research and discovered that she had been paying them $12,000 per year to “manage” this account, which she was unaware of, as these fees are embedded in the mutual funds. The service she received from these advisors did not match the amount of money she was giving them annually, and we all agreed that she deserved better. She also informed us that her RMD was placed into a municipal bond fund at a fee of roughly 1%. Meanwhile, Blackrock offers a nearly identical fund (ETF) with a fee of only 0.18%, an 80% cost savings!
Centennial Advisors offers a free, zero-obligation Retire Right Report in our consultations for this exact reason: you often don’t know where you stand until you have an objective, third-party analysis. With professional assistance being part of your number one action plan, don’t wait to book a free consultation with us that includes our Retire Right Report, personalized just for you.
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