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Year-end Checklist for Investing and Taxes

Tips for Portfolio Management, Investment Strategies, and Capital Gains


At the end of each year, investors need to review certain items to determine if any required actions are needed prior to the end of the year. December is also a good time to do some portfolio management and general housekeeping items to make the New Year the best it can be for your investment accounts.

Consider Tax-Loss Harvesting

If you have a regular brokerage account, where you may have capital gains and/or capital losses, you will be wise to see how you can take advantage of tax loss harvesting. For example, if you have capital losses, you may be able to use them to reduce or eliminate (offset) capital gains. You may also be able to reduce ordinary income, if you do not have any capital gains to offset. Remember that capital gains and losses do not apply to tax-deferred accounts, such as IRAs, 401(k)s and certain kinds annuities and other insurance-based investment products. Check with IRS.gov, your tax preparer, or your investment advisor to be sure your account qualifies for capital gains.

Understand the 1099 Form and What to Do With It

Do you expect a 1099 for this tax year? Which type of 1099 do expect? What should you do with it? If you receive a 1099, does it mean you owe taxes? There are more than a dozen different types of 1099 forms but the most common 1099 forms are generated from investing activities, such as dividends, capital gains and retirement account (IRA, 401k, 403b) distributions. The most common types of 1099's received by investors include 1099-R, 1099-DIV, 1099-INT and 1099-Q.

Watch for Mutual Fund Capital Gains Distributions

You may not have bought or sold any mutual funds during the past year but you could still have taxes on capital gains. Stock mutual funds may invest in dozens or hundreds of stocks. Often the mutual fund manager will buy and sell shares of several of the stocks within the mutual fund during any given year. When the manager sells stocks that have gained in value since the time he or she purchased those stocks, these trades generate capital gains, which are then passed along to the investor (you). For more possible surprises on mutual fund taxation, be sure to check my Top 10 Things to Know About Mutual Fund Taxation.

Know Your Risk Tolerance

Your investment portfolio should be built upon only two primary factors -- your risk tolerance and your investment objectives. Did you move your investments around during the previous year based upon economic, market or political reasons? Risk tolerance is an investing term relating to the amount of market risk, especially the volatility (ups and downs), an investor can tolerate. Usually gauged by a calculator or questionnaire, risk tolerance is often used to categorize investors as Aggressive, Moderate or Conservative. Know your risk tolerance and invest accordingly so you won't be tempted to make moves based upon the whims of the market.

Plan Your Asset Allocation Tactics

Most investors would consider their investment style somewhere between buy-and-hold and market timing. In different words, you're not a market timer but you do want to try and make small tactical adjustments periodically to maximize returns and minimize risk when possible. If this describes your style, you may be a tactical asset allocator and year-end is a good time to study economic and investment outlooks for the New Year.

Analyze Your Mutual Funds Performance

Past performance of a mutual fund may not be a guarantee of future results but if you know how to analyze performance--if you know what to look for and what to avoid--you can make better investment decisions. Compare your fund to the average of other categories or a standard benchmark, such as the S&P 500 Index, that is appropriate. Also, you'll want to use one of the best online research sites to help in your comparisons.

Research and Choose Best Mutual Funds

There are dozens of data points and statistics an investor can research and review when choosing the best mutual funds. However, there are a few key points to review before making your decision.

Know Where to Invest Now

Where is the best place to invest now? How do you know which funds will do the best in the next year and beyond?? No one knows the answers with certainty but there are smart, strategic and sound moves you can make now to invest wisely for both short-term and long-term time horizons.

Rebalance Your Portfolio

If you feel comfortable with your asset allocation and investment selection, you may want to perform a simple portfolio rebalance, which will return your investments back to the original target percentages. For example, if you have a simple 5-fund portfolio with 20% allocated to each fund, some of those percentages could be higher and some could be lower after one year of market activity. When you rebalance, you effectively sell a portion of the "winners" and buy back into the "losers" to return to the original allocation. Once per year is generally a good frequency for rebalancing and the end of the year can be a logical time to remember for portfolio management. Be aware of tax consequences when buying or selling in taxable accounts.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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