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Watch out for capital gains:

For the first time in a long time, we may see capital gains from mutual funds. Some of the biggest culprits may be those that are not performing well this year. (That means emerging markets.) Many mutual funds have used up their carry-forward losses from 2008 and 2009 and are now rebalancing or satisfying redemptions. Individual investors may find themselves in the same situation having used up their personal carry-forward losses as well. If the gains are significant, consider selling the fund before these are distributed or at least hold off on new purchases until after.

Changes in income:

If you know that your income will change this year to next, there are some planning opportunities.

If your income is set to decrease because of an event like retirement and you anticipate that your income in future years will be much less, use the higher income tax bracket this year as an opportunity to donate more to charity. If you’re not quite ready to choose the charities, use a donor-advised fund that will allow you to take the large deduction this year at a higher tax bracket and direct the funds to your charities in the future.

If you started a business or have had little or no income but expect it to rise next year and into the future, consider using the temporary lower tax bracket to your advantage by converting an IRA to a Roth. You may pay little or no tax due to the low income, yet enjoy tax-free growth and avoid Required Minimum Distributions (RMDs) later on.

Consider a Roth 401(k):

Most companies don’t announce the addition of a Roth 401(k) to their plan lineup with balloons and streamers, but if your employer added one, it may be an opportunity to save in a different way. According to outsourcing firm Aon Hewitt’s 2013 Trends and Experience in Defined Contribution Plans survey, 50 percent of employer plans now allow Roth contributions, up from 11 percent in 2007, but only 9.6 percent of eligible employees elect to save in a Roth.

If you have the Roth option, you can contribute to both the traditional 401(k) and the Roth, or, if your plan allows conversions, you can convert to a Roth if you think your tax bracket will be higher in the future.

Set up auto rebalancing:

A buy low/sell high strategy that automatically rebalances your account either quarterly, semi-annually or annually – with the stock market reaching new highs seemingly every day, U.S. stocks have far outperformed most asset classes, and your 401(k) is likely overweight U.S. stocks. This may be fine, but keep in mind that the risk may be higher than you originally intended. Auto rebalancing sets up a discipline to keep risk in check. If you had this in place over the last seven years, your account would have been selling stocks leading up to the financial crisis, and buying them when they were cheaper during the downturn.

Offset gains with losses:

You may have losses to utilize where you least expected it.That bond fund that has made you money because of reinvested dividends may in-fact have a tax loss. How so? Simple: Because each and every reinvested dividend increased your tax basis.Take a closer look at these investments and their current basis and consider taking the loss to offset another gain in your portfolio.

Conclusion: Always plan ahead for tax issues. When you are done, plan some more.


Dan Lucas
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