As the year draws to a close, there are typically many tasks on your to-do list. One task, that generally gets lost in the shuffle, is a year-end review of your investments. If you take the time to get organized now, it may help you accomplish your long-term goals more efficiently. Here are some steps that might help.
1. Max out retirement plans
It’s a good time to review how much you have contributed to retirement plans for the year and add contributions if needed. Keep in mind the contribution limits for a 401k is $18,000 if you are under the age of 50 and $24,000 if over the age of 50. For traditional and Roth IRA’s the contribution limits (Income phase outs apply) are $5,500 under 50 years of age and $6,500 if you are over 50.
2. Take all RMDs
If you are above the age of 70.5 you must take a Required Minimum Distribution from your retirement accounts. The penalty for not taking the RMD is an additional tax of 50% of the amount that should have been taken that year. Be sure to consider all retirement accounts when taking your RMD.
3. Evaluate your investment portfolio
Review how your overall investment portfolio fared over the past year and determine whether adjustments are needed to keep it on track.
Here are some questions to consider:
• How did your investments perform during the year? Did they outperform, match, or underperform your expectations?
• What caused your portfolio to perform the way it did? Was it due to one or multiple factors?
• Were there any consistencies or anomalies compared to past performance?
• Does money need to be redirected in order to pursue your short-term and long-term goals?
• Is your portfolio adequately diversified, and does your existing asset allocation still make sense?
Addressing these issues might help you determine whether your investment strategy needs to change in the coming year.
4. Aim for balance
During the portfolio review process, look at your current asset allocation among stocks, bonds, and cash alternatives. You might determine that one asset class has outperformed the others and now represents a larger proportion of your portfolio than desired. In this situation, you might want to rebalance your portfolio.
5. Consider tax loss harvesting
If you own taxable investments that have lost money, consider selling shares of losing securities before the end of the year to recognize a tax loss on your tax return. Tax losses, in turn, could be used to offset any tax gains. When attempting to realize a tax loss, remember the wash sale rule, which applies when you sell a security at a loss and repurchase the same security within 30 days of the sale. When this happens, the loss is disallowed for tax purposes. Be sure to speak to a CPA about any tax questions.
If you don't want to sell any of your current investments but want to change your asset allocation over time, you might adjust future investment contributions so that more money is directed to the asset class you want to grow. Once your portfolio's asset allocation reaches your desired balance, you can revert back to your previous strategy, if desired. Keep in mind that asset allocation and diversification do not guarantee a profit or protect against loss; they are methods used to help manage investment risk.
6. Set goals for the coming year
After your year-end investment review, you might resolve to increase contributions to an IRA, an employer-sponsored retirement plan, or a college fund next year. With a fresh perspective on where you stand, you may be able to make better choices next year, which could potentially benefit your investment portfolio over the long term.