Call me after the holidays
By David Jackson, MBA, CFP®, C(K)P™, Managing Partner – Investments, Southern Springs Capital Group
We are now in the unique month-long, pseudo-holiday period that we call ThanksgivingChristmasNewYear. All of those days aren’t official holidays of course, but for a lot of people they might as well be.
We’ve all said it to someone else and had it said to us. Someone wants you to do something, or you need someone to take a look at something etc., and the response is always something along the lines of “That sounds good, why don’t you give me a call after the first of the year.”
But in our industry, the end of the calendar year is an important deadline for a few things. Here are some things that shouldn’t wait until after January 1st.
Converting IRAs to Roth IRAs
In most cases, Traditional IRA distributions are taxable, and Roth IRA distributions are generally not taxable. Converting an IRA to a Roth IRA usually sounds like a great idea until you realize that you would have to pay income tax on the amount you convert. Normally, the best time to convert an IRA to a Roth IRA is when your income is down, or you are in a low tax bracket. For many people, this year represents a year of lower income. Perhaps you work somewhere that had to be shut down during the pandemic. Perhaps you own a business that either had to close or operate at less than full capacity. This may be the year where it finally makes sense to convert some of your IRA assets into a Roth IRA. Remember, you don’t have to convert an entire IRA, you can convert a portion if that makes more sense.
Giving Appreciated Assets to Charity
Many people make their charitable gifts near the end of the year. Most charities know this which is why you are getting so many emails from them this month. If you have securities that have appreciated, consider giving securities as opposed to cash. If you have a stock that has doubled in value, selling it and giving the money to charity will leave you with taxable capital gains. If you just give the shares to a qualified charity, the charity can sell the shares without the capital gain, and you still get the charitable deduction, pending some eligibility requirements. Be sure that you have owned the shares for at least a year, and you have to transfer the shares to a brokerage account at the charity, so don’t wait until December 31st to begin this process.
Selling to Generate a Tax Loss
In every successful portfolio, there are usually at least a couple of things that didn’t work out. If you have some securities that have gone down in value from your purchase price, consider selling them before year-end. You can use the losses to offset realized capital gains on other securities.
Also, under current law, a capital loss deduction allows an investor to claim up to $3,000 more in losses than in capital gains, meaning investors can reduce their taxable income dollar for dollar, up to that $3,000 limit. (The limit is $1,500 for a taxpayer who's married and files separately.)
However, any investor selling securities as part of a tax-loss harvesting strategy should trade cautiously. An IRS restriction known as the wash-sale rule makes it difficult to realize a short-term benefit from quickly getting back into an identical security after selling the investment at a loss; the loss can't be deducted unless an investor waits at least 30 days to reinvest in that same investment, so be sure to wait 31 days if you still like the investment and want to buy it again.
Remember that all of these options require you to take action before December 31, so be sure to reach out to your financial advisors and tax professionals now. Your personal advisor may have other ideas as well. Whatever you chose to do, just don’t wait until after the holidays.
For more information on Southern Springs Capital Group, visit www.southernspringscapital.com. Our offices are located at 2555 Meridian Boulevard in Franklin. We can be reached at 615-905-4819.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Southern Springs Capital Group is not a registered broker/dealer, and is independent of Raymond James Financial Services.
