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Year-End Moves For Investment Portfolios

Article by Bennett Stein

Photography by Eliana Kinneman, Main Character Photography

Originally published in Destin City Lifestyle

We all know the end of the year is a busy time. I don’t want to give anyone homework for the holidays, but this is an important time of year for managing your investment portfolio. Here are a few items to consider as you wrap up 2023.

Tax Loss/Gain Harvesting:
Tax loss harvesting is the practice of selling shares of securities (stocks, bonds, etc.) at a loss to balance out against securities in taxable investment accounts that have been sold during the year at a gain. Securities that have not yet been sold have a realized gain or loss. Once sold, the gains and/or losses are recognized, netted together, and reported on your tax return as a net capital gain or net capital loss. Net capital losses in excess of $3,000 are suspended and carried forward until they can be used against gains
in future years.

If at the end of the year you are looking at a net capital gain, selling some shares that are trading at a loss will lower or eliminate the net capital gain, thus minimizing the tax burden when it comes time to file in April. After December 31, you would have to wait at least another year to net out shares of stocks or bonds sold at gains.

Tax loss harvesting can result in substantial tax savings, but try not to sell the wrong shares. Good candidates for tax loss harvesting are typically shares that are at a realized loss and that don’t look likely to appreciate in the foreseeable future. Perhaps you overpaid for them, or the company’s fundamentals have taken a turn for the worse. The point is you don’t want to sell shares at a loss for tax savings only to watch them skyrocket in value soon thereafter. Any tax savings recognized may be dwarfed by investment gains you could have subsequently realized.

Tax gain harvesting can also be used for portfolio optimization. If your portfolio has recognized losses for the year (or carried forward from prior years), you can sell shares of securities at a gain, net them against your losses, and secure a lower or tax-free gain on the sale. This must also be practiced with discretion, as you don’t want to sell the wrong shares purely for tax purposes and miss out on future capital appreciation. The best share candidates for tax gain harvesting are typically those that are trading substantially higher than their intrinsic value and are at risk of price regression.

Roth Conversions
A Roth conversion occurs when funds from a Traditional IRA are transferred directly to a Roth IRA account. Taxpayers who do a Roth conversion recognize income from the amount of cash converted and/or the fair market value of securities converted at the time of transfer. Taxpayers recognize income in the year of Roth conversion.

A Roth IRA is an individual retirement account where contributions are not tax deductible in the year of contribution, but withdrawals are generally tax free in retirement. A Traditional IRA is an individual retirement account where contributions are typically tax deductible in the year of contribution, and withdrawals are taxed as ordinary income. Once the taxpayer hits a certain age, they must take Required Minimum Distributions (RMDs) which are taxed at ordinary income rates. Roth and Traditional IRAs are tax-deferred, which means that Interest, dividends, and capital gains are shielded from income tax while funds remain in the accounts. Roth conversions must be completed by December 31st to be counted for the same year.

You may be asking, “Why on earth would I volunteer my deferred retirement savings to be taxed this year?” The answer is most people should not at any given point. But if your income is temporarily low, and you expect your retirement income to be similar or higher than today, then a Roth conversion may be an opportunity to transfer your funds into Roth accounts at minimal tax where they can remain or be withdrawn tax-free at retirement. A common example is recently retired people who haven’t yet started
social security and Traditional IRA RMDs.

Furthermore, if you have shares in your portfolio that are down but you’d like to hang onto them, you can transfer them directly and have the depressed price count as ordinary income. If they appreciate
after, you’ve converted a dollar for a lower amount of income reported on your taxes. A Roth conversion isn’t for everyone and is a long-term, frequently multi-year tax strategy that should only be undertaken after planning with your tax and financial advisor.

The end of the year presents opportunities for portfolio optimization moves for many investors. If you are at a recognized net capital gain and have shares that are down and don’t look likely to come back, look into selling them and at least getting some savings next April from tax loss harvesting.

Conversely, if you have shares that have appreciated in value and are trading at high valuations, consider selling and netting them out against any losses. If your income is temporarily low and you have substantial Traditional IRA funds, consider converting them into a Roth account for long-term tax savings with depressed shares you think are likely to rebound. 

Investment advisory services offered through Stein Financial LLC, a Registered Investment Advisor. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability. Information in this article does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information on products and services. A professional adviser should be consulted before implementing any of the options presented. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy and results of your portfolio.