The end of the year is a great time to review your accounts and investments. Consider the following moves during your year-end review.
Move 1: Check your asset allocation.
The mix of investments you hold is referred to as your asset allocation. Younger investors tend to hold more in stocks for higher return potential, and older investors need more money in bonds for stability. The end of the year is a great time to check your investments and rebalance back to your target allocation.
Move 2: Reassess your risk tolerance.
We’re all a year closer to our financial goals like college education expenses and retirement, so we should reevaluate our risk tolerance and adjust our asset allocations accordingly. Make sure you have enough in stocks for growth potential but not too much that you run the risk of losing sleep at night or suffering a market loss right before you need your money.
Move 3: Sell some losers.
Nobody likes losing money, but there is a silver lining to the investment losses cloud. If you have investments in a taxable account, meaning that they’re outside of a tax-favored account like an IRA or 401(k), you can sell these investments and write off the losses against investment gains. Just be sure not to buy a similar security within 30 days before or after you sell your losers or the IRS won’t allow you to deduct the losses. This is known as the wash sale rule.
Move 4: Be careful when selling winners.
Capital gains rates are currently 0%, 15%, or 20% depending on your tax bracket. High-income taxpayers may have an additional 3.8% Medicare tax applied to their gains, for a total tax of 23.8%. It might make sense to sell some winners now if you’re in the 0% or 15% capital gains tax bracket, but you might be able to save money by selling in a future year if you expect your income to drop significantly.