2 – Convert Pre-Tax Retirement Money to Roth

So, let’s say you’re sold on the idea of accumulating Roth funds, but your money is still stuck in a traditional pre-tax savings vehicle. Oh, what to do? For certain investors, a Roth conversion may be a viable option—but this path is not without its own pitfalls. When you convert pre-tax money to a Roth IRA, you must pay taxes on the amount you’ve converted. If you’re a high-income earner, a Roth conversion should be carefully planned to be sure you don’t inadvertently push yourself into a higher marginal tax rate. Fortunately, there’s nothing in the law that states this conversion can’t be done incrementally, so you may still be able to gradually shift your funds to a Roth account over the course of a few years. In any case, the most appropriate move forward will depend on your age and tax bracket. Your best bet is to work with a wealth advisor who can guide you through this process.

3 – Health Savings Account Contributions (HSA)

If you’re enrolled in a healthcare plan with a high deductible, taking advantage of a health savings account (HSA) may be another effective way to optimize for tax-deferred savings. HSAs offer many of the same benefits that retirement plans provide, with both vehicles sharing features like tax-deductible contributions and tax-free investment growth.
Unlike a Roth 401k or IRA, which requires you to wait until age 59 ½ to make a qualified withdrawal without penalty, an HSA will allow you to dip into your savings at any time—provided you’re using the funds to pay for a qualified medical expense. This allows you to use your account to pay for things that aren’t typically covered by your health insurance plan (such as prescription drugs, vision and dental care, and long-term insurance premiums), all on a tax-free basis. Additionally, there’s no requirement to spend your HSA account each year (unlike a Flexible Spending Account), allowing you to accumulate years of tax-free earnings similar to a Roth IRA.

4 – Consider tax-loss harvesting

When it comes to managing a portfolio, it’s not so easy to stomach market volatility or an economic downturn. Seeing losses on your statements obviously isn’t what you want, but selling an investment at a loss may offer an unexpected silver lining…we’ll explain. By “tax-loss harvesting” in your portfolio, investors can sell the positions or parts of a position that have lost money to realize those losses and help offset capital gains that other investments may have generated. If the losses you’ve realized are greater than your gains for the year, you can use those losses to offset up to $3,000 in non-investment income. Have more than $3,000 net capital losses? You can continue to carry these losses forward into future tax years.

While this practice is generally most popular towards year-end (since investors have a pretty good window into their tax year at that point), it can also be deployed strategically during times of market volatility. If there was a sharp decline in the market, for example, it might be a good idea to realize a loss on certain investments with the intention of reinvesting back into the market or even the exact same investment at some point in the future. While selling an investment to realize a loss can be straightforward, reinvesting the proceeds from a “tax-loss harvest” is not.

Investors must take care to abide by the IRS’s Wash Sale rules when reinvesting after realizing a loss. In order to keep the loss you just realized for your taxes, the IRS requires a waiting period of at least 31 days before you can repurchase the same investment or a security the IRS deems “substantially similar” to the one you just sold. Just like #2 above, it is best to work with a wealth advisor to help determine the most effective way to implement tax loss harvesting within your portfolio. You can see how quickly it can become complex as you work to realize losses in your portfolio but remain invested in your chosen strategy.

5 – IT’S ALIVE – Don’t Let your Portfolio become Frankenstein’s Monster

Whether you are actively trading or not, your portfolio’s allocation is changing every day the markets are open thanks to their fluctuating prices. On a single day there may not be much change, but over a longer stretch of time it’s impossible to predict how much your allocation may change. We’ve met investors who haven‘t looked at their portfolios for years. One of the most common reasons why they haven’t looked is they believe their portfolio is meant to be a “set-it-and-forget-it” strategy. Sounds dreamy, right? But remember, your portfolio is an ever-changing, living thing—and living things need to be nurtured.

Simple example: if bonds have a positive year and stocks have a negative year, your portfolio maybe overweight bonds and underweight stocks headed into a new year. Is that the strategic decision you want to make? Should you rebalance? If you do rebalance, should it go back to the old weightings? Should you set new weightings? Now extrapolate that example over decades and add in more asset class options. The questions quickly get messier and the answers less black and white. If ignored long enough, you may find a terrifying monster lurking in your portfolio that you didn’t mean to create.

You can work to avoid those scary surprises by ensuring your portfolio gets regular health checks that go way beyond a simple performance review. It is vital to reconfirm that each individual investment choice fits within your portfolio’s wholistic strategy and your allocation is still appropriate given your unique financial situation and goals.

Every portfolio and allocation is different so there is no right answer on how often to review your portfolio, but the wrong answer is to set-it and truly forget-it. Make sure you have a set schedule for detailed portfolio check-ins and stick to your schedule. It takes time, expertise and dedication to manage, but more importantly, grow a portfolio. If you feel like you are lacking any of those areas, work with a Wealth Advisor who understands the importance of ongoing portfolio management and analysis.