This year has been a bumpy ride on Wall Street, with dramatic swings up and down. Now is a good time to review your retirement account and your personal portfolio. While changes you make in your retirement account won’t impact current taxes (no gain or loss is reported on transactions in your IRA or other retirement account), the actions you take in your personal portfolio (your taxable account) will affect your taxes for 2014.
Review actualized and potential transactions
Look at the gains or losses you’ve already taken this year. Also look at your paper gains and losses that could be actualized before the end of the year. Then decide on your course of action, keeping in mind these factors:
Remember, securities transactions should be based primarily on investment decisions; tax results are only one factor in making these decisions.
Added tax costs
In deciding whether to actualize more gains, consider the 3.8% additional Medicare tax on net investment income. While long-term capital gains are usually taxed at 15% (0 for those in the 10% or 15% tax bracket; 20% for those in the 39.6% tax bracket), there is more than just income tax to consider. The 3.8% tax applies to the lesser of:
Factoring in this added tax means your effective rate is 18.8% (23.8% for top tax bracket filers).
Those who are 70½ years old or older must take required minimum distributions (RMDs) from IRAs and qualified plans (with some exceptions) for 2014 based on their account balance at the end of 2013. Unless you have a cash position sufficient to cover your RMD requirements, you’ll need to sell securities. Review your holdings now to determine what sales to make.
Note: The opportunity to make a direct transfer from an IRA to a public charity up to $100,000 for those at least 70½ expired at the end of 2013 but could be extended for 2014. These transfers can include amounts to cover RMD requirements. Check for any legislative update.
Year-end selling can be a way to reposition your portfolio for better investment returns. Of course, your year-end securities transactions in your taxable accounts may impact your tax bill for the year. As such, be sure to adjust your estimated taxes (the final installment is due January 15, 2015). Alternatively, if you have a job, you can ask your employer to adjust your income tax withholding for the remainder of the year to account for any additional taxes you expect to owe.