Commentary by Adam Cmejla
The fourth quarter is the time of year when the financially savvy start to look for ways to reduce their taxes and make year-end moves in pursuit of key financial objectives. When considering your own situation and the moves you might make, keep these ideas in mind:
Can you max out your IRA contribution?
If you have, congratulations (especially if you benefit further from an employer match). If you haven’t, you still have the chance to put up to $5,500 into a traditional or Roth IRA for tax year 2013, $6,500 if you are 50 or older this year, assuming your income levels allow you to do so. Traditional IRA contributions are tax-deductible to varying degrees. The contribution limit for participants in 401(k), 403(b) and most 457 plans and the Thrift Savings Plan is $17,500 for 2013, with a $5,500 catch-up contribution allowed for those 50 and older.
Should you go Roth in 2014?
The younger you are, the more sense Roth IRA conversions or contributions may make. If you have a long time horizon to let your IRA grow, have the funds to pay the tax on the conversion and want your heirs to inherit tax-free distributions from your IRA, it may be worth it. If you think you will pay less tax in the future or you might die with a large charitable bequest, then it may not be a wise move.
Can you harvest portfolio losses before 2014?
This is the time of year to think about tax-loss harvesting – dumping the losers in your portfolio. You can claim losses equivalent to any capital gains recognized in a tax year, and you can claim up to $3,000 in additional losses beyond that, which can offset dividend, interest and wage income. If your losses exceed that limit, they can be carried over into future years.
In terms of taxes, should you delay a big financial move until 2014?
Talk with a tax professional about the impact that selling or buying a home or business might have on your 2013 taxes. You may want to wait. Receiving a bonus, getting married or divorced, exercising a stock option, taking a lump-sum payout – these events have potentially major tax consequences as well.
Look at tax efficiency in your portfolio
Investors were strongly cautioned to do this at the end of 2012 as the fiscal cliff loomed; it is a good idea before any year ebbs into the next. You may want to put income-producing investments inside an IRA, for example, and direct investments with lesser tax implications into brokerage accounts.
Do you need to change your withholding status?
If you have married or divorced, if a family member has passed away, if you are self-employed now or have landed a much higher-salaried job, or if you either pay a lot of tax or get unusually large IRS or state refunds, you will want to review this with your tax preparer.
Adam Cmejla is president of Integrated Planning and Wealth Management, a financial services firm in Carmel providing comprehensive retirement planning strategies to individuals near or in retirement. He can be reached at 853-6777 or email@example.com.