Friday closed out the third quarter with the overall S&P 500 Index down just under one percent for the month of October but still up over one percent for the quarter and 10% year-to-date. Once again, technology stocks saw a loss last week while over 70% of the S&P was positive. Remember that the index is cap-weighted; currently the ten largest companies make up about 40% of the S&P. So, when six of those ten drop, some by double digits, the overall index drops even when other companies are doing well. This is a great reason to consider diversifying beyond an index fund if your portfolio is big enough.
Holding individual stocks provides more opportunities for you, or your advisor, to harvest losses throughout the year. Over the next month, your advisor should be looking at gain and loss harvesting, as well as Roth conversions. By November, you should have a good idea of how much you are going to earn this year, or, if you are retired, how much you will withdraw from your accounts. Projected 1099s, or tax documents showing gains and losses, should also be available.
With this information, you can see if harvesting gains would be appropriate. Perhaps you had a big realized loss, either from the sale of a depressed asset, or loss harvesting throughout the year. You can realize gains by selling stocks that have gone up in value, up to the amount of losses you already have. This can help rebalance your portfolio without a major tax hit.
If your children or grandchildren have UTMA or UGMA accounts, your advisor should harvest gains up to the tax-free limit. The goal is that, when the child receives the account, usually around 21, they are not saddled with years of unrealized gains and have a tax bill when they need to use the account.
If you have a low-income year, or are retired, a tax projection should be done to run scenarios with Roth conversions. A Roth conversion is when you move money from your pre-tax traditional retirement account to an after-tax Roth retirement account. There are no limits on how much you move, but you do need to pay taxes on the amount transferred. Your advisor should run scenarios filling different tax brackets to minimize the taxes you’ll pay over your lifetime.
Roth conversions can be paired with charitable contributions, to further increase the tax benefits. Contributing appreciated stock, or investments that have increased in value, to a Donor Advised Fund can not only reduce the tax impact of a large Roth conversion, but also reduce unrealized capital gains in your portfolio.
The short version of this: talk with your financial advisor this month to discuss loss and gain harvesting, charitable contributions, and Roth conversions.
Your action item this week is to pull your full credit report using annualcreditreport.com. Check for unknown or delinquent accounts.
If you have a question you want answered, email us at info@covingtonalsina.com. Be sure to check out our Facebook page or website to see our upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.