Barnett and Company

End of Year Investment Tune-Up

It’s that time again; Black Friday is over, Cyber Monday is past, only 20 more “biggest online sale days ever” before Christmas. But attention to a few important tax issues in your retirement portfolio could pay dividends long after the decorations are put away.

Tax selling. This can be one of the most important moves you can make if you hold investments in a taxable account. Despite the best laid plans, some stock picks flounder, and while our inclination as human beings is to hold out for a recovery, it may be best to dump it now and convert the loss into a tax asset.

Suppose you caught Cannabis Fever last year, and purchased 100 shares of the popular pot stock Tilray (TLRY) on January 1 at $71.90 per share. So far at least, it has been a bad trip, with the stock falling over 70% year to date. If you have concluded that the hype was overdone, you might sell the stock and lock in your $5,000 loss to offset a realized gain elsewhere and reduce your tax bill.

And even if you haven’t given up on the stock, you can still buy it back after a 30 day wait, establishing a new, lower cost basis and preserving the realized loss for your tax return. Dude.

Similarly, you can use other realized losses to take specific gains off the table if you believe the stocks may be frothy. Tax selling is a powerful and underutilized tool.

Max out retirement plan contributions. If you participate in a 401(k) or 403(b) defined contribution plan, you may want to contemplate throwing a few more bucks in at the end of the year. The limit for employee deferrals is $19,000 for 2019, but remember that if you are 50 or over you may make an additional “catch-up” deferral of $6,000.

Check with your plan administrator or HR department to learn the rules and deadlines related to additional lump sum deferrals or redirecting a bonus into your plan. Remember that your additional contribution reduces 2019 taxable income dollar for dollar, and you may be able to maximize any employer match as well (read: “free money”). Even if it turns out you exceeded the limits, you have until the due date of your 2019 tax return to reverse any excess contributions.

Required Minimum Distributions. If you are over age 70 ½, the IRS requires that you take at least a minimum distribution from any IRA, 401(k) or 403(b) accounts excluding ROTH IRAs (although if you are still working, you may delay your qualified plan distribution). The penalty for messing this one up is severe: Uncle Sam will confiscate 50 cents of every dollar you fail to take as required.

If you do not need the money, too bad. However, one option to consider is a Qualified Charitable Distribution (QCD). Although you must take the withdrawal, you may opt to directly transfer the distribution to a favorite charity, which will satisfy the mandatory requirement but will not be reported as taxable income. An elegant solution if the situation warrants, and a raspberry to the Tax Man.

Finally, if you hold securities in your IRA with unrealized losses but still like the stocks, consider a “distribution in kind”: instruct your custodian to satisfy your withdrawal requirement with specific securities instead of cash, transferred into your taxable brokerage account. If you are right and the investments recover, any additional taxation will be in the form of capital gains rather than ordinary income, and could pass tax-free to your heirs.

 A little time invested now can be rewarding in April.

Christopher A. Hopkins, CFA

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