Get A Jump Start On Year-End Planning

November is the time to start preparing for the end of the year. December is busy for everyone, so use November to get a head start. This is what we’re doing for clients this month. We’re paying attention to the early estimated year-end distributions from mutual funds and looking for ways to reduce taxes. We’re making sure clients take their required minimum distributions (RMDs), and we’re updating investment plans, especially changes to contributions and withdrawals.

You can do the same in your portfolio. Setting aside some time now to make your year-end plans can give you more peace of mind during the holidays, and it can really help you start the New Year off on the right foot.

Here are five key things to do now:

1. Prepare for Mutual Fund Distributions

November marks the start of distribution season. Nearly all stock funds distribute capital gains and income to shareholders at the end of the year. Most funds distribute in December, but a handful of funds make payouts in November, including Ariel, Artisan, Baron, Hussman, Leuthold and Parnassus.

If you own funds in a taxable account, distributions are taxable to you whether you take them in cash or reinvest them in new shares, so trade carefully this time of year. Before buying a fund this month, check with the fund to see if it plans to make a distribution. You may opt to buy ETFs, since most ETFs don’t pay out capital gains, and most distribute income quarterly.

If you invest in a tax-deferred account like an IRA or 401(k) then you don’t need to worry about the tax implications of distributions. But you should still be aware of them when looking at a fund’s performance: a fund’s NAV or share price drops by the amount of the fund’s distribution. This can look like a fund has sold off sharply when, in fact, the fund simply distributed some assets to its shareholders. Reporting services like Yahoo Finance don’t always factor in a fund’s distributions, so it may look like your fund has lost money when it really hasn’t.

2. Harvest Losses in Taxable Accounts

A smart way to lower your tax bill is to realize losses where you can. When you sell shares of a fund at a lower price than you paid for them, you “realize” the loss in that investment. You can use those losses to offset taxable gains that you have already realized, so selling those losing shares before year-end makes sense.

Review your portfolio and look for any funds you own that are worth less than you paid for them. This may include funds that you’ve actually made money on, but you can still have an unrealized loss because of a reinvested distribution. If a fund is low ranked and you hold it at a loss, you can realize that loss by selling the fund and use that loss to offset other taxable gains. Of course, remember the “wash sale” rule: if you’ve sold a fund for a loss, you can’t buy it back within 30 days. If you do buy back into the fund, you can’t use the loss to offset other gains. Buying back into the fund “washes” out the loss, though you do get the benefit of a stepped up cost basis so that when you eventually sell the shares, your gain will be lower.

3. Take Your Required Minimum Distributions (RMDs)

The IRS requires that people aged over 70-and-one half withdraw at least a minimum amount from their retirement accounts each year. If you don’t take your RMD, you’ll face a steep penalty of 50% of the amount you should have withdrawn.

Many brokers, like Schwab, calculate the RMD amount for IRA accounts and include it on your monthly statement. But if you have an inherited IRA, you may have to calculate the amount yourself, based on your age and the value of the account as of December 31 of last year.

Remember that while the IRS requires you to take the money out of your IRA each year, you don’t have to spend it. When we manage RMDs for our clients, we’ll often move the money from an IRA into a taxable account, often one that is managed in a very similar, yet tax-efficient way.

4. Adjust Your Retirement Contributions or Withdrawals

If you’re saving for retirement, consider making your 2016 IRA contribution now. You have until April 15, 2017, but the earlier you get invested, the more time your money has to grow. You should also consider increasing your contributions to keep up with inflation or if your salary has increased. Most retirement planning assumes that you are bumping up your contributions over time, but many people forget to do so.

If you’re retired, you may need to adjust your withdrawals periodically to account for inflation. You also might change your withdrawals based on how your portfolios have performed–withdrawing more after a year of good gains and less after a down year–or if you expect to spend more or less in the coming year.

5. Consider a Roth Conversion

Finally, year-end is a good time to consider the possibility of a Roth IRA conversion if you have had less income this year than in the past. This means transferring some or all of the assets from a traditional or rollover IRA into a Roth IRA. You’ll pay tax now on the transferred assets, but by converting those assets to a Roth, you won’t have to pay taxes on future gains or withdrawals, and you won’t have to take required minimum distributions.

Bonus tip – Write Down Your Year-end Plans
This list should help you stay on track through the end of 2016, but one additional step can really help you follow through: write down your plans. Calendar when you’ll take your RMD or make your annual IRA contribution, for instance, and write down what you’ll do with that money. This can help you stick with your plans, even if markets change.

Janet M. Brown, president of FundX Investment Group and managing editor of NoLoad FundX, joined FundX in 1978. Janet has been researching funds and developing successful fund investment strategies for many years. Prior to joining FundX, she worked in Brussels with a financial services company where she specialized in mutual funds. Janet is frequently interviewed by the media on investment and mutual fund issues.