Year-end, tax-smart investing tips

As 2018 draws to a close, it may be worth your time to explore a few year-end investment and financial moves that can potentially pay off for you when you file your taxes in April. Here are a few such moves to consider:

Boost your 401(k) contributions. If you’re like most people, you probably don’t usually contribute the maximum amount to your 401(k), which in 2018 is $18,500, or $24,500 if you’re 50 or older. Unless you have a Roth 401(k), your contributions are made with pre-tax dollars, so the more you put in, the lower your taxable income. Ask your employer if you can increase your 401(k) contributions in 2018. Also, if you receive a bonus before the year ends, you may be able to put that toward your 401(k), too, thus deferring the taxes you’d have to pay on this extra income.

Add to your IRA. You actually have until April 15, 2019, to contribute to your IRA for the 2018 tax year, but the more you can put in now, the less you’ll have to come up with at the filing deadline. Contributions to a traditional IRA may be deductible, but the deductibility is affected by your tax-filing status, along with whether you and/or your spouse may be an active participant in an employer-sponsored retirement plan. If so, then deductibility may be phased out if your Modified Adjusted Gross Income rises above certain levels. For 2018, you can put in up to $5,500 to your IRA, or $6,500 if you’re 50 or older. (Roth IRA contributions are never deductible.)

Contribute to a 529 plan. When you contribute to a 529 plan, your earnings grow tax-free, provided they are used for qualified higher education expenses; however, 529 plan distributions not used for these qualified expenses may be subject to income tax and a 10 percent penalty. Furthermore, your 529 plan contributions may be deductible from your state ordinary income taxes or, alternatively, may be eligible for a state tax credit. In 2018, 529 contributions made by any Wisconsin adult reduce their state-taxable income, dollar for dollar, up to $3,200 per beneficiary per year. The contribution may be made to an existing account you own, another Wisconsin account, or to a new one. Incoming rollovers from other states’ 529 plans are accepted.

Be generous. It’s certainly the season for giving, and when you make charitable gifts, you can both give and receive. By sending cash to a qualified charity, you may get a tax deduction, but if you look beyond your checkbook, you might gain even bigger benefits. Specifically, if you donate appreciated securities you’ve held for more than one year to charity, you can deduct the fair market value of the securities based on their worth when you make the gift. Plus, neither you nor the charity will have to pay capital gains taxes on the donated investments.

Sell your “losers.” If you own some investments that have lost value, and that may no longer be essential parts of your portfolio, you could sell them and use the loss to offset capital gains taxes on investments you’ve sold that have appreciated. If the loss from the sale was greater than your combined long- and short-term capital gains, you can deduct up to $3,000 against other ordinary income, including your salary and interest payments. And if your losses exceed your capital gains by more than $3,000, you can carry the remaining losses forward to future tax years.



Delay purchasing mutual fund shares. Many mutual funds pay capital gains distributions in December. So, if you were to buy new shares of a fund just before the distribution date, you may get a larger distribution, but you’ll owe capital gains taxes on the money you just invested — without really having received much benefit from your investment. To avoid this potential problem, ask the mutual fund company for the date of the distribution, and consider delaying additional investments until afterward.

Be careful with your RMDs. Once you turn 70½, you must start taking withdrawals — known as required minimum distributions, or RMDs — from your traditional IRA and your 401(k) or similar employer-sponsored plan. Please note, however, that if you are still working and participating in your 401(k) plan or any other “qualified” retirement plan (e.g., a traditional profit sharing plan) beyond age 70½, and you are less than a 5 percent owner or shareholder in the business sponsoring the 401(k) plan, then you may be able to delay or postpone the commencement of RMDs until you actually separate from service. You’ve got until Dec. 31 to take your RMDs for 2018; if you miss this deadline, you may face a hefty penalty from the IRS. However, if you just reached 70½ in 2018, you have until April 1, 2019, to take your first RMDs. As the name suggests, you must take at least a minimum amount from your traditional IRA and 401(k) — the exact figure is primarily based on your account balance and your age — but you could take out more. Be aware, though, that these withdrawals are usually taxed as ordinary income, so the more you take out, the bigger your tax bill. Consequently, you may want to work with a financial professional to find ways of keeping these RMDs as low as possible, without jeopardizing your standard of living.

Lauri Droster, CFP, is Madison branch director and senior vice president of RBC Wealth Management, a division of RBC Capital Markets LLC.

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