5 Savvy Year-End Strategies for Retirement Investors

by Tim Guthrie, CFP^® - Founder and Chief Investment Officer of Bullseye Investment Management

Strategy #1

Make sure that you have maximized your retirement plan contributions.  

This can mean contributing the legal maximum allowed contribution or that you have contributed all that you can afford into these plans.  Below find the customary legal maximum contributions:

• The maximum IRA or Roth IRA contributions for someone under 50 years old for 2019 is $6000.¹ 
• The maximum IRA or Roth IRA contribution for someone who is reached 50 years old in 2019 is $7000.¹

Employment-based retirement plans have much higher contribution limits allowing you to create much more wealth.  The limits for 2019 below:

• 401(k) and 403(b) Employee Deferral Limit1 - 2019 Limit¹ $19,000                       
• 457 Employee Deferral Limit - 2019 Limit¹ $19,000                       
• Catch-up Contribution2 - 2019 Limit¹ $6,000

If you can afford to make the maximum deferral, it is likely that this is an excellent idea.  The exception to this would be if the investment options in your plan are particularly poor.  If you cannot afford to make the legal maximum contribution, you still need to satisfy yourself that you have saved enough to achieve your retirement goals.  Bullseye Investment Management can assist you with the retirement planning calculations to determine what level of savings is necessary to reach your goals.

Strategy #2

Use the “back door” Roth Conversion Process to make contributions to your Roth IRA  

If your income is too high for regular contributions.  Roth IRAs are the greatest tax break in history.  You get to invest money and let it grow tax-free.  Then when you redeem the funds, that income is tax-free.  However, congress capped the income for people to receive this amazing tax benefit.  If you are married and file your taxes jointly, the maximum income limit to make a full Roth contribution is $193,000.  It may be possible to get around this though if you use the “back door” Roth Conversion Process.  Because there is no income limit on the ability to contribute to a traditional IRA, it is possible to contribute to a traditional IRA then convert those funds to a Roth IRA if you qualify.  This method requires a non-deductible traditional IRA contribution (usually in a new traditional IRA account opened just for this purpose).  Once the traditional IRA contribution is made, the funds can be transferred to a Roth IRA.  You do have to fill out IRS form 8606, but this method is IRS-approved.  Please call Bullseye if you have want to learn more about this wealth-creation technique.  The tax advantages of Roth IRAs are powerful.  Don’t miss this opportunity if you qualify and have the funds.

Strategy #3

Use Tax Loss Harvesting to save money on your taxes  

Tax loss harvesting is a strategy for reducing your capital gains taxes long term in taxable investment accounts.  We do not desire losses, but having some losses are a fact of life for nearly every investor.  Further, losses in taxable accounts have a real dollar value.  Fortunately, this has been a good year and most investments are up.  But, if you have a taxable account (not an IRA), then you can lock in losses to reduce your capitol gains.  The goal is to minimize your taxes. IRS rules allow an investor to reduce the taxes on capital gains, by subtracting losses from those gains or by ‘carrying forward’ losses from prior years.  

Review your realized gains and losses for the year (‘realized’ is a tax term meaning that the gain or loss is actual, the investment has been sold, and ‘un-realized’ is a ‘paper’ gain or a loss, as the investment has not been sold). Then examine any losses for possible tax loss harvesting.  For example, say your account has seven holdings, and two have losses.  One of those holdings with a loss you still consider having good investment potential.  In tax loss harvesting, we sell that holding to ‘realize’ the loss (now we can use it to reduce taxes on some realized gains, or use it in the future) but then we buy another similar (often nearly identical) investment to stay invested in that sector to benefit when the prices for those securities improves.  Doing this, we have our cake and eat it too.  We get the benefit when the new investment appreciates, but we captured the loss for tax purposes.  Remember, the tax loss has a dollar value.  To continue the example, if the loss ‘harvested’ was $2,000, realizing the loss could save you anywhere from $300 to $600 in capital gains taxes (your capital gains tax rate multiplied by the dollar value of the loss).  This process both lowers your breakeven price for the investment and reduces your tax bill.

Many investment ‘professionals’ do not harvest losses, they simply tell their clients that the investment with the losses ‘will come back’.  The problem with that approach is that it costs their clients real money.  It does, however, reduce the amount of work and expertise required for that ‘professional’.  Don’t let your investment advisor miss an opportunity to save you money.

Strategy #4

Reevaluate your risk tolerance

Many investors fail to adjust their risk tolerance as they approach retirement.  While best way to create wealth in the long-term is owning stocks, short-term fluctuations could still wreak havoc with your retirement plan.  While there are other factors, the simplest way to evaluate your risk is to determine what overall percentage of your retirement account is invested in stocks.  Typically, your employer’s retirement plan will categorize your retirement options based on whether it is a stock, bond, or blended investment.  If 60% of your 401k plan is in stock funds, then your working assumption should be that your account has about 60% of the risk of being in stocks.  If you were content with a high level of risk when you were younger, but are now approaching retirement, you may want to evaluate how much of your wealth is at risk.

This subject is more complicated than the above generalizations.  The risk level among different stock products can vary greatly and bonds do have risks as well.  Our firm specializes in helping clients accurately assess their risk level and build investment plans to match their risk tolerance using modern approaches.  You only have one shot at retirement, let us help you get it right.

Strategy #5

Evaluate the competitiveness of your holdings 

How much have they grown this year?  How does that compare to other investment vehicles?  Many stock portfolios are compared to the S&P 500.  The problem is that if your account is not 100% stocks with 30% of those being in technology, this comparison may not be relevant.  Despite that issue, if the S&P is up 20% and your account that is allocated mostly to stocks is only up 13%, you need to dig deeper.  Our firm sees perspective clients every week who despite have significant savings are not sure if their portfolio is a contender or a pretender.  Don’t fly blind into your retirement.  Contact us today for a thorough, impartial evaluation of your holdings.