With the year coming to an end, you’ll likely see dozens of articles suggesting ways to reduce your taxes and improve your portfolio. If you’ve been engaged with our newsletter for a while, you know we favor making regular tweaks throughout the year to minimize taxes and maximize total return over the long-term. That said, we love a good tip or trick just as much as the next guy, so we’ve compiled a few of our favorites you can implement in December to help reduce your tax bill in 2019.
INCREASE YOUR RETIREMENT PLAN CONTRIBUTIONS
The maximum amount you can contribute to an employer retirement, such as 401(k), is $19,000 for 2019. If you are age 50 or older, you can take advantage of an additional “catch-up” contribution of $6,000. Likewise, you can contribute a maximum of $6,000 to an IRA with an added $1,000 if you are 50 or older. Generally, you have until December 31, 2019, to contribute to an employer retirement plan and until April 15, 2020, to contribute to an IRA.
If you are self-employed, you may want to consider establishing an individual 401(k). The plan must be established and partially funded before year-end and should be done under the guidance of a CPA.
USE HSA TO PLAN FOR FUTURE HEALTH CARE COSTS.
For those with a high deductible health insurance plan, you are eligible to contribute up to $3,500 and $7,000 for families in 2019 ($8,000 if you are age 55 and over) to a Health Savings Accounts. Similar to a 529 plan, contributions made to an HSA grow tax-free and withdrawals used to pay for qualified medical expenses are also tax-free.
FUND A 529 EDUCATION SAVINGS PLAN
Contributions made to a 529 plan grow tax-free and withdrawals made for qualified education expenses are also tax-free. You can give up to $15,000 per beneficiary each year ($30,000 from a married couple) without filing a gift tax return. With some restrictions, it is possible to give more with “superfunding” (5 years at one time.)
DONATE TO CHARITY USING APPRECIATED STOCK
If you itemize on your tax returns, giving away appreciated stock allows you to not only deduct the full market value of the donation but also avoid paying capital gains on that appreciation. If you make donations on a regular annual basis but do not qualify to itemize, you may consider putting several years of gifts in a donor-advised fund. This may allow you to itemize your deductions in the current year while maintaining control over the specific timing of your donations to qualified charities over time.
“April showers bring May flowers.” Can the same be said about the recent GOP tax reform and stock market returns?
I don’t know and neither does anyone else!
What does the evidence tell us?
Dimensional Fund Advisors’ Apollo Lupescu answered this very question when he joined us last fall for presentations in Houston and St. Louis.
Relive it here.
Apollo asserts, “The tax policy, the president and the politics have much less to do with the market than the fundamentals.” We agree.
Here’s another idea to consider as you embark on a fresh start in 2017: In financial jargon, what you own is sometimes referred to as asset allocation. But what about where you own what you own? That’s called asset location. It’s about deciding whether to locate your stocks, bonds and other holdings in your taxable or tax-sheltered accounts, so we can maximize your portfolio’s overall tax efficiency.
Unfortunately, compared to asset allocation, asset location is less familiar to most investors. That’s too bad, because a little bit can go a long way toward minimizing some of the sticker shock you experience when your Form 1099s start rolling in, revealing your annual taxable capital gains and interest earnings.
How far can it take you? In this related Illustration of the Month, Nerd’s Eye View’s Michael Kitces estimates it can bring you up to 0.75% of economic impact to your bottom line.
How Does Asset Location Work?
The general rule of thumb is to:
- Place your least tax-efficient holdings in your tax-sheltered accounts, where you aren’t taxed annually on the capital gains or interest earned. Think bonds, real estate and tax-inefficient equities such as emerging markets.
- Place your most tax-efficient holdings in your taxable accounts – such as the rest of your stock holdings.
- In your taxable accounts, invest in low-cost evidence-based funds that are deliberately managed for additional tax efficiencies. (Start by looking for “tax managed” in their fund names and prospectuses.)
Advisor to Assist
It makes intuitive sense that, by locating your most heavily taxed investments within your tax-sheltered accounts, you can minimize or even eliminate their tax inefficiencies as described. But it’s not as easily implemented as you might think.
First, there is only so much room within your tax-sheltered accounts. After all, if there were unlimited opportunity to tax-shelter your money, we’d simply move everything there and be done with it. In reality, challenging trade-offs must be made to ensure you’re making best use of your tax-sheltered “space.”
Second, it’s not just about tax-sheltering your assets; it’s about doing so within the larger context of how and when you need those assets available for achieving your personal goals. Arriving at – and maintaining – the best formula for you and your unique circumstances involves many moving parts with judgment calls and tradeoffs to consider, and evolving tax codes to remain abreast of.
Ready To Get Located?
It’s common for your assets to wander far and wide over the years, as you accumulate regular accounts, retirement plan accounts and financial service providers galore. Proper asset location often gets lost in the shuffle, and can result in your paying more than you need to on your income taxes. If you’ve not yet built asset location into your investing, consider this tax season to be a great time to take a closer look at how to put asset location to work for you and your wealth.