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7 Year-End Tax-Saving Moves

Is your portfolio ready for 2012?

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4. Consider Opting Out of Automatic Reinvestment

We recommend that our clients have their income and capital gains distributions deposited into a money market fund rather than automatically reinvesting the proceeds in the fund that generated them. This provides the flexibility of reinvesting in the fund at a later date or, as part of a rebalancing strategy, using the cash to add to other funds that may have underperformed recently.

5. Maximize Opportunities for Tax-Deferred Growth

It’s a well-known fact that 401(k)s, IRAs and other retirement accounts are a great way to keep assets growing tax-deferred. Therefore, consider contributing the maximum amounts allowable to each account every year. Depending on your employer’s plan, you may be able to defer up to $17,000 in earnings to a 401(k) or 403(b) plan in 2012. If you will turn 50 before December 31, 2012 and your plan allows it, you can contribute an additional $5,500. For IRAs, the maximum contribution in 2011 and 2012 is $5,000, plus a $1,000 “catch-up contribution” for those who turn 50 before the end of 2012. You have until April 17, 2012 to make your 2011 contributions, but if you do it now, your money can enjoy the benefits of tax-deferral sooner rather than later.

6. Don’t Forget Your Required Minimum Distributions (RMDs)

If you have tax-deferred accounts, you will be required to withdraw a minimum percentage each year after reaching a certain age. The RMD rule exists to make sure that savings in retirement accounts are actually used for retirement and not just passed on to heirs.

You generally have until April 1 of the year following the calendar year in which you turn 70½ to take your first RMD. These rules apply to any retirement account in which you contributed tax-deferred assets or had tax-deferred earnings, such as Traditional IRAs, Rollover IRAs, SEP-IRAs, 401(k) and 403(b) plans (Roth IRAs are not subject to RMD rules).

The RMD is calculated (in most cases) by dividing the adjusted market value of your tax-deferred retirement account as of December 31 of the prior year by an applicable factor taken from the IRS life-expectancy tables. If you fail to take your RMD from your retirement account, you will be assessed a penalty equal to 50% of the amount you should have withdrawn, in addition to normal income taxes. These are heavy penalties, so clearly it’s in your best interests to take these RMDs, something we help our clients with each year.

7. Focus and Finish

While taxes are one of the last things you may want to think about during the holiday season, taking the time to fine-tune your portfolio now may help prevent bigger headaches and tax bills come April. That said, restructuring a portfolio and moving assets in an attempt to avoid distributions can be tricky, which is why we recommend you consult with a professional tax adviser before doing so.

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