Portfolio Moves to Consider Before Year-End

Nov 2019

As of this writing, stock markets are hitting all-time highs amid signs the economy is not quite as dire as some thought and recent progress on the U.S./China trade negotiations.  The Dow Jones Industrial, S & P 500 and NASDAQ indices are all in record territory!  In my view, the stock market tends to reflect the current environment better than any economic indicator.

It has been a strong year indeed, and a breath of fresh air considering where we were about a year ago!  However, the year is not over, and anything can happen between now and December 31.  There are three main considerations investors may want to think about before 2019 closes.

Here they are:

  1. Portfolio Review/Rebalance. Rebalancing is a strategy used to ensure you are not too heavily exposed or underexposed to stocks or bonds based upon allocations you determined appropriate for your situation. If you have not rebalanced your portfolio this year, you might find yourself overweight in stocks given how strongly equity markets have performed this year.  Do-it-yourself investors should consider formally reviewing their portfolios at least twice per year to make sure they are adequately balanced. Rebalancing helps to mitigate downside risk by trimming or selling your stocks back down to your targeted level.  Adhering to a rebalancing process is meant to manage market risk.  This process may be difficult to implement for fear of selling your winners, but it is absolutely the right time to do it.

If you have a variety of account types like taxable, tax deferred and tax-exempt (Roth IRAs, then you may have more flexibility to rebalance.  If you hold stocks or stock mutual funds in all the accounts, then you can adjust those investments with gains in tax-advantaged account first, thus mitigating realizing gains in taxable accounts.  However, if you have unrealized capital losses in your taxable accounts, then you can sell those securities with losses to offset any realized capital gains (see below.)

You may have to weigh realizing gains with possibly seeing your portfolio decline if stocks hit a rough patch.  You may also want to consider briefly delaying taking gains this late in the year, and rebalance fully in January.  However, you will need to weigh your penchant for risk in doing so.


  1. Capital Gains/Losses. Capital gains and/or losses are a part of investing, and especially if you subscribe to a rebalancing process as described above. There is no avoiding gains or losses if you own non-retirement accounts.  At some point, either due to regular rebalancing or for other reasons, you may sell investments at a gain or loss and must report that activity on Schedule D of your 1040.  In 2019, the capital gain tax rates are either 0%, 15% or 20% for most assets held for more than a year.  Capital gains tax rates on most assets held for less than a year correspond to ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).

Short-term capital gains tax:  Think of this as ordinary income for tax purposes.  If you are in a high tax bracket, then it makes financial sense to delay selling an investment asset until you have held it longer than a year.

You can offset capital gains with capital losses dollar for dollar, so if you realized capital gains, then be on the lookout for any positions you can sell at a loss to minimize capital gain taxes.  Please note that any short-term capital losses are generally offset against short-term capital gains first, and once those are fully exhausted, any remaining losses will be used to offset any long-term capital gains, where necessary.  Investors should consider looking for capital loss opportunities throughout the year since losses can also be used against year-end mutual fund distributions.

Please remember if you have realized losses, and have offset all capital gains, then up to $3,000 of losses can be used against ordinary income.  If you have losses that exceed $3,000, then those losses can be carried over to use in future years indefinitely.

Caveat:  Be aware of the “Wash Sale Rule.”  If you sell a security for a loss and then repurchase that same security or “substantially identical” security within 30 days, then your loss would be disallowed.


  1. Required Minimum Distributions (“RMDs”.)

RMDs as they are often quoted, are required distributions that occur when someone reaches age 70½ per Internal Revenue Service guidelines.  Participants must begin withdrawing from their retirement accounts by April 1 following the year they reach age 70 ½.  The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation.  Many participants withhold a certain portion for taxes and either reinvest the proceeds back into a taxable investment account or they take the income.

Important: If you miss taking your RMD, then you are subject to a 50% tax penalty on the amount not distributedYou can schedule your RMD to be done at the same time each year.  Just contact your advisor and/or brokerage firm

Older people who are still working have an advantage.  If they are participants in a 401(k) plan, they may not have to take this distribution until they retire, but only if the plan allows it.  If you own more than 5% of the company where you work, then you’ll still need to take those RMDs.  Keep in mind those who are still working can only postpone RMDs from the 401(k) at their current employer.  If they have IRAs and other retirement account from former employers or elsewhere, they’ll still need to take the distribution from those accounts.  You can make a distribution from one retirement account that satisfied all your other retirement accounts if you desire.

If you are charitably inclined, then you can donate up to $100,000 of your RMD amount to a charity of your choice, but keep in mind, this donation must go directly to your charity from your brokerage firm/custodian.  This is known as a Qualified Charitable Donation (QCD).  The donated amount will not be taxed as ordinary income and you will not receive a charitable deduction on your personal tax return.  It is a good idea to provide the charitable information to your advisor or your financial institution prior to the distribution so you have everything in place.

In either situation above, you will need to review your portfolio to make sure it is not out of your targeted balance.  If you are overweight equities or bonds, then you may be able to rebalance using your RMD amount.

As always, it is smart to reach out to your financial advisor to help you navigate these considerations. Everyone’s situation is unique; it is important to have all of the details when making your financial plans.

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