How did we get to the end of the year so quickly? Now that they start playing Christmas music after Halloween, the years seem to fly by more quickly than ever.
This has been an eventful year for the market, which has built on gains that have totaled 359%¹ since the beginning of the rally in March 2009. Our clients have been happy with the performance, but also a little nervous. They are aware that every eight to ten years on average, the U.S. market goes through a correction or downturn in the market. It’s actually healthy for the market to find its correct price, cool down, and eventually go on to hit new highs.
We believe the expected correction will be a relatively mild one, because the underlying U.S. economy is very strong, much stronger than most global economies. On that basis, many economists feel that the market should do well for at least the next couple of years, even if we have a correction.
Investors who have a broad, globally-diversified portfolio should do well. Diversification means spreading your risk as widely as possible, just the opposite of putting all your eggs in one basket. This approach helps alleviate a correction because different assets behave differently, often just the opposite of one another. When the U.S. market goes through a rough patch, the international market tends to do quite well, and pick up the slack. It’s fortuitous that currently, the international market is already doing very well, hitting record highs.
Thanksgiving is also the time of year that we send out Required Minimum Distributions on retirement accounts (like an IRA, 401k, 403b, etc.) for our clients who are age 70 ½ or older. This is mandatory, and the penalties for non-compliance are harsh — if you don’t take your RMD like you’re supposed to, the IRS can penalize you 50% on what you should have taken out. If your financial advisor is on top of things, he or she should have already calculated your RMD for this year, and let you know that it will be sent to you before the end of the year. If you haven’t already received this notice, you may want to be proactive and make sure that your RMD is in the works.
Your Required Minimum Distribution is re-calculated every year. Your financial advisor will take the value of your retirement account on December 31, 2016, and divide it by a factor based on your age. At age 70 ½, your RMD is about 4%. The percentage gradually increases as you get older. Many people think that the value of their retirement account will decrease once they start taking RMDs, but this doesn’t have to be the case. It’s not unreasonable for a retirement account to grow 7% per year or more on the average in a highly-diversified strategy. Even if you have to take a 4% RMD, your account can still grow. This can give you the peace of mind that you’re not going to run out of money in retirement.
The end of the year is a good time to harvest losses in your investment. Tax loss harvesting is the practice of selling a security that has experienced a loss. You are able to offset taxes on both gains and income. If you have a passive gain (e.g., from selling an investment or real estate), you can wipe out or reduce the taxes by harvesting a similar loss. If you have no passive gains, you can reduce up to $3,000 per year of ordinary income with a long-term passive loss.
If you have carry-over passive losses from previous years, you can take advantage of those losses by selling some investments at a gain. Your Certified Financial Planner™ and CPA can collaborate to match gains and losses. This way, you can sell some investments on which you would normally pay capital gains taxes, and pay no taxes at all!
Finally, this is a good time of year to consider supporting your favorite community organization, church or temple with a charitable contribution. If you donate appreciated investments, you can escape paying capital gains taxes, and the charitable organization (because it pays no income or capital gains taxes) will receive the full amount. It’s a win-win.
If you haven’t decided which organizations you want to benefit, but want to take the tax deduction this year, think about opening a Donor Advised Fund. You’ll be able to take an immediate tax deduction, and decide later on who you want to gift to. Because you can keep the money invested and growing in a Donor Advised Fund, it’s the type of gift that can keep on giving.
You can donate your Required Minimum Distribution as well. One of the most effective ways to do this is through a Qualified Charitable Distribution. The QCD is written directly from the investment to the organization. This way, your Required Minimum Distribution bypasses the calculation for Adjusted Gross Income, and helps to keep down the taxation of your Social Security benefits, and your Medicare premium.
Consult with your Certified Financial Planner™ or CPA to determine what type of contribution would benefit you the most.
We hope you have a happy and healthy holiday season!
¹ WSJ 11/18/2017, based on the performance of the Standard & Poors 500 index