Year-End Tax Planning for Investors

For investors, 2020 has been marked by volatility and uncertainty. As we approach the end of the year, it’s a good idea to review your portfolio and consider strategies for reducing your tax bill, improving your cash flow and positioning yourself for future growth. Let’s take a closer look at a few tax planning moves worth exploring.

Convert to a Roth IRA

If you’ve been considering converting a traditional IRA or 401(k) plan into a Roth IRA account, now may be an ideal time. Roth accounts offer many benefits, including tax-free earnings and withdrawals and no required minimum distributions (RMDs) after you reach a certain age.

Contributions to these plans are nondeductible, however, so it’s important to weigh the benefits of a Roth down the road against the loss of deductions up front. Generally speaking, you’re better off with a Roth account if you expect your income tax rate to be higher when you withdraw the funds than it is when you contribute them. And some experts predict that the government will raise tax rates in the future to help pay for the debt incurred to address the COVID-19 pandemic.

When you complete a Roth conversion, the amount converted is fully or partially taxable. However, if the value of your account has declined this year, you have an opportunity to minimize the tax cost with careful tax planning. And that cost may decrease even further if a reduction in income this year has dropped you into a lower tax bracket.

Harvest losses

Tax-loss harvesting simply means selling poor-performing investments to realize capital losses you can offset against capital gains you realized earlier in the year or expect to realize during the remainder of the year. If you end up with a net loss, you can use it to offset up to $3,000 in ordinary income, such as wages or interest.

Harvesting losses can be an effective strategy for reducing your tax bill, but that doesn’t mean you should sell off all your losing investments strictly for tax purposes. Rather, it’s an opportunity to rid yourself of investments that are unlikely to bounce back and replace them with investments whose long-term prospects are strong.


Diversification is a fundamental principle of sound investing. By investing in a variety of asset classes, funds, companies, industries and geographical regions, you minimize the risk that poor performance in one area will have a negative impact on your overall portfolio. Although there are no guarantees, a properly diversified portfolio, which includes assets that tend to perform differently under various market conditions, improves the chances that some investments will perform well at any given time.

Even the most carefully diversified portfolio can get out of balance over time, so it’s important to monitor your asset allocation and rebalance your portfolio periodically to ensure the right mix of investments. Doing so can come at a tax cost, however, as you sell some assets and invest the proceeds in others. An economic downturn may create an opportunity to make changes to your portfolio while minimizing the tax cost.

Donate appreciated stock

If you plan to make charitable contributions this year, consider donating appreciated publicly traded stock that you otherwise planned to sell. Even if a stock’s value has declined this year, it may be worth more than you originally paid for it and, therefore, would trigger capital gains taxes and possibly net investment income taxes. By donating the stock directly to a qualified charity, you’ll avoid those taxes while still claiming a charitable deduction equal to the stock’s market value.

Note, however, that this year there are additional considerations. The CARES Act temporarily increased, to 100%, the deduction limit for certain cash contributions. Depending on the specifics, therefore, tax-wise you may be better off selling the stock and donating the cash.

Look at the big picture

Tax planning is important, but it’s just one of many factors to examine as you review your investment choices. As you explore the potential strategies, don’t lose sight of the big picture: Investment decisions should be based on your overall financial situation and should never be driven by tax considerations alone. Before taking action, talk to your tax advisor about the right year-end tax planning strategies for your specific situation, or feel free to contact us.

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