Financial Updates with Erin Kennedy & Peter Richon | 5 Year End

We want you to plan for success. Welcome to Planning Matters Radio.

Hey Peter, good to see you. Today we are talking five year-end tax strategies. Only a few months left in the year, so now is the time to start planning. We are still firmly in bear market territory, stocks and bonds are both sharply negative, and the market has lost nearly one quarter of its value since the beginning of the year.

Ouch. So now let's talk about how those negatives though offer some unique opportunities. And first on your list is something we've talked about before, tax loss harvesting.

What is that? Yeah, tax loss harvesting is an important financial strategy opportunity. I do want to say that the fourth quarter of the year is time for a lot of execution on these strategies and is a deadline for these strategies. I think tax planning should happen proactively, and really with the very first dollar that we ever earn, we need to start learning and understanding the full tax implications and where we have opportunities, hopefully, to pay as little as possible and control our tax liability.

So that conversation should be happening throughout the year much, much more often and proactively than it does. But yes, fourth quarter of the year, now it's crunch time, now it's deadline time, and tax loss harvesting a great opportunity number one. This basically says that if there are losses in your portfolio, which many of us have, you can actually utilize those losses to potentially offset some gains.

And during the course of one calendar year, that can be done on a dollar per dollar basis. So if you've got one position that has had $1,000 in gains and another position that has had $1,000 in losses, you can sell off both the winner and the loser and basically wash the tax liability of that gain against the loss and then repurchase 61 days later into whatever positions you think are appropriate then. If you have significant losses without gains, you can still do some tax control. Those losses can be utilized, but they have a limit of $3,000 per year and then they carry over. Sometimes a substantial amount carries over, as we have heard from billionaires such as Elon Musk, who said that they were able to write off their total income.

Elon's not the only one. I think Jeff Bezos had said the same thing, that they didn't pay any taxes in a certain year because they had carry over or carry forward losses. That's when they claimed losses in one year against income into future years. But doing so, you've got a limit on the amount that you can do on an individual level.

If you carry it forward to that next year, $3,000 per year. Okay, next on your list, rebalance. Why is that important? I think this kind of goes hand in hand, right? Again, we've got those two example positions or let's say in this year, we've got our equity side of our portfolio, the stocks and the mutual funds, and then we've got the fixed income side of our portfolio, bonds and bond funds. If the two move in different amounts or different directions, then we are off of our target allocation and the traditional mix for a retiree might be 60-40. We hear about this asset allocation, the modern portfolio theory of a 60-40 mix between fixed income and stocks. And if the stock market is on a tear going way, way up, well, suddenly that 40% of our portfolio that we were comfortable taking stock market risk with might be 50 or 60%. We are overweighted in risk and therefore we should rebalance back to our target to capture gains when they are present and to keep our risk exposure in alignment with our risk tolerance. Well, here we don't have that fantastic rising upward market, the market has come down, but it's still time to rebalance because the opposite effect may also be true, is that if we rebalance into equities when the market is at a lower value, we're buying when there is opportunity for more gain. And again, keeping our risk exposure in line with our risk tolerance. So rebalancing really needs to be an ongoing proactive thing. And one of the big faults I think with the 401k, it's fantastic in that it's automatic and it's sort of set it and forget it, but a lot of times people forget to do that rebalancing that is so important. And after 10, 20 years inside of a 401k, that can result in a whole lot more risk than people are really aware of. Right, right, right. Really important consideration.

Next, Peter, I don't know if this is because it's Halloween. You have beware phantom income. Either way, it does scare me. Yeah, so a lot of people don't really realize or understand where that tax bill can come from for mutual funds that lost value the year prior.

And to say it is an unpleasant surprise is an understatement. But mutual funds in particular, inside of non-qualified, non-retirement accounts, present a kind of unique quality. Because mutual funds are, for lack of a better comparison, socialism in investment form, meaning from all according to their ability, to all according to their need. And if two people invested in the same mutual fund, and let's just say $10,000 was invested by both parties, and then the fund lost 20% of its value. So now we're down to $8,000. So person A says, hey, I want to cash out. I want my money back.

Send me a check. Well the mutual fund manager probably liquidates some of the positions inside the fund to create the liquidity that have gained in value. Well those gains are passed on to all of the investors in the mutual fund. So in order to give one investor the liquidity that they desired, that gain was realized and therefore a tax bill was sent to investor B even though their investment lost value.

And this was a big surprise to a lot of people in 2008 and 2009 after the Great Recession. Again, non-qualified, non-retirement accounts with mutual funds have this potential to lose value and then simultaneously, either from individuals who want to liquidate the positions or simply internal turnover within the mutual fund itself. It doesn't necessarily have to be blamed on one person liquidating. It can be the fund management itself to generate tax implications and tax liabilities for gains when your fund actually lost in value.

It's a pretty important factor to consider and one of the reasons why ETFs may be a good alternative to mutual funds inside of a non-qualified account because they don't have that quality. Right, right. Wow, that is very important.

Interesting too. Alright, next on your list, Roth conversions. These are a really great consideration for a lot of people for tax planning purposes.

I mean if you like pouring salt and vinegar into an open wound, yes. But it's short-term pain for long-term gain. Really, like all joking aside, it is a fantastic strategic opportunity to control your tax bill. And we hear during our working career often, it's not what you make, it's what you keep. Well, in retirement, that changes slightly.

It's not what you have, it's what you get to keep from it. And in tax-deferred accounts, your 401k, your IRAs, even though we have seen losses in the market and that is painful enough, we really may want to consider doing some Roth conversions. And again, it's going to be painful because you've got to pay the tax bill in addition to the losses that you've suffered. But the traditional 401k IRA tax-deferred account was based upon the belief that we will be paying lower taxes into the future, into retirement. And when we make the transition from our working career to retirement, for a lot of people that does come to fruition. But if we are in retirement or don't see ourselves dropping income into the future, then likely we are in the lowest tax environment we are going to see. And the discussion of taxes and the tax atmosphere is really changing directions. And by the way, the Tax Cut and Jobs Act of 2017 was only a eight year measure. So taxes, if nothing else is done, will be going up in 2026. And not just for the evil rich people making $400,000 or more, the 12% bracket is slated to become the 15% bracket. So the Roth conversion says if we convert and pay our tax bill now, a lower amount is due because of the losses that we've seen. And then when a recovery happens, it happens on a side of the tax ledger that is tax free.

The growth is tax free and the income in the future is tax free. So it really is a great opportunity, albeit kind of a painful discussion and consideration to have considering losses. Right, right. And the last consideration on our list here, RMDs, required minimum distributions.

What do we need to keep in mind here? Yeah, well, it is a requirement, not a consideration if this does apply to you. And for this year, it is anybody who has turned 72 or is 72 or above in this calendar year. And that shifted a couple years ago at the end of 2019. It was 70 and a half. The SECURE Act made that 72.

So now that an extra year and a half has passed, we're back on the same page. Everybody, if you were born in 1950 or prior, is required to remove at least some amount from tax deferred accounts. Now, if you've got a 401K that you are still working and contributing to, let's set that one to the side because that one is exempt. But if you've got any tax deferred account that you're no longer making contributions to, you are required to take out a distribution so that the IRS can begin to harvest the taxes that they have allowed you to defer up till this point. And if you don't believe that there is a bill and a debt to the IRS inside of your IRA, just wait till they start requiring minimum payments.

That's what this is. And if you are late on that minimum payment, it is one of the heftiest penalties that the IRS levies. It's a 50 percent penalty on what you were supposed to take out. And then you still have to pay tax on the full amount of the distribution. So say that we had a ten thousand dollar required minimum distribution, it would be a five thousand dollar penalty if we missed it, plus taxes on the full ten thousand dollars, something that you do not want to overlook or miss. So if it applies to you, if you're 72 or above, definitely make sure that you take that required minimum distribution, get help where necessary.

If you've got a family member that that description applies to, make sure to remind them of that fact. And oh, by the way, there is one opportunity within the tax code that applies to RMDs that gives us the the opportunity, the rare, rare opportunity for truly tax free dollars. And that is something called a qualified charitable distribution or a QCD. If you are charitably inclined, if you tithe to your church, if you've got an organization that you give to regularly that is a nonprofit, then you can take your RMD, remove it from your IRA, satisfy the IRS's requirements, and then gift it as a gift directly to that church, charity or organization. It goes to them as a tax free donation and it comes out of your IRA without you actually owing tax on it, because the deduction that you would receive for the donation offsets the taxes that would be due on the distribution.

So you earned the money, put it away tax deferred, grew the money tax deferred and then gifted it to your charity tax free. It is a rare and valuable opportunity that if, again, you are charitably inclined, you really should consider carefully. Yeah, that's a great point, Peter. I actually think we should maybe do a separate video on that maybe towards the end of the year as people are looking at those. Give people a little pro proactive notice. Yeah, you've got to take some time to do that carefully. So let's make sure to do that in advance.

Yeah, well, there you go. So this is a perfect opportunity to call a trusted advisor now. Peter, if somebody would like to talk to you about these strategies, what's the best way to reach you? Give us a call at Rishon Planning, 919-300-5886, 919-300-5886. You can email me peter at rishonplanning.com or visit online richonplanning.com is what it looks like, rishonplanning.com. There is a opportunity for a free download of my book, Understanding Your Investment Options, right there on the home page.

Go and download that. And the last several chapters do talk about some of these tax planning moves and strategies. That's great. All right, Peter, thank you. Absolutely.

Thank you, Erin. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brookstone Capital Management, a registered investment advisor. Piduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.