In the 2024 presidential election campaign, we heard from Donald Trump supporters and the “never-Trump” group. Both are now asking us the same question, “What now?”
Although you, dear reader, may not have been as focused on inflation at the gas pump or the grocery store, inflation became an election focal point this year. Recall that it was a mere two and half years ago that inflation jumped from 2% to 9%. The pain was evident around the country, but I fear that the cause (supply and demand) was widely misunderstood. Nevertheless, it appears most voters were convinced that Trump would do a better job of fighting inflation than the Democrats would. But take note: His announced policies of tariffs, extending the tax cuts from his 2017 Act, and exporting immigrants are all likely to be quite inflationary.
It is time to take stock. Here is a checklist of year-end items to consider:
Consider the Impact of Rising Interest Rates on Investments
While you should always be mindful of your portfolio, the year end is a great time to reassess where you stand and where want to go for the next year. Watch out for the bond vigilantes (those bond investors at very big firms). When they get tired of the dithering and never-ending spending by Congress, rates will be bid up, adding to market instability.
Every investor should re-evaluate his or her investment goals, risk tolerance, risk capacity, and asset allocation on an ongoing basis. At a minimum, do it once a year to determine whether the portfolio has deviated from its target allocation and whether your target, perhaps set years ago, needs to be altered due to changes in the economy or in your individual circumstance. The great temptation is to let winners continue to grow to the point that they become a concentrated risk. Taking gains for the purpose of risk reduction is usually a good idea.
Consider Tax-Loss and/or Capital Gain Harvesting
If you invest in a diversified portfolio, you may have specific investments that have fallen from your purchase price, i.e., you have an unrealized capital loss. Look at individual investments and consider that the red ink spells “opportunity” to harvest those losses and offset capital gains that you might have booked earlier this year. Our caution is, do it with care.
One can only deduct $3,000 of net capital losses with any excess carried over to 2025. Just remember the wash-sale rule says that to deduct the loss, you must wait at least 30 days before investing in that same company or when buying a substantially identical investment.
Maximize Retirement Contributions
Now is the time to make sure that you have taken full advantage of retirement plan contributions for this year. Review your year-to-date contributions to your retirement accounts i.e., 401(k), 403(b), and IRAs. For 2024, an individual may contribute up to $23,000 into their 401(k), $16,000 into a SIMPLE, and $7,000 into an IRA. If you are 50+, you may add an additional $7,500 for retirement plans, $1,000 for IRA accounts, or $3,500 for Simple IRAs.
Hopefully, you have also taken advantage of the mega-Roth contribution if your employer’s plan permits. Please discuss this maneuver with our tax advisor if you are eligible or unsure.
Double Check RMDs
If you are 73 or over, take care to ensure that you have taken your required minimum distribution (RMD) for this year. Also, even if you aren’t 73, but have an inherited IRA, you may need to take the RMD on that account. The penalty for failure to distribute required minimum distributions is onerous and can easily be avoided.
If you are at least 70 1/2 and interested in supporting charitable causes, taking a qualified charitable distribution (QCD) can avoid taxes on the distribution because it never gets treated as income in the first place.
As you consider your RMD, it is also a good time to look at your tax projection for this year. Consider if the withholding on the RMD can help you avoid an underpayment penalty if you have not had enough withheld or have not paid estimates throughout the year. Withholdings made via your RMD are treated as having been paid ratably throughout the year.
Update Tax Projections for 2024 and 2025
We suggest that you always maintain a rolling two-year projection of both state and federal income taxes. Since you have filed your 2023 tax return, and you know most of your year-to-date amounts for 2024, you should use that data to prepare a projection for 2024 and 2025, looking for tax saving opportunities by shifting income and deductions from one year to the other.
Now is also the time to look at the liability side of your balance sheet, especially if you have variable rate or high-interest rate debt. Remember, it’s okay to carry debt with an interest rate that is less than your portfolio return, but it might make sense to use some of the portfolio to pay off credit cards, home equity, or automobile loans.
With the potential for much higher inflation, the need for a watchful eye has perhaps never been greater. Don’t put this off. Plot your course for 2025!