Crucial Year-End Portfolio Moves for Tax-Saving | Podcast

Crucial Year-End Portfolio Moves for Tax-Saving

December 15, 2021

Episode Description
FEATURING Charlie Toole, Steve Johnson and Devin Murray

It’s been a hectic year—and a positive one for the U.S. stock market. Taking the time to fine-tune your portfolio now may help prevent headaches (and tax bills) come April.

In this episode of The Adviser You Can Talk To Podcast, Charlie, Steve and Devin talk techniques for tuning up your portfolio, including how a look under the hood of your holdings may uncover unexpected tax savings. They discuss:

  • When and how to rebalance your portfolio
  • Tax-loss harvesting at the lot level
  • Avoiding common mistakes when it comes to fund distributions
  • How ETFs can help avoid wash sale troubles

Before you get wrapped up in all the holiday merrymaking, make sure to take one last lingering look at your bottom line. A few tweaks to your portfolio before year-end may make a world of difference come April 15.

Click here for the Year-End Checklist

Episode Transcript

Charlie Toole:

They say that failing to plan is planning to fail. Join us as we discuss some of the steps you can take in your portfolio to plan ahead for success. Hello, I’m Charlie Toole. Welcome to another The Adviser You Can Talk To Podcast. It’s the end of the year and that means we’ll be shopping for holiday gifts, spending some quality time with family and friends, and, in my case, eating too much. But it’s also the time of year when you can make some proactive moves that can help minimize your tax bill in April and set up your portfolio for the new year. Adviser Investments has an exclusive checklist that outlines steps that you can take. A copy of this checklist is available for download in the show notes. So today we’re going to review the benefits of a few of these steps. And joining me in the discussion will be Steve Johnson and Devin Murray. Steve is a portfolio manager here at Adviser Investments. Steve, welcome to the podcast.

Steve Johnson:

Thank you, Charlie. Happy to be here.

Charlie Toole:

And Devin Murray is a data analyst and he’s done some extensive work on tax-loss harvesting. It’s a spoiler alert. That’s one of the topics we’ll be covering. Devin, welcome to the podcast.

Devin Murray:

Thank you very much, Charlie.

Charlie Toole:

All right. Let’s jump right in and cover a few of these steps that investors can take before year-end. The first one we’ll cover is rebalancing your portfolio. This is something that we’ve done extensive work on here at Adviser Investments. And it’s not something I think that investors consider doing to their portfolio at any time, never mind year-end, but in a year like this, where stocks have gone up and bonds haven’t, your portfolio can be different than where it was at the beginning of the year or even a couple of years ago. And that may not match your risk expectations.

Steve Johnson:

Yeah, Charlie, that’s the point I think right now that many investors are looking at. Because over the last five years, we know that U.S. stocks have done phenomenally well. So not only is your portfolio probably more aggressive than you started out with; it’s probably a little bit imbalanced, too, because as we mentioned, the U.S. has done very well—and not only just within the U.S.—but we know that’s large-cap growth. As we talked about over the last couple of weeks, you look at stocks like Apple, Microsoft and Nvidia—those names have driven performance. So what you’re seeing now is a portfolio that investors have that has probably too much U.S. exposure. And if you are 60/40, you’re probably now closer to 70/30, which means that you’re taking on more risk than you probably want to at this point.

Charlie Toole:

That’s right. And I think what we’re trying to just say here is take a look at your portfolio, make sure it matches your risk expectations. You might be comfortable letting it go to 70/30, but as you mentioned, you can be concentrated in some of these areas that have done really well. One of the things we’ve done here is we’ve looked at the different ways you can rebalance. You can rebalance on a time basis, every six or 12 months or every three or four years, or you can rebalance when you get a certain percentage away from your allocation. As you mentioned, 5% or 10% away from your 60% allocation in stocks. I think rebalancing on a time period, at least in the analysis that we’ve done, works better than rebalancing as soon as you get a certain percentage away from your stocks.

Steve Johnson:

Yeah, Charlie, I think that’s a great point. I think it’s easier to do it on a calendar basis because what it does is it requires the investor to do what is emotionally uncomfortable, and that is perhaps buying assets that are lower and selling those that are higher. The other thing that investors can think about as we head into the new year is you can also change where you’re contributing. In fact, if you’re not looking to make any sales, what you can do in your 401(k) and your IRAs is adjust where you’re contributing. So if you were underweighting bonds there, maybe you are going to add there. Maybe you’re going to add to international as well, if you’re underweight there. So you don’t necessarily have to sell, but it does allow you the opportunity, with your new contributions, to rebalance.

Charlie Toole:

That’s a great point, and I think the last point to be aware of when you’re rebalancing is: It is the end of the year, so if it’s a taxable account, you should be aware of the taxes that you might realize if you do sell your winners. One of the techniques that you can use is instead of selling in December, you can wait and sell in the first week in January, and you put off that tax bill on that realized gain another year instead of having to pay it in April. You’ve got a whole other year before that tax bill comes due. And I think that’s a good pivot point to get to our next topic, which is tax-loss harvesting.

Charlie Toole:

So one of the things you can do in your portfolio is look and see if there are underperformers that have losses, and you can harvest those losses or realize those losses to offset gains. That is one way that you can help lower your tax bill. And I know, Devin, you’ve done some work on this. There are some benefits there.

Devin Murray:

Thanks, Charlie. So I spent some time building a tool that can help us identify loss within a security that is at a loss—or even securities themselves that are at a loss. The advantage of finding these is that they can be sold and these unrealized losses could then become realized, and this would allow them to offset any realized gains that have been accrued over the course of a year. If there are no realized gains over the course of a year, they can also be used to deduct up to $3,000 from income for each year.

Charlie Toole:

That’s a good point, Devin. I think the work that you’ve done and the tools that you’ve created here at Adviser help us look at the individual lot level. And that may be something that some of our listeners don’t understand. But when you look at your account and you see your position in Apple, you might show a really high gain in that holding. But the shares that you bought a year or two years ago are different from the shares that you bought last week, and the shares that you bought last week might be at a loss, and that might be the loss that you can harvest. So there’s selling your whole position in a position that might not have done well this year, or you can go in and say, “I want to sell the specific shares that I bought on a specific date because those are at a loss while the others are at a gain.” And there’s a way that you can customize what losses you sell, or what shares you sell to realize those losses.

Devin Murray:

Exactly. I think a good way to think of it is each tax lot is an individual purchase done on any given day. So, as you can imagine, if someone were to purchase a security on a monthly basis or something like that, they can really add up, and they all have their own gain and loss information.

Charlie Toole:

That’s a good point. And the other thing with losses is that the deduction from your income, the deduction of the $3,000—you can also carry forward any losses that you don’t use. So if you had a big loss that you realized but you didn’t have any gains to offset that, you could offset gains next year or offset another $3,000 next year. You don’t lose it if you don’t use it this year; you can carry it forward. I think the one other thing to be careful of here—we talk about individual loss—is the wash sale rule. Steve, this is something we talked about before. You need to be careful when you buy and when you sell, because if you realize that loss, you can’t buy it back right away.

Steve Johnson:

That’s right, Charlie. So a lot of investors will sell and then they’ll try to re-buy the stock right away, and that will negate the loss, so you’re not able to take it for tax purposes. You do have to wait. What we look at is 31 days. So if you buy a stock today, you’ve got to wait for that period so that you can realize the loss. But what you also can do, Charlie—especially with how many ETFs exist out there, or exchange-traded funds that trade like a stock—you can really take advantage of the volatility. For example, you mentioned Apple. If you had a little bit of a loss there, you could sell the stock and then buy an ETF that holds Apple, and then you’re not in violation of the wash sale.

Steve Johnson:

So the way that the wash sale operates is you can’t buy something that is very close to the existing security, but you can buy other options. For example, if you are buying Apple, you can buy the ETF. Also, if you owned Apple and you had a loss, you could sell Apple and buy Microsoft. So you could stay within the same sector as well. We’ve done that in our dividend portfolio with Pepsi and Coke. Maybe you sell Pepsi and buy Coke for that time period—or other names in the same sector. But you also have to be careful; you can’t sell the stock in your individual taxable account and then buy it in your spouse’s account. You can’t do it in your taxable account and then buy that same position back in the IRA. So you do have to be careful of the wash sale, but it is a very good technique, especially to substitute other positions, because of how many ETFs there are that hold the underlying stocks.

Charlie Toole:

Great point. And the last thing with tax-loss harvesting—we’ve talked a lot about individual stocks, but there’s also mutual funds, and it’s mutual fund distribution season. If you have even a mutual fund that’s at a slight loss or a small gain, those distributions are coming up and you can sell before that distribution to avoid realizing the gain that the distribution produces. So that’s another sort of technique that you can use with tax-loss harvesting.

Devin Murray:

You could also use it to rebalance your portfolio. Is that right? Kind of like what we were talking about earlier?

Charlie Toole:

Absolutely. Absolutely. Again, you can use it to offset gains and help rebalance and reduce those winners that have become a larger part of your overall portfolio. And I think that ties these three topics that we’re covering together.

Charlie Toole:

You’ve got rebalancing, you’ve got tax-loss harvesting, and the last step that we advise is fund distributions in reinvestment. I mentioned this is fund distribution season within a mutual fund. The managers are buying and selling stocks or bonds and they’re realizing gains and losses. The funds have to pay out those realized gains in distributions by the end of the calendar year. And so we’re seeing a lot of distributions being paid by mutual funds. And it’s important to know when those funds are paying distributions. The classic faux pas that you want to avoid is buying a fund and then having them pay out a taxable distribution so that you are realizing that gain that you didn’t participate in as a fund owner. So, Steve, one of the things we talk about with clients is make sure you know that mutual fund—when it’s paying its distribution. And make sure you’re not buying it beforehand; make sure that distribution has been paid.

Steve Johnson:

Correct. Charlie, I think the point that you make is a very good one. It’s all about planning, right? So whether it be talking about harvesting losses, looking at your distributions—and I know our financial planning team has talked about gifting stock, gifting appreciated stock. All of these are tools that you can use as an investor to your advantage to limit your taxes, to gain efficiency, but you can’t do this Dec. 27, in the last week of the year. We want to make sure that you’re actually planning for this, because you don’t want to create any unintended consequences, or you don’t want to blow up your portfolio just because you’re worried about the tax piece. So all of these are great tools, but obviously have a discussion with your adviser and your portfolio executive to really work on a plan.

Charlie Toole:

That’s a great point, Steve. As you said, planning and preparing matter, and these three steps we discussed today are portfolio best practices. They are relevant not only today but throughout the year. The bottom line is to continue to rebalance, prepare for the future and talk to your adviser. Steve and Devin, thank you for joining me today. As I mentioned at the top, we only covered a portion of the year-end checklist. So please download the full version in the show notes. This has been Charlie Toole, Devin Murray and Steve Johnson from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you’ve enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcast. Your feedback is always welcome. And if you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com. Before closing, I’d like to thank Kailey Steele and Ashlyn Melvin. They do all the hard work making this podcast possible. Thank you for listening.

Podcast released on December 15, 2021. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

The Adviser You Can Talk To Podcast is a trademark of Adviser Investments, LLC.

© 2022 Adviser Investments, LLC. All Rights Reserved.

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There are many tools you can use as an investor to gain efficiency. There’s no need to blow up your portfolio just because you’re worried about the tax piece.


Steve Johnson, JD, CFP®

Vice President, Portfolio Manager

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