Generally, the reason you might want to use end of year investment strategies is to reduce your tax liability and/or maximize tax advantaged accounts that allow limited contributions each year. The strategy behind deferring or reducing taxes each calendar year is that it provides more principal to invest and grow over the long run. For example, if you make a contribution that reduces or defers taxes by $1,000, that $1,000 tax savings can grow and compound for many years. Ultimately, you will most likely still have to pay those taxes, but the longer you can defer them, the more time your money has the opportunity to compound and grow.

We asked our investment advisors and CPA partners for a few end of year investing strategies. Here is what they came up with.

Contribute to Retirement Accounts

Contributing to a retirement account has many tax advantages. However, depending on your age, employment situation, and income there are many details to consider. We recommend talking with your wealth advisor or certified public accountant to discuss your eligibility for contributing to retirement accounts. Below are popular retirement accounts you may be eligible for.

  • 401(k): This is the most common plan, which allows employees the option to contribute a portion of their wages to an individual account on a pre-tax basis. The employer can choose to match a portion or all of the contributed amount. Each 401k plan typically comes with a limited selection of investment options selected by the employer or plan fiduciary. Also, many employers offer Roth 401(k) plans with tax treatment similar to that of a Roth IRA.
  • SEP IRA: This plan is generally best for self-employed individuals and small business owners with very few or no employees. Under the IRS regulations you may contribute up to 20-25% of your net income, however, as the employer, you must also contribute a proportional amount for any employees.
  • Traditional IRA: Similar to a 401(k), an Individual Retirement Account (IRA) allows you to contribute pre-tax dollars to a retirement investment account. The account can grow tax-deferred until you retire and start making withdrawals at age 59 ½ or older. The contributions are tax-deductible in most cases, but the IRS uses income caps to eliminate contribution deductibility for taxpayers exceeding certain income thresholds. It’s also important to keep in mind that when you do start withdrawing for retirement, contributions and earnings are taxed at your normal income tax rate.
  • Roth IRA: A Roth IRA is similar to the Traditional IRA, except your contributions are made with after-tax dollars and the earnings grow tax-free. Meaning, when you start withdrawing from the account after age 59 ½, your money will be taken out both tax- and penalty-free. However, like the Traditional IRA, there are contribution limits of $6,000 in 2022 for anyone under 50 years old and $7,000 for those 50 or older(both of these figures increase by $500 for 2023). Additionally, if you’re filing by yourself you must have a modified adjusted gross income (MAGI) of less than $144,000 in 2022, and if you’re married and file jointly, your MAGI must be under $214,000 for the tax year 2022 to be eligible for Roth IRA contributions.
  • Backdoor Roth IRA: This option is more of a strategy than an account and is normally utilized by high-income individuals that would otherwise be limited by the income caps on Roth IRA options. The Backdoor Roth IRA allows you to contribute to a 401k or IRA, then roll over to a Roth IRA.
    • This strategy is legal and is used by individuals to get around Roth IRA’s income caps. It is not a tax dodge, in fact, you could encounter higher taxes when first established but you’ll still get the future tax savings of a Roth IRA.

Contribution limits generally change every year. It’s best to check the IRS website or talk to your CERTIFIED FINANCIAL PLANNER™ for the most up-to-date information.

Tax Loss Harvesting

Tax Loss Harvesting is a useful end of year investing strategy if you have an investment that if sold would generate a loss. The IRS will allow investors to write off investment losses on their tax return as long as they do not reinvest in the same investment within 30 days. The idea is to use the losses to offset any capital gains from the year and/or offset up to $3,000 worth of ordinary income.

Tax loss harvesting works like this:

  1. You sell an investment that’s underperforming and has unrealized losses.
  2. You immediately reinvest the money from the investment sale into a similar, yet different security or investment that meets your investing needs and asset-allocation strategy.
  3. After 30 days, you may repurchase the original security without violating wash-sale rules, or you may decide to keep the replacement position.
  4. When you are doing your taxes, you use the loss generated to reduce your taxable capital gainstax liability.. If you have no realized capital gains in the same year, you can offset up to $3,000 of ordinary income per year, and any unused loss may be carried forward indefinitely into the future until the loss is able to be used.

To learn more about this end of year investment strategy check out our blog post or contact a Morgan Rosel financial advisor today.

Contribute to Other Tax Advantaged Accounts

Aside from retirement accounts, there are additional tax advantaged accounts that you can contribute to. 

  • HSA – A Health Savings Account lets you save money to pay for qualified medical expenses on a pre-tax basis. This money can be spent to pay deductibles, copayments, and other medical expenses but generally cannot be used to pay premiums.
    • After the age of 65, withdrawals from an HSA for non-medical expenses are taxed just like a traditional IRA. Putting money into an HSA is a good strategy if you have a qualifying high deductible insurance policy and are not able to contribute to an IRA due to the income limitations. 
  • 529 – A 529 account helps families save money for college. Just like a Roth IRA, your earnings will grow tax free and some states have tax benefits for contributions. So, when the time comes for you to make withdrawals for higher education expenses you won’t pay any taxes on the contributions or earnings. However, it would be smart to review the rules of what this money can be spent on, otherwise you may have to pay a penalty.

Learn more about 529 accounts and strategies for using them to transfer wealth in this blog post or contact our wealth management team today.

Charitable Giving

Donating money to a qualified charitable organization can help reduce income tax through a charitable contribution deduction. To qualify, make sure you’re keeping track of charitable contributions to qualified organizations throughout the year.

To determine and prioritize your end of year investing strategies, we believe in reviewing and updating your financial plan. This includes your estate plan, investing strategy, and retirement plan. Having a Morgan Rosel CERTIFIED FINANCIAL PLANNERTM as your wealth advisor not only provides you with investment advisory services, but our CPA partners provide invaluable tax advice to round out your complete financial picture. This is just one of the many benefits to Morgan Rosel’s family office style approach to wealth management.

A wealth advisor well-versed in end of year investment strategies can provide recommendations and make strategic moves on your behalf. The Morgan Rosel Wealth Management team looks at each individual client profile to determine and prioritize the most tax advantaged end of year investing strategies. Contact a wealth investment advisor today to plan your end of year investment strategies.

This commentary reflects the personal opinions, viewpoints and analyses of the MorganRosel Wealth Management, LLC (“MRWM”) employees and guests providing such comments, and should not be regarded as a description of advisory services provided by MRWM or performance returns of any MRWM Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. MRWM manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. MRWM may recommend the services of a third-party attorney, accountant, tax professional, insurance agent, or other specialist to clients. MRWM is not compensated for these referrals.