Even the savviest stock pickers had a tough time revving their portfolios in this year’s disappointing stock market. But now, at year-end, you have a good chance to bolster your retirement stash and save money. Simply follow the three steps below — they may turn out to be the most lucrative moves you’ll make all year.
When you want to invest in a mutual fund, it rarely pays to procrastinate — except at year-end. Here’s why: Many funds distribute net capital gains (gains that exceed losses) in November and December on stocks they’ve sold for the year. The gains may be short-term or long-term, depending on how long the fund held the stock before selling it. Investors may receive about 5% to 10% of their assets in distributions, and owe capital-gains taxes on that amount, even if it’s automatically reinvested.
That’s fair for people who have shared in the fund’s gains. But if you invest late in the year, part of your investment will, in effect, be kicked back to you and you’ll owe taxes on it. Say you invest $10,000 in a fund on Dec. 1, and on Dec. 15 the fund distributes a short-term gain of $1,000 to you. The payout will reduce the value of your account to $9,000 and, if you’re in the 28% tax bracket, you’ll have to pay short-term capital-gains taxes on the $1,000 — that’s $280. So check with the fund to find out its distribution date, and wait until after that to invest.
Sell your losers
If you sold winning investments this year, you face a capital-gains tax bill. But you can trim it by also selling some losers. “For each dollar of loss you realize, you can offset a dollar of gain,” says Anthony Manziano, tax director at Bederson & Co., an accounting firm in West Orange, N.J. Excess losses can be used to reduce your taxable income. A caveat, though: Beware of the “wash-sale rule,” which holds that if you buy back a losing stock within 30 days of selling it, you can’t use the losses from the sale to offset gains.
Get the max out of tax-deferred accounts
If you don’t understand the urgency of maximizing your retirement savings, consider this: If you invested $500 a month in a tax-deferred plan earning an average annual 9%, you would have $564,765 after 25 years. If you wait five years before investing, you’d have just $336,448, according to T. Rowe Price in Baltimore, Md.
Your top priority should be to invest as much as you can in your 401(k), because your contributions are made before taxes and employers often match a portion of what you put in. Once you hit the maximum allowable 401(k) contribution, invest in a Roth IRA or a nondeductible IRA.