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Your End-of-Year Financial Checklist

Written by Samuel Taube
Posted November 24, 2019

By the time you read this, there will only be 37 days left in this year.  

And 2019 has certainly been an eventful year for investors. All of the major indices are up by double digits.

end of year, financial checklist

But that doesn’t mean your work is done for the year. 

In fact, this pre-Thanksgiving weekend might be your last chance to reduce your tax liability and rebalance your portfolio before you’re swept away in the blur of traveling, cooking, and present-buying that is the holiday season.

That’s why we’re going over a simple end-of-year financial checklist that will help you get ready for the 2020s. 

Fund (Or Take Required Distributions From) Tax-Advantaged Accounts

You have until New Year’s Eve to rack up tax deductions for 2019. And some of the biggest and most user-friendly tax deductions available to pre-retirees are those generated by tax-advantaged accounts. 

If you’ve been thinking about adding some more funds into your traditional 401(k) or IRA, 529 plan, or health savings account (HSA), now is the time to do it. You’ll be glad you did in April, when you can deduct these contributions from your tax liability. 

On the other hand, if you’re above age 70.5, you need to start withdrawing money from your traditional 401(k) or IRA to avoid a penalty. 

The IRS requires investors to take required minimum distributions (RMDs) from certain retirement accounts after that age — or face a tax penalty equal to 50% of the RMD amount. More information on RMDs is available here

You’ll also want to withdraw any remaining money from flexible spending accounts (FSA), as the balances in these accounts typically don’t roll over into the next year.  

Reduce Your Capital Gains Taxes

If you have any investments held outside of a tax-advantaged account, now is the time to harvest your losses (and long-term gains) to minimize your capital gains tax liability. 

Realized capital losses (that is, losses from unprofitable investments you’ve sold) can be used to offset tax liability from realized capital gains (profits from investments you’ve sold), so long as you don’t repurchase the unprofitable assets within 30 days of selling them. 

If your realized losses exceed your realized gains, you can use up to $3,000 of those losses to offset ordinary income — and you can carry the rest forward to offset income in future tax years. This technique is known as tax-loss harvesting.

On the other hand, realized capital gains outside of a tax-advantaged account are taxable, but there are two different sets of capital gains tax rates. Short-term capital gains — that is, profits you earn by selling an investment less than a year after buying it — are taxed at a much higher rate than long-term capital gains.

end of year, financial checklist

Sources: IRS, FinancialSamurai.com

As you can see, single taxpayers who earn less than $38,600 per year can enjoy tax-free long-term capital gains. For those taxpayers, now is a good time to sell profitable investments you’ve owned for more than a year. 

Reallocate and Rebalance Your Portfolio

The double-digit stock market gains this year are good news to be sure, but they might have thrown the balance of your portfolio out of whack. 

Investors should maintain certain ratios of stocks and bonds as they age. Younger investors should hold the majority of their wealth in stocks, where it can grow fastest, while older investors should have most of their money in bonds, where it’s safest from market downturns. 

After a year of great stock market performance like this one, you may find that the stock portion of your portfolio has grown larger than it should be (especially given that your portfolio should be getting more conservative as you age). 

An easy remedy to this problem is to rebalance your portfolio at this time of year. That means selling off some of your highest-earning investments and reinvesting the proceeds into your lowest-earning investments, thereby restoring your portfolio to its target allocation. 

end of year, financial checklist

Sources: Seeking Alpha, Business Insider, S&P, Barclays, MSCI, J.P. Morgan

This process — selling your winners and buying more of your losers — might feel counterintuitive. But as you can see in the chart above, rebalanced portfolios can outperform non-rebalanced portfolios by double-digit margins over the course of decades. 

Another Way to Get Financially Ready for 2020

These three financial chores can help you start the new year with the lowest possible tax liability and the best possible portfolio design. 

It's likely that hundreds of wealthy people — or their financial advisors, at least — are busily making last-minute contributions to tax-advantaged accounts, realizing capital losses, and rebalancing their portfolios as you read this. 

But for ordinary people like us, these financial chores can be tough to remember. 

That’s why we launched our newest publication, Wealth Daily Insider. This financial education service teaches you to manage your wealth like a millionaire using the smart money’s stock tips, portfolio strategies, and tax loopholes. 

Wealth Daily Insider subscribers get access to an exclusive podcast of interviews with CEOs, senior analysts, and other market experts and monthly market news roundups summarizing the latest findings from Angel Investment Research analysts — including three free investment recommendations per month.

They also get access to a curated library of special reports, including a comprehensive tax minimization guide and an easy-to-use portfolio design tutorial.

Until next time,

Monica Savaglia

Samuel Taube

Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.

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