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Year-End Portfolio Checkup: 5 Tax-Smart Tips

The end of year is a good time for investors to think about their portfolios and their overall savings and investing approach. There’s still time to take steps that could help to minimize your tax liability for the current tax year, and to position your portfolio for the coming year.

Here are five steps you should consider now:  

  • Rebalance your portfolio: Market changes can skew your asset allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. This can leave you exposed to unintended risk if the market environment should suddenly change, turning former “winners” into underperformers.

    Rebalancing means selling positions that have become overweight in relation to your target allocation and moving the proceeds to positions that have become underweight. The end of the year is a good time to take a look at your portfolio allocation and make sure it’s aligned to your goals and risk tolerance. This can be especially important for people nearing or in retirement, who might not be able to withstand sudden volatility.
  • Consider tax-loss harvesting: Tax-loss harvesting is an underappreciated investing strategy that investors should consider while rebalancing their portfolios. Investors generally don’t want to sell anything at a loss, but there can be a significant tax benefit if you have capital gains to offset. Tax-loss harvesting can also serve as a motivation to sell underperforming investments or to re-diversify overly concentrated stock positions. 
  • Max out retirement savings (if you can): The end of year is a good time to evaluate your overall savings and determine if you can bump up what you’re putting away for retirement.1 It’s a good idea to take full advantage of your employee retirement plan, at least to the point of any employer match. You can also use lump sums, like an annual bonus, to give your savings a boost. If you're self-employed, consider a small business retirement account such as a SEP-IRA, SIMPLE IRA or individual 401(k).
  • Consider a Health Savings Account (HSA): It’s open-enrollment season, and if your employer offers an HSA—and you qualify to contribute to one—this tax-advantaged way of setting aside money for qualified medical expenses  may be worth a look.2 HSAs offer a triple tax advantage: you pay no federal taxes on your contributions3, no federal taxes on investment earnings4 and no taxes on withdrawals as long as the money is used for qualified medical expenses.5
  • Charitable giving: The end of year is a time when many people think about charitable giving. As with other aspects of your finances, it’s important for charitable giving to be part of a broader financial plan. Two considerations, particularly for older investors, are: taking advantage of the charitable gift exclusion6 to contribute to a child or grandchild’s 529 college savings account; and donating a portion of your retirement income that you don’t need for living expenses, as you can deduct contributions to qualified organizations..

    If you’re 70½ or older, you could also consider donating directly to a charity from your retirement account, using a qualified charitable distribution (QCD).  A QCD allows you to meet the required minimum distribution and has the added benefit of not being included in your taxable income. 

Year-end is a great time to give your portfolio a checkup. Consider these tax-smart strategies to help boost your after-tax returns.

1 For 2017, the maximum employee 401(k) contribution is $18,000. If you’re age 50 or older, you are allowed to contribute an additional $6,000 in catch-up contributions, for a total of $24,000.

 2 In 2017, the IRS contribution limit is $3,400 for HSAs linked to self-only health insurance coverage, and $6,750 for HSAs linked to family coverage; people age 55 or older may contribute an additional $1,000 in either scenario. For 2018, the contribution limit is $3,450 for HSAs linked to self-only coverage, and $6,900 for HSAs linked to family coverage; people age 55 or older may contribute an additional $1,000.

3 HSA contributions are not deductible in several states, including California, Alabama and New Jersey. Check with your tax advisor for specific tax advice.

4 State taxes may vary.

5 See IRS Publication 502 for a list of these expenses.

6 For 2017, the charitable gift exclusion is $14,000.

What you can do next

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events can be created that may affect your tax liability.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.


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