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Pro tip: Get a Head Start on Your Year-End Investment Plans

If you’re managing your own investments, here’s a pro tip: take some time now, before the holidays, to get your investments in order.

Getting a headstart on your year-end plans can give you some peace of mind and help you end the year organized and prepared.

This is what we’re doing for our money management clients this month: we’re paying attention to the early estimated year-end distributions from mutual funds; looking for ways to reduce taxes; making sure clients take their required minimum distributions (RMDs) and updating their retirement contributions and withdrawals.

You can do the same in your portfolio.

Here are the four key things every investor should do at year-end:

1. Keep an eye on mutual fund distributions

Nearly all stock funds distribute capital gains and income to shareholders at the end of the year. Most funds distribute in December, but some funds make payouts in November, including Ariel, Artisan, Baron, Hussman, Leuthold and Parnassus.

If you own funds in a taxable account, these distributions are taxable to you whether you take them in cash or reinvest them in new shares, so trade carefully this time of year. Before buying a fund, check with the fund to see if it plans to make a distribution. You may opt to buy ETFs, since most ETFs don’t pay out capital gains, and most distribute income quarterly.

2. Harvest losses in taxable accounts

The end of the year is an opportunity to lower your tax bill by realizing losses where you can. When you sell shares of a fund at a lower price than you paid for them, you realize the loss in that investment. And you can use those losses to offset taxable gains that you have already realized, so selling those losing shares before year-end makes sense.

Review your portfolio and look for any funds you own that are worth less than you paid for them. This may include funds that you’ve actually made money on, but you can still have an unrealized loss because of a reinvested distribution.

Of course, remember the wash sale rule: if you’ve sold a fund for a loss, you can’t buy it back within 30 days. If you do buy back into the fund, you can’t use the loss to offset other gains.

3. Take your required minimum distributions (RMDs)

The IRS requires that people aged over 70 ½ withdraw at least a minimum amount from their retirement accounts each year. If you don’t take your RMD, you’ll face a steep penalty of 50% of the amount you should have withdrawn.

Many brokers, like Schwab, calculate the RMD amount for IRA accounts and include it on your monthly statement. But if you have an inherited IRA, you may have to calculate the amount yourself, based on your age and the value of the account as of December 31 of last year.

Remember that while the IRS requires you to take the money out of your IRA each year, you don’t have to spend it. In the portfolios we manage for our clients, we’ll often move the money from an IRA into a taxable account, often one that is managed in a very similar, yet tax-efficient way.

4. Adjust your retirement contributions or withdrawals

If you’re saving for retirement, consider making your 2018 IRA contribution now. You have until April 15, 2019, but if you start now, you’ll have more time to let your investments grow.

You should also consider increasing your contributions to keep up with inflation or if your salary has increased. Most retirement planning assumes that you are bumping up your contributions over time, but many people forget to do so.

If you’re retired, you may need to adjust your withdrawals periodically to account for inflation. You also might change your withdrawals based on how your portfolios have performed. For instance, you might withdraw more after a year of good gains and take out less after a down year. You also should change your withdrawals if you expect to spend more or less in the coming year.

Bonus tip – Write down your year-end plans

This list should help you stay on track through the end of 2018, but one additional step can really help you follow through: write down your plans. Calendar when you’ll take your RMD or make your annual IRA contribution, for instance, and write down what you’ll do with that money. This can help you follow through, even if markets change.

This was previously published on Forbes

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