As the tax filing season draws to a close on Monday after the year the pandemic suffered, financial professionals suggest investors review their financial position and clean up a bit in the spring.
Although portfolio and financial management is a year-round endeavor, with various deadlines and periodic reviews, such as appointing beneficiaries, the next few weeks offer a convenient time to prune surplus holdings, rebalance allocated funds, adjust spending or savings, or simply rethink goals and priorities.
“Spring is a great time not only for a careful review of the past year, taking profits and rebalancing the portfolio, but also for … preparing the portfolio for next year,” says Emily Bowersock Hill, founding partner at Bowersock Capital Partners in Lawrence, Cannes.
Here are four things to consider when spring cleaning:
Tax planning
A review of your income tax for 2020 after the end of the tax season could encourage investment changes to reduce your tax bill for the following year. This year, it is important to start considering President Biden’s plans to increase taxes.
Hill’s firm typically conducts tax audits with clients and their accountants in May or June. This is the time of year to start positioning for major taxable events, she says. For example, if you have lost your job and have a particularly low income this year, you may want to make more capital gains or consider a Roth IRA conversion.
On the other hand, if you expect an unexpected drop, say from the sale of a building or business, there are strategies you can use to reduce taxes. She says some of them will need three to six months.
In parallel with such a review, it recommends setting specific tax and investment targets for the year. These could include a charitable spending plan that allows maximum use of charitable deductions and a family gift plan, especially on education savings accounts that will maximize the use of the annual gift tax exemption and all deductions for 529 contributions from the plan, she says.
The White House’s current plan, among other provisions, calls for an increase in capital gains tax, tax on qualified dividends and maximum marginal tax rates. So, 2021 would potentially be a good year for those earning to accelerate revenue, make some additional capital gains, or turn traditional IRA assets into a Roth IRA, Hill says.
Simplify and simplify
“You have a 401 (k), somewhere you have an individual retirement account and maybe another brokerage account with some mutual funds,” says Kathy Carey, director of research at Baird Private Wealth Management in Milwaukee. “You have to look at them in combination and think,‘ Am I investing in the right places or am I overinvested? ”
For example, a growth fund in each account could leave you with significant exposure to some specific technology stocks, she warns. “Maybe you own more than you thought you wanted and want to be more diverse,” she says.
On the other hand, you may be too diverse, with so much investment that you don’t achieve your goals, she says. For a broad stock portfolio, holding more than 30 to 40 shares could mean losing some of the benefits of diversification, she says.
Candidates for removal typically include assets that have undergone management or ownership changes and those with a cost ratio that are no longer competitive due to new members in the category, Hill says.
Investors should compare the performance of the investment with the appropriate benchmarks, says Anthony Paul, chief executive at Hamilton Group of Concurrent, Denver. Does the high-capitalization growth fund exceed, for example, the high-capitalization growth index?
Given how your fund has had positive and negative results, it will help you make a decision, he says. For example, the S&P 500 lost 20% in the first quarter of 2020; if the fund you measure against the index has lost 15%, it has surpassed its index.
Funds that have not been successful on a six-quarter risk-adjusted basis should at least trigger a thorough audit, Hill says. “Once the fund has performed so poorly, you really need to understand the reason; it will influence your decision about what to do with it, ”she says.
Consider consolidation
If you changed employers – as many did during the pandemic – and now have several 401 (k) accounts, it may make sense to consolidate them, Carey says.
“Sometimes it makes sense to take care because you may have access to a certain investment” that you wouldn’t otherwise have, she says. “But keep assessing if it makes sense,” because inserting old 401 (k) into a new one or into an IRA could greatly simplify your financial life, she says.
Savers generally have more investment opportunities and more real estate planning strategies available with the IRA, Paul says. In addition, some people prefer to leave Plan 401 (k) after leaving the company, he says. “In my experience, you don’t get the same dissemination when you’re no longer sitting at a company table,” he says.
However, most employer-sponsored retirement plans, such as 401 (k) s, are protected from creditors, while IRAs do not offer the same level of protection. In addition, you may be able to withdraw a loan from your 401 (k), a benefit you will not have with the IRA.
If you are considering switching, carefully weigh your options and compare costs. Your 401 (k) charges fees, including management fees and fund investment costs. If you choose an IRA Investment Management Advisor, consider their fee. Some brokerages offer cash incentives to transition to the IRA. “I’ve seen cases where individuals are offered a‘ bonus ’ranging from $ 350 to $ 2,500,” Paul says.
Budgeting and savings
Whether you lost your job or thrived during a pandemic, the things you spend on will change with the return to normalcy, Paul says. As such, he says it is important to evaluate your budget and goals and prepare your financial plan immediately.
For example, if you’ve used Instacart for grocery delivery, you may want to consider whether you still need it, he says. For those returning to work, there will be travel costs and new clothes, and “there will be a new cost – a children’s camp, holidays, increased flight and hotel prices,” he says.
Reimbursing exhausted funds for emergencies should be paramount, Carey adds.
Changing your pension account contribution or distribution may also be fine. Some people received bonuses earlier this year, and many spent less over the past year, Hill says. After reviewing their cash flow, a retiree may decide they don’t need a regular monthly distribution for the next three months or they may want to show off, she says. In any case, “you don’t want to get lost without making a thoughtful decision,” she says.
Write to penzija@barrons.com
