It’s Time For Your End-Of-Year Investing Checkup

With the new year just around the corner, this is the right time to give your investment and retirement accounts a checkup. As of writing, the S&P 500 is up over 60% from its spring plunge—so despite the malaise and volatility of 2020, the markets haven’t had a terrible year. Nevertheless, the tumultuous year means your portfolio could probably use rebalancing, and it might be worth considering end-of-year moves that could slash your tax bill.

1. Review Your Investment Goals

Begin by taking some time to review your investing and retirement goals. You may have hit a few milestones this year, so revising your list of goals for the year ahead will help you understand where you need to focus your attention.

For taxable investment accounts, consider the goals you’ve met and the ones you’re still working towards. If you’ve added goals for the short or long term, decide whether you want to open separate accounts to pursue them, or do everything in one account.

For retirement accounts, consider if you’re on track to meet your retirement savings goals, and whether your investments are keeping pace with inflation.

This probably won’t be an issue for most people in 2020, assuming you kept up contributing to low-cost index funds. But if you had to dial back contributions to your plans this year, whether due to furlough, job loss or reduction in pay, check in to gauge your progress.

If your income has returned to normal levels, you can still make contributions to your workplace plan until the end of the year. You have until you file taxes—so until at least April 15, 2021—to make contributions to your individual retirement account (IRA).

If you dealt with job loss or reduced income in 2020, now’s the time to start reviewing how to adjust your retirement goals and plan contributions in 2021. Don’t get discouraged if you aren’t able to meet your expected contributions 2020. Keep in mind that compounding returns grow your wealth even when you aren’t able to make new deposits.

2. Assess Your Risk Tolerance

After over a decade of almost unbridaled bull market growth, 2020 may have been a real wakeup call for those who only started investing after the Great Recession. It’s easy, after all, to have an aggressive stock portfolio when it seems like the market is only going up.

When markets swoon over a short period of time, as they did in March 2020, that’s when you get a real sense of your own risk tolerance—or willingness to tack on losses in the pursuit of greater gains.

If you got queasy or panic sold your investments during the spring, take time now to reassess your portfolio. On the flip side, if you’ve held off from adding more equities, you may want to become more aggressive in the new year.

For taxable investment accounts, those willing to take more risk can look to individual stocks and more aggressive asset allocations. Those aiming to invest in individual stocks should research companies and sectors poised for large rebounds as the economy begins to reopen in 2021.

Those who prefer a lower risk portfolio but who still want more equity exposure can look to basket-type securities like exchange-traded funds (ETFs) and mutual funds that might hold their favorite stocks but don’t rise and fall as sharply as the individual securities themselves.

If 2020 has you seeking more stable returns in the future, consider adding more bonds and bond-based funds to your portfolio. This means you’ll likely have to contribute more of your own money to reach your goals, rather than relying on investment growth, but the stability and certainty may be worth it to you, especially for near-term goals.

For retirement accounts, consider how close you are to retirement and whether your current holdings need to make a shift more towards capital preservation via conservative holdings like bonds and away from the growth offered by equities.

If you’d like to pursue a strategy that adjusts with your goals over time with less heavy lifting, consider a robo-advisor or target-date fund that automatically rebalances and adjusts your risk the closer you get to retirement. For more on how to optimize your retirement investments, check out our guide on how to invest for retirement.

3. Rebalance Your Portfolio

“Several widely held individual stocks saw tremendous gains in 2020,” says Tracie McMillon, head of asset allocation strategy at Wells Fargo Investment Institute. “It may make sense to take some gains and reinvest in other areas of the markets.”

This process is called rebalancing, and it helps ensure your investments stay on track to help you reach your goals. Even if your risk profile hasn’t changed from this year’s events, you may still need to adjust your portfolio holdings due to investment growth.

For taxable investment accounts, consider tax-loss harvesting. Andrew Rosen, a certified financial planner (CFP) with Diversified Lifelong Advisors, says that it’s important to be proactive with tax management in 2020. If you sold while the markets were down, for instance, you might be able to take those spring losses and use them to decrease your taxable income for 2020—and potentially beyond if the total is more than $3,000.

If you held steady and now have appreciable gains in certain thriving sectors like consumer goods and stay-at-home stocks, you may want to sell off some of these to bring your portfolio asset allocation back to the distribution you want.

While it can seem counterintuitive to sell off stocks that have recently performed very well, this helps keep your overall risk tolerance in check going forward. Check out our guide on portfolio rebalancing for strategies to minimize your tax burden when you do this.

For retirement accounts, check in on your asset allocation, even in accounts you haven’t contributed to for a while. 2020 stock gains and lower bond yields may have your distribution more aggressive than you want long term, particularly if you’re approaching retirement. And if 2020 has shown you you’d rather set things and forget them, consider target-date funds or robo-advisors.

Some Other Strategies to Consider

Look at a Backdoor Roth IRA Conversion

If you want to assure yourself tax-free withdrawals in retirement, you might take now to convert your traditional IRA to a Roth IRA. This move may be especially helpful for those who were laid off or had significantly lower income in 2020.

“By [doing the conversion], you’ll likely pay lower taxes [on converted funds] because your income was decreased, putting you in a lower tax bracket,” says Steve Azoury, a financial advisor and owner of Azoury Financial.

If you’ve been hit hard financially this year, you might be in the lowest tax bracket of your lifetime until retirement. That means 2020 may be a particularly great time to do a Roth IRA conversion if you can afford the taxes you might owe on your retirement funds.

Be Mindful of Any CARES Act Benefits You Took

When Congress passed the CARES Act, which included the first stimulus package as well as extended unemployment benefits, it also granted a few special benefits for those with retirement accounts.

If you took advantage of any of those, you have a couple ofextra things to keep in mind going into 2021, including any taxes you may owe on money you withdrew early, repayment plans for any loans you took and strategies to maneuvering required minimum distributions (RMDs) this year. Check out our guide to managing CARES Act retirement benefits here.

Going Boldly into 2021

Our handy checklist covers the major boxes you need to check as you wrap up your 2020 investing year. If you have any questions about your particular financial situation and how you should best manage your finances at year’s end for the year ahead, reach out to a financial advisor to get the expert insights and guidance you need to keep your goals on track.