Year End Portfolio Planning Tips

Tax Considerations

As Congress debates the fate of future tax rates for Americans, it is more important than in past years for investors to be vigilant of tax law changes. Without action by Congress to extend Bush-era tax cuts, income taxes, short-term capital gains tax, and long-term capital gains tax will increase.

Here is an example. Investors in the 15% tax bracket or less (making under $68,000 filing jointly) currently do not pay long-term capital gains tax. This group of investors might typically be retirees with social security, a small pension, and a taxable portfolio. If the tax cuts are not extended, the long-term capital gains tax increases to 10% in 2011 and beyond. This means that a taxable portfolio that has increased by $10,000 would pay $1,000 in taxes next year with no extension of the tax cuts. A savvy investor in this situation will take his or her gain before the end of the year and establish a higher basis heading into a higher tax environment and pay no taxes.
Investors must pay attention to tax laws as we head into the end of the year and act swiftly as Congress debates the future of taxes. Investors in all tax brackets will have to decide on changes to their portfolios that could save thousands of dollars in taxes in the future as we consider the prospect of higher income tax and capital gains tax rates. If tax laws are extended, investors will then need to consider the length of the extensions and whether it makes sense to take a strategy to harvest gains or losses before the end of the year.

Tax Efficient Portfolio

As we consider the prospect of higher taxes, wealthy investors must also consider a tax efficient portfolio. A tax efficient portfolio for a taxable accumulation can include municipal bond funds which pay income that is not subject to federal tax, as well as stock funds that are managed tax efficiently. Many retirees may have income they did not expect from employment, required minimum distributions, or income from taxable accounts that have pushed them into a higher tax bracket. Taking some time at the end of the year to review income and the tax efficiency of a portfolio can save tax liability in the upcoming year.

Estate Tax

Again, if the Bush-era tax cuts are not extended, the estate tax threshold is dropped to $1,000,000. Many Americans who do not consider themselves wealthy, but have estates over $1 million will suddenly have part of their estates that can be taxed as high as 55% in the event of their death. With this in mind, individuals may find that additional estate planning is necessary. Although this does not have to be done by the end of the year, the estate tax threshold will drop back to $1 million on January 1 if the tax laws are not extended.


You may contribute to a Traditional or Roth IRA through April 15 for the previous year. The end of the year is a good time to start planning on how and where your IRA contribution will come from. Retirees should keep in mind that they can also contribute to a Traditional or Roth IRA if they have earned income over the course of the year (up to the current limits or amount of income earned).

Required Minimum Distributions

For those investors with IRA’s and qualified retirement accounts over the age of 70.5, it is important that they make sure they have taken their required minimum distribution. Failure to take the required minimum distribution can result in an IRS penalty of up to 50% of the amount that should have been taken out.

Roth IRA Conversions

In 2010, taxpayers with modified adjusted gross income more than $100,000 will be allowed to convert a traditional IRA to a Roth IRA. However, the tax liability for conversions completed in 2010 can be spread over two years. So the 2010 conversion amount may be included as taxable income in 2011 and 2012, helping to spread out the tax bite. Conversions in subsequent years are included in income during the tax year in which the conversion is completed. Again, investors should consider if converting to a Roth IRA from a Traditional IRA makes sense before the end of the year to take advantage of the ability to spread tax liability over two years.


Investors should take the time to review their portfolios and determine a strategy for the upcoming year.  Tax considerations, changes to investment contribution laws, and the overall allocation of a portfolio should be considered.  Taking a little time to consider a strategy could save thousands of dollars in the upcoming years.

Kevin McNab

This article is written by Kevin J. McNab. Kevin is President of ACE Wealth Partners, LLC and is a CFP®, ChFC®, and CRPC®. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by ACE Wealth Partners, LLC unless a client service agreement is in place. If you have any questions regarding this Blog Post, please Contact Us. Please read our website DISCLOSURE carefully for additional information.