December 10, 2014
by Michelle Perry Higgins
1. If an investor has taxable accounts, you should review them with the goal of calculating how much capital gains the mutual funds in the account will distribute. This can be done by going to the mutual-fund website where preliminary estimates of capital-gains distributions can often be accessed. After the investor ascertains how much the funds are likely to distribute, there are a couple of things they can do to try to avoid or reduce the tax hit. First, the investor needs to review capital loss carry-forwards to determine if any are available to offset the distributions. Second, the investor should review their portfolio to see if there are any positions to sell at a loss to offset the gains. The investor should consider if it makes sense to sell the fund before the record date to avoid the distribution. Of course before selling, the investor needs to determine whether if by selling they are substituting one capital gain for another. Finally, if they do decide to sell, they need to consider a replacement fund to maintain their target allocation.
2. Another action item for investors who are over age 70 1/2 is to review their retirement plans to make sure they are compliant with the required minimum distribution (RMD) rules. In my practice, some clients have several small IRA or 401k accounts that they self-direct. In those situations where the investor has multiple retirement plans, it is easy to overlook a plan and neglect to make a timely RMD. The penalty for RMDs that are late is 50% on the amount not withdrawn. This is a costly mistake so don’t miss this deadline. The penalty may be waived by the IRS, but of course there is no guarantee that they will do so.