Spring Cleaning for Portfolio Management

Spring is an excellent time of year to clean and organize and financial planning should be near the top of the to-do list. Procrastination can be harmful to the long-term health of client financial planning efforts since many strategies can take time to implement. Re-examining long-term goals and avoiding possible pitfalls along the way can be a great reason for financial planning professionals to reach out to clients. Prudent financial advisors will touch base with clients and begin looking at the previous year to see what was successful and what needs to be cleaned up.
Analyze gains and losses from the previous year
Many people who are familiar with taxable investment portfolios are aware of what “loss harvesting” is and what it means for their portfolio, but many others do not. The idea is a straightforward: sell poorly-performing positions before the end of the year to lock in potential tax benefits of a capital loss. However, this opportunity often falls by the wayside, forgotten in the holiday rush. Tax season and the early part of spring is a good time to set up a plan with clients for the remainder of the year so that they are prepared to tackle any loss harvesting tasks before the holiday season so they might reduce client tax obligations this time next year.
It is important that investors work closely with their advisors when pursuing any kind of capital loss tax strategy so that they do not violate any wash-sale rules. A “wash-sale” occurs when an investor purchases “substantially identical” securities within the 30 days before or following a sale resulting in capital losses. Often this will happen by mistake when investors have multiple accounts and all account aren’t under the purview of an advisor.
It’s not always advantageous to realize losses and in some cases, it may be more beneficial for clients to realize gains when looking at tax implications of a sale. For example, many people are not aware that individuals falling within the two bottom federal tax brackets can take advantage of a 0% federal tax rate on any long-term capital gains. If this is the case, a client using dollar-cost averaging might receive more benefit realizing a gain on a portion of their portfolio while the step-up in cost basis that creates might still leave them with a gain on paper for their remaining positions.
Retirement Plans
Every retirement plan is unique with its set of eligibility rules for deductions varying from person to person, but it’s important that clients are aware that contributing to these plans are tax deductible. In certain situations. Maximizing contributions to these plans may serve two beneficial purposes: adding to a client’s retirement savings while also reducing annual taxes. Every plan is unique, as is every situation, so it’s important for financial advisors to speak with clients directly to see if there are any options to maximize current-year tax deductions using retirement plan contributions.
Conversions for Roth IRA Accounts
A common goal for many investors is to achieve income deferral, but there are situations where it makes more sense to accelerate current client income. If clients are currently in a lower tax bracket than they likely will be during the years where minimum distributions are required from retirement accounts, it might make sense to take into consideration either a partial or a full Roth IRA conversion. Simply put, this is converting funds presently in a traditional IRA to a Roth IRA. This will make the funds transferred over taxable during the conversion year, but they are then allowed to grow tax-free in the Roth IRA without any required minimum distributions in later years. Accelerating the taxation of deposits in years where the client is in a lower tax bracket can result in significant tax savings down the road.
Review Estate Plans
Life changes, sometimes rapidly and clients can often forget to adjust beneficiaries, update documents, when those changes are first warranted.
It’s important to speak to clients regularly about updating estate planning documents and insurance/retirement account beneficiaries. While spring cleaning a portfolio, organizing tax ramifications and sorting through old asset positions, is there a better time to ensure estate plans are up to date? This is also a great time to conduct a beneficiary review of all client accounts to ensure that no changes are needed.
Plan out charitable contributions for the remainder of the year
There are obvious tax benefits by gifting cash and other assets to charity. Even if clients are not participating in a planned giving program this year, it’s always prudent to talk about using charitable contributions to the client’s advantage to minimize taxes at the end of the year.
Spring is a generally happy time of year, a season of renewal that has long been associated with cleaning, organizing and sorting through accumulated possessions. Speaking with clients with this perspective of renewal and organization in mind can be a great initial yearly contact for prudent advisors. Looking at previous year performance, organizing retirement contributions, sorting through tax strategies and cleaning up estate plans are all cornerstones of a successful long-term financial planning strategies and a clutter-free investment portfolio.