It's Time For a Year-End Tax Tune-up

As year-end approaches, take a closer look at your investment portfolio. There may be some tax-saving strategies worth considering.

For example:

• Offsetting losses and gains. Harvesting your losses – or gains – is a standard year-end strategy. The goal of this strategy is to offset gains and losses, then to use any excess loss to offset up to $3,000 of ordinary income (e.g., dividends, interest, and wages). If you still have an excess loss, it can be carried over to next year. With long-term capital gain tax rates as high as 20% and the 3.8% net investment income surtax, harvesting losses can be an effective year-end tax-cutting strategy.

• Calculating tax efficiency. Have you shifted your asset allocation and begun buying municipal bonds to reduce the effect of the 3.8% net investment income surtax? Review the impact of the change on any alternative minimum tax you may be liable for. Also, assess whether it makes sense to hold bonds in your retirement fund accounts, such as your IRA. Putting nontaxable municipal bonds in a tax-advantaged retirement account means you're effectively converting sheltered income to taxable income when you eventually take distributions from your IRAs and other retirement accounts.

• Wash sale trap. If you decide to sell a security before year-end to take advantage of a capital loss, be sure to avoid the wash sale trap. If you sell a security and then buy a substantially identical security within a 30-day period before the sale and 30 days after the sale, it's considered a wash sale and the loss is not currently deductible.

Consider all the relevant tax and financial factors in making investment decisions. Contact our office for details and assistance in your year-end portfolio review.

Supreme Court rules on inherited IRAs

Your retirement funds are protected from creditors even if you file for bankruptcy, with only a few limitations. This protection extends to funds in all government-qualified pension plans, including IRAs (traditional and Roth), 401(k)s, 403(b)s, Keoghs, profit sharing, money purchase, and defined benefit plans.

A recent U.S. Supreme Court decision has held, however, that an inherited IRA is not a "retirement fund" and therefore doesn't qualify for bankruptcy protection.

An inherited IRA is a traditional or Roth IRA that a deceased owner has bequeathed to a beneficiary. It differs from a "true" retirement account in three ways:

1. The beneficiary is not allowed to contribute additional retirement funds to the inherited IRA.

2. The beneficiary, regardless of age, may withdraw funds from an inherited IRA in any amount and at any time without penalty.

3. The beneficiary, regardless of age, is required to take annual minimum distributions from any inherited IRA.

Based on the above characteristics, the Court unanimously concluded that with respect to beneficiaries, inherited IRAs are "not funds objectively set aside for one's retirement" and instead constitute a "pot of money that can be used freely for current consumption."

If you need more information about this Court ruling in your situation, contact our office.