Before 2018 ends, investors can use these strategies to reduce their portfolio’s risk and their taxes.
Rebalance your portfolio: Suppose that three years ago, you put $60,000 into Vanguard Total Stock Market Index fund and $40,000 into Vanguard Total Bond Market Index fund because you wanted a 60-40 split between stocks and bonds.
As of mid-October, your portfolio would have grown to $127,270. But now it’s made up of 68 percent stocks and 32 percent bonds as stocks have soared. You have a riskier portfolio than you wanted.
It’s time to rebalance by moving enough from your stock fund into your bond fund to regain a 60-40 mix.
Aside from reducing your risk, you’re also selling high and buying low.
Reap the tax harvest: The tax code allows you to sell investments that have fallen below your purchase price and use the resulting loss to offset capital gains in taxable accounts.
That’s a compelling reason to consider jettisoning your losing positions. Investments that you’ve held for a year or less are taxed as ordinary income, but investments you’ve held longer are taxed at the long-term capital gains rate, which ranges from zero to 23.8 percent.
After matching short-term losses against short-term gains, and long-term losses against long-term gains, any excess losses can be used to offset the opposite kind of gain.
If you still wind up with an overall net capital loss, you can use up to $3,000 of that loss to offset ordinary income and roll the rest over to the following year.
Investors in the bottom two tax brackets (with income less than $38,600 for single filers and $77,200 for joint filers) pay no capital gains tax on investments held for more than a year.
Watch for capital gains distributions: Mutual funds are required to pay out to their shareholders any gains realized from the sale of stocks or bonds during the year.
If you own the fund in a taxable account, you must pay taxes on these distributions when you file your tax return, even if you reinvest them.
Mutual funds typically publish an estimate of their capital gains distributions in November or December, along with the date of the distribution. Estimates are on a per-share basis, so if you figure out how many shares you have, you can gauge the size of your distribution.