Investment strategy

Smart Moves to Make With Your Retirement Portfolio Before the End of the Year

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As you make your to-do list to wrap up the year, don't forget to include checking on your retirement portfolio.

There are several moves you can make now to help boost your savings and set yourself up for a good year ahead.

"There are a handful of items that are sensitive to year end," said certified financial planner John Roland, partner and private wealth advisor at Beyond Financial Advisors, an affiliate of Northwestern Mutual Private Client Group based in Oak Brook, Illinois.

"It's an opportunity you can't get back."

Whether they are time sensitive or just make good sense, these strategies can help strengthen and optimize your retirement savings.

Max out your savings

You only have until Dec. 31 to reach the 401(k) maximum contribution of $19,500 this year, or $26,000 if you are age 50 or older. If you aren't going to get there, consider increasing your contribution rate from your remaining paychecks.

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Also, if you turned 50 this year, you may not have even thought about signing up for the additional $6,500 catch-up contribution, Roland said. It's not too late.

"Most employers will allow you to adjust that contribution rate per paycheck," he said. Lower it back down in January to smooth out your contributions for 2022.

Rebalance if necessary

Rebalancing your portfolio should be considered throughout the year, but now is still a good time to check your investments to make sure you are still allocated properly.

"There may have been a few winners in their portfolio," said CFP Misty Lynch, director of financial planning at Dedham, Massachusetts-based Beck Bode.

Those gains may have caused some parts of your portfolio to grow beyond your initial allocation. Therefore, for instance, if you have gone above your 10% allotment in large-cap growth stocks, adjust it back down.

Think about other adjustments

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When you first started saving for retirement, you may have been conservative, or perhaps you are moving up your retirement date. Either way, take a look at your portfolio and your goals and make adjustments if necessary, Lynch said. There may be investments you want to change.

"Sometimes getting started is great, but you still have to take a look at it and optimize your strategy as you get more confident," she said.

Consider a Roth conversion

The tax rates for most Americans are the lowest they've seen in their lifetimes, Roland said.

For that reason, he suggests considering converting some of your pre-tax IRA assets to a Roth, especially if you still have room before you move into a higher tax bracket.

You'll pay tax now but the money will grow and can be distributed tax-free after you hit 59½.

"Converting pre-tax dollars today acts as a hedge against future tax increases," he said.

While IRA contributions for 2021 can be made until April 15, 2022, conversions must be done by Dec. 31.

Once in retirement, the cost of Medicare and Social Security benefits are based on your taxable income. Since your Roth distributions are tax-free, it will lower those costs. Plus, Roths aren't subject to required minimum distributions, so it can continue to grow tax-free.

"All of these little tweaks you can make over your lifetime can add up over the decades and can make a big difference," Roland said.

Take your RMD

After a one-year break due to Covid, RMDs from your 401(k) and traditional IRAs are back this year. Those who turned 70½ before 2020 are required to take distributions. Anyone born after July 1, 1949 starts taking them at age 72.

If you forget to take any distributions or you don't take enough, you may have to pay a 50% tax on the amount not distributed as required. That's on top of the taxes you'll pay on the income.

Tax-loss harvesting

If you made money on the sale of some assets this year, you may want to think about selling an underperforming asset at a loss in what's known as tax-loss harvesting. By doing so, it will make up for some of the gains you made and should reduce the amount of taxes you will have to pay.

This isn't about timing the market, Roland said. Instead, you can sell a fund at a loss, and then purchase another, similar fund to stay invested, he said.

Just remember, receiving gains isn't a bad thing.

"Don't let the tax tail wag the dog on your taxable portfolio, but look for opportunities within the holdings you do have for tax losses," Roland advised.

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