With 2022 rapidly coming to an end, there are also opportunities to influence investments and potentially taxes for the year. This time of year is often a time of celebration and family unity, so it’s easy to forget how important it is to get your investment-related finances in order.
With that in mind, three Motley Fool contributors stepped up to share their investment moves to make before the end of the year. They pointed out the importance of diversification, the value of tax loss harvesting and the importance of funding IRAs. Read on to find out why these moves are worth considering, and decide for yourself if you should take advantage of them while you still have a chance to make an impact in 2022.
Balancing your portfolio can provide diversification benefits
Parkev Tatebosyan (Portfolio diversification): My recommendation to readers is to diversify your portfolio. A lot has happened in 2022 and property valuations have fluctuated wildly. It is imperative to access a portfolio of assets and consider whether there is too much exposure to an asset class or assets within a class. For example, suppose you own a portfolio of three stocks containing: Amazon, appleWhen Tesla.
This set of assets does not fully benefit from the risk mitigating attributes of diversified portfolios. These benefits include risk mitigation by spreading investments across multiple assets in different industries. In one year he may do poorly in the price of one stock or asset, another year he may do well. Consumer decisions about where to spend their money often change. One year, Apple’s purchase of his iPhone may become very popular. In another year, the iPhone may fall out of favor, but Tesla’s cars are raging. As an investor, it is important to reduce your exposure to any one company or product when diversifying your assets and stocks.
Experts recommend holding 15-30 stocks across different industries and geographies for optimal diversification. Investors heading into 2023 will do well by reviewing their investments to determine if they are taking full advantage of the benefits of diversification.
3 small letters that can bring big profits
Eric Volkman (Channel Funds to IRA): An Individual Retirement Account (IRA) is a great place to keep some cash in your portfolio or the proceeds from a year-end stock sale. An IRA is an investment vehicle that gives those who invest significant tax relief over the long term.
Of course, not all investors and savers are created equal, so there are many different types of IRAs available. A traditional IRA is the classic model and remains popular over the years as it gives the account holder double the tax benefits of his.
This is a tax deferred account. This means that taxes are paid only after eligible withdrawals are made from your account. Currently, the goal of retirement accounts is to only make withdrawals when a person is nearing or nearing the end of their working life. Because they have a much lower income base than those who are delinquents, they will pay much less to the tax office when the time comes.
Benefit number two is that traditional IRA account holders can deduct contributions to their accounts if certain conditions are met. This is a significant benefit as the maximum annual contribution for an individual for the current year is his $6,000. So who wouldn’t appreciate her four-figure deduction on her tax return?
However, it is important to note that the amount of deductions traditional IRA contributors can claim begins to decrease at certain annual income levels. For 2023, this would make him $68,000.
Another note: Although the contribution deadline is the same as the filing deadline (April 18th for 2023), it’s best to do it in conjunction with other end-of-year portfolio housekeeping. You will be busy enough to collect your tax return materials.
Entire books and scholarly tomes have been written about the IRA. This is just one example. I’m not even into other types of these accounts! For more information on these great investment vehicles, check out The Motley Fool’s extensive article on IRAs and other retirement products.
You may be better off profiting from the rough market in 2022
Chuck Saletta (recovery of tax losses): If there’s a positive side to the tough markets that investors have faced throughout 2022, it’s that they may offer an opportunity to lower taxes. A concept called tax loss harvesting allows you to close your losing investment positions and use those losses to offset your gains. Annual recurring income can be up to $3,000.
There are some important rules you need to understand to make it work. The biggest one is called the wash sale rule. Essentially, if you buy back shares or other “substantially identical securities” within 30 days of the sale (either before or after), you cannot claim a tax loss. Instead, losses are added to the basis of new investments.
Due to the wash sale rule in large part, it’s a good idea when closing a losing position to make sure it’s actually the position you want to exit from. After all, a lot can happen in that window around the sale date. I will have to sell it for a tax loss.
Additionally, it is important to recognize the importance of closing loss positions by the end of 2022 to offset 2022 gains. If you end the year with net capital gains from your closed positions, you will be taxed on those net gains. If you end the year with a net loss from a closed position, you can deduct the first $3,000 for her ($1,500 for him if married) from your regular income. In that case, the remaining losses he will carry forward to 2023.
Ultimately, of course, you want to get a return on your investment. In the long run, it’s better to pay taxes on profits than to claim losses and save taxes.Still, when a rough year comes like 2022, it’s nice to have Several Profit from a tough market.
Time’s Running Out — Make Your End of Year Moves Now
In 2022, there is just one week left of the market week with reduced holidays to get things moving before time runs out for most of the tools at your disposal. If you’re not ready to tackle your year-end goals, now is your last and best hope. Make today a day to prepare your plans so that you can actually make them happen while there is still time. Because with time running out, any chance to make that impact in 2022 will quickly disappear.