6 Financial To-Dos by Year-End

Last Updated Dec 15, 2010 1:36 PM EST

As we wind down 2010, this is a good time to go over some year-end financial advice. I asked my Buckingham Asset Management colleague John Corn to share some of the financial tips he's been telling his clients.

Many of these should be done year-round. However, as with all things, life gets in the way, and sometimes we put things off until the very end. However, with a couple of weeks left in the year, there's still time to take advantage of some smart (or some cases required) year-end actions.


Rebalance and Pay Off Debt If you need to rebalance your portfolio, you may be locking in some gains in your equity positions and buying bonds. However, with rates still at very low levels, you may want to consider paying off debt instead of buying fixed income. Why buy a bond paying 2 percent when you can reduce your mortgage charging you interest at 5 percent?


Review Your Beneficiaries One of the most important planning items you can do is to periodically review your beneficiaries for your investment accounts. The end of the year can be a good time for such a review. For example, if you had a life event -- such as a marriage, divorce, birth or death in the family -- just updating your trusts and wills alone isn't enough. You also need to update the beneficiary designations on your investment accounts.

For IRAs in particular, designating beneficiaries and keeping the election updated are crucial planning steps to help mitigate the risks of leaving your IRA to unintended individuals or entities and to help maximize your beneficiaries' distribution options.


Look for Tax-Loss Harvesting Opportunities Review your portfolio for any positions with unrealized losses. Selling those positions means using the losses to offset capital gains and make Uncle Sam share the pain of your tax bill. In addition, to the extent that you "harvest" more losses than you have gains to offset, you may take up to an additional $3,000 of those capital losses to offset ordinary income. If you still have capital losses available, you may carry them forward and use them to offset income in future years.


Make Your Annual Charitable Contribution Charitable contributions aren't just ways to give to worthwhile causes and organizations. They're also smart ways to reduce taxable income. Contributions to qualified charitable organizations are tax-deductible. You can contribute cash or property, which includes shares of appreciated securities such as stocks and mutual funds. If you contribute securities, you not only get the charitable deduction, but you would avoid paying the capital gains on the unrealized appreciation.

As a result, if you have both cash and appreciated securities available, it makes better sense to donate the securities and invest the cash (which can also take care of rebalancing your portfolio).

Note, however, that only securities with long-term gains (more than 12-month holding periods) should be contributed. If they have NOT been held for more than a year, the charitable deduction would be limited to the securities' original cost. In addition, it doesn;t make sense to contribute securities valued below their cost basis. It would be better to sell these first, take the capital loss and donate the cash.


Take Your RMDs If you are over 70 ½ years old, you're required to take distributions from your IRA (and most 401k plans). The penalty for failing to take your annual required minimum distribution by December 31 can be severe. If you withdraw less than the minimum required amount, the IRS will penalize you at 50 percent on the amount not taken.


Convert Your IRA to a Roth
In the past, only those with less than $100,000 of modified adjusted gross income could convert IRA assets into Roth IRAs. Starting in 2010, that income limit was eliminated.

However, there's a special provision only for 2010. If you convert before December 31, you can spread the tax burden evenly between tax years 2011 and 2012. That means you would owe no tax on the conversion for 2010. Since the amount you convert is subject to ordinary income tax rates, this can be an expensive strategy and not for everyone. If you're not sure whether a Roth conversion makes sense, you still may want to convert some assets because you have until October 15, 2011 to click the undo button and "recharacterize" your Roth back to an IRA, assuming you either file an extension or amend your return.

More on MoneyWatch:
Active Managers Take a Beating in 2010 Why You Shouldn't Be Scared of Low Interest Rates Why a High-Dividend Stock Strategy Isn't a Good Approach How to Build a Bond Portfolio How to Avoid Financial Errors
Hear Larry Swedroe discuss current investment trends and topics every Sunday at noon on 550 AM KTRS in St. Louis or streaming via the KTRS Web site. Can't catch the show? Download the podcast via www.investmentadvisornow.com or through the Buckingham Asset Management podcast page on iTunes.
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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