Don’t Forget about Year-End Tax and Investment Planning

As the year draws to a close, you might have a lot of outstanding tasks on your to-do list.  One task I would encourage you to complete is to set up a meeting with a financial advisor.  If you do not have an existing relationship with a financial advisor please begin by working with a Certified Financial Planner® that works with clients in a fiduciary capacity.  A CFP® is trained to provide comprehensive financial planning; they must have at least three years of work experience and uphold the highest ethical standards in order to use the CFP® mark.  Even if you have a relationship with a financial advisor you might want to consider a second opinion.  One of the main reasons to seek a second opinion is to determine if you are receiving true value from your current advisory fees.  In other words, your investments need to be performing as expected after factoring in all fees.  If not, it is time for a second opinion.

Albert Einstein said “The hardest thing to understand in the world is the income tax.”  I have to agree with him.  As a CFP®, ChFC® and CLU® I can say our income tax system is complex.  However, there are several year-end tax and investment planning strategies that can help avoid unnecessary taxes for 2016.

First, you might want to consider the Roth IRA conversion.  The Roth IRA is a fantastic vehicle to prepare for retirement.  I am a huge fan of creating a tax free income environment during retirement.  One way this can be done is through a Roth IRA conversion.  This strategy allows you to convert assets from a Traditional IRA to a Roth IRA.  Why would an investor want to implement this strategy?  The assets within a Roth IRA experience tax-free growth and generate tax-free income for you and your beneficiary when withdrawals begin.  But, there is a downside.  The amount that is converted is subject to taxation because the money was never taxed in the first place.  Therefore, the best way to approach this strategy is to convert a portion over time to reduce the tax hit.  Also, if you think your future income will be higher, a Roth IRA conversion is a great option to consider.

Second, max out your 401k, 403(b), Traditional IRAs and other qualified plans.  Contributing the maximum amount allowed under the IRS tax code is one of the best ways to secure your retirement future.  The assets within these investment vehicles grow tax deferred and the contribution amount can be utilized as a tax deduction on your tax return.

You may be saying these strategies sound great however what about the investment growth within the following investment vehicles.  After all if we do not have the growth we need from our investments then our tax planning becomes useless.  In one of my previous articles “Doing the Stock Market the Right Way”, I believe tactical portfolio management is a more efficient way to provide the investor with downside protection and upside market participation.  For many years, investors focused on the traditional buy and hold investment approach to money management.  This works well in good market conditions.  However, the market does not always go up.  From March 2000 to February 2003 the S&P 500 lost 44% due to the tech bubble and it took 5 years to recover.  From October 2007 to February 2009 the S&P 500 lost 53% and it took 4 years to recover.  When an investor experiences such a huge loss it is very difficult to hold on and stay the course.  Therefore, I submit to you that a well-designed tactically managed portfolio is better way to manage money to give the investor the growth they need.  Tactical portfolio management creates an effective exit strategy that can be activated if the market is trending in the wrong direction.  This approach to investment management is “insurance” for your portfolio.  Too many investors make decisions based on emotions, which ultimately leads to poor decisions.  Tactical portfolio management takes emotions out of the investment management process and protects the investor from catastrophic or life changing losses within their portfolio.

Working with the right financial advisor is critical for a successful financial future.  With the right investment strategy and product solution 2016 will be a great year.

To learn more about Blake Fambrough and his approach to financial planning view his Paladin Registry profile.

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