4 year-end tax strategies that work

Towards the end of the year, a flurry of activity begins—and not just in the nation’s kitchens. With just a few months left in 2015, people are starting to think about 2016—and the tax bill that will be due in April.

You probably know that it is a good idea to do some year-end tax planning to try to reduce your 2015 tax bill. However what actually works, and what exactly should you do? Donate to charity? Sell some losing stocks? Pay January’s mortgage bill now?

The answer, of course, depends on your individual circumstances. While a certified financial planner or other professional can help you make a customized plan, here are some rules of thumb for when to try some common tax-reducing strategies—and when to skip them:


1) If your income fluctuates a lot from year to year, take a look at whether you can accelerate or defer some of that income. This strategy often works best for people who are self-employed, like small business owners, freelancers, and some doctors and dentists, or those who work on commission, like real estate brokers or other salespeople. If you are having a particularly good year, you could hold off on sending out a couple of end-of-year bills to push some of that income to next year. If it is a bad year—if you have just started a business or spent a lot on business expenses and your profits are low—see if you can pull some January income into December, in the hopes that your tax bracket will be lower this year than next.

For most people with traditional full-time jobs, accelerating or deferring income will not make a big difference. “When you have changes in income, that is a place where a lot of opportunities come in,” says John Scherer, a certified financial planner with Trinity Financial Planning.


2) If you are in a low tax bracket, you should consider tax-gain harvesting, Scherer says. This strategy works well for retirees who do not have a lot of income coming in, or for people with fluctuating income who are in a lean year, for example.

Most people know about tax loss harvesting, and for many investors, that is worth doing most years. “It is sort of like free money,” Scherer notes. But “tax gain harvesting, people do not talk a lot about,” Scherer says. Anyone who is in the 15% tax bracket (singles earning up to $37,450, or married couples filing jointly earning up to $74,900) will not have to pay capital gains tax, Scherer says. So any year you are going to end up in that lower tax bracket, you can lower your future tax bills by taking gains now, he says.

Here is how this works: You will sell some investments that have appreciated, and you will not pay any capital gains tax on them. You then immediately buy them again at today’s higher price—so you keep your investment portfolio the same, but later, when you need to sell those investments for income, your cost basis will be higher, and your tax bill will be lower.


3) If your deductions are close to the standard deduction amount, consider bunching your deductions. Generally, you should itemize if your itemized deductions will be greater than the amount of the standard deduction, which this year is $6,300 for single people. But if your itemized deductions are not adding up to much more than that standard deduction, you can bunch your deductions into on and off years and reduce your total tax bill, Scherer says.

Basically, you would pull as many deductions into this year as possible—pre-pay your January mortgage, property tax, or tuition bills, make 2016’s charitable contributions in December, and so on. You would itemize your deductions this year and take as many deductions as you can. Then, next year, you would have fewer deductions and take the standard deduction. You could save yourself a few thousand dollars over the course of two years through this method, Scherer says.


4) If you are subject to the alternative minimum tax, most deductions will not help you—except for deductions for charitable donations, Scherer says. So if you are subject to AMT, make sure you get receipts for all your donations, including donations of goods. Most people do not keep track of the value of, say, old clothes they are donating to Goodwill, but those donations can add up, Scherer says.

Of course, donating to charity only saves you money if you were going to donate anyway, Scherer notes. If you donate $1,000 and it saves you $250, you are still out $750; so do not donate just for the tax deduction. “It is like buying something at the store that is on sale—you are still out the money,” Scherer says.

Make sure all your tricks and tips are really worth it to your personal bottom line. Look for strategies that make sense for your personal situation, and do not spend money just to save money.


SigFig Wealth Management is not a tax advisor. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax advisor. SigFig Wealth Management does not provide tax or legal advice. This material is not intended to replace the advice of a qualified tax advisor, attorney, accountant, or insurance advisor. Consultation with the appropriate professional should be done before any investment decisions are made. The material contained herein is for informational purposes only and does not constitute tax advice. Investors should consult with their own tax advisor or attorney with regard to their personal tax situation.

Sarah Morgan

Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.

The smartest thing millennials are doing with their money: Making cheap investments

It is hard to save for retirement when you are just starting out. Maybe you have student loans you are struggling to pay off. Maybe you are saving up for a wedding or a house, or supporting a young family. Maybe you are not making very much money to begin with.

All these individual reasons for saving less add up to a lot of young investors who could be saving more. Our data shows that the majority of investors in their 20s and 30s are not saving as much as they could in their 401(k) accounts. More than half of investors in their 50s or older are on track to make the maximum possible contribution to their 401(k) accounts this year, but only 1 in 5 investors in their 20s are set to do the same.

If these young investors save more in their 20s and 30s, they will reap huge rewards. Every dollar saved when you’re young has more time to compound and grow—making it far more valuable than a dollar saved down the road.

Even if they are struggling to save a lot, these young investors do have one advantage over their elders; they are paying less in fees. Investors under 30 pay a median 0.07% in fees, while investors in their 30s pay 0.10%, investors in their 40s pay 0.15%, and investors over 50 pay a median 0.17%. Just as early savings pay off big down the line, over the course of working life, even small differences in the fees you pay on your investments can add up to hundreds of thousands of dollars in lost savings.


If you cannot afford to save much, then you certainly cannot afford to overpay for your investment options. Our data shows that more expensive investment options do not outperform cheaper options over the long term. In fact, the research shows that the cheapest investments will give you a greater total return in the long term.

The millennial investors who are choosing cheap funds for their 401(k)s are making the smartest possible choice with the limited amount of money they have available—something older investors could learn from.

Still, no matter how smart you are about investing, there is no substitute for starting your saving early and taking a moment to reevaluate how much you can actually afford to save. Consider putting an anticipated bonus or raise straight into your retirement account, or adjusting your tax withholding so that you’re taking less money out of your paycheck to pay the government, and more to pay your future self. A small change now could be worth a lot of money later.

Sarah Morgan

Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.

Spend five minutes today, and retire a millionaire

Summer is over. Kids are back in school. It’s time to start thinking about sweaters, pumpkins, and how the holidays will be here before you know it. There’s one more thing you should potentially add to the list: checking in on your 401(k).

Last year, we saw more than 30 percent of investors play catch-up and make last-minute contributions to their 401(k)s. These investors made 10 percent or more of their total contributions for the year in December. In comparison, if this same group of investors had saved and contributed an equal amount each month throughout the year, they would have only needed to make 8 percent of their total contributions each month.

Being late to the party is not necessarily a bad thing. There are plenty of possible strategies for 401(k) investors who want to boost their savings rate in the last few months of the year, and there are plenty of investors who could be saving more. Individuals can contribute a maximum of $18,000 to their 401(k) accounts this year, and investors at the age of 50 or over can make additional “catch-up” contributions of up to $6,000.

However, most investors are not on track to meet that maximum this year. In fact, only 39 percent of investors who track their portfolios with SigFig are on track to max out their contributions to their 401(k) accounts so far.


So who are these latecomers? By and large, younger investors.

Older investors are more likely to max out. Only about 1 in 5 investors under 30 are saving enough to hit $18,000 by the end of the year. Meanwhile, 44 percent of investors in their 30s and 58 percent of investors in their 40s are on track to max out their contributions.

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Of course, there are plenty of reasons why younger investors might have trouble saving $18,000 over the course of a year. Younger investors are likely to be making less, and may be saving for other, more immediate goals, like a car or a house—or struggling to pay off student loans.

Unfortunately, delaying saving for retirement will have huge costs down the line. The math is firmly on the side of those who start saving early. If you manage to start saving when you’re 25, and you save $7,000 a year, you’ll have about $1.9 million when you hit retirement age. However, if you max out your 401(k) starting when you’re 25, you’ll end up with almost $5 million. Thanks to the power of compounding, those early dollars—the ones you cannot easily spare when you’re just starting out—are worth much more than any catch-up contributions you might make when you’re in your 50s.

There is still hope though. If, for example, you can’t save much during your 20s, but you start to ramp up your savings in your 30s, you could still end up with more than $3 million by the time you retire. Check out some of these other good reads for more tips around saving for retirement:

Sarah Morgan

Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.

Are You Paying Too Much for Your IRA?

An Individual Retirement Account can hold almost anything. Many investors like having wide-open options, but some investors find that much choice overwhelming. Some investors turn to an advisor to try to sort through the vast universe of funds and figure out what to buy. Unfortunately, that advice can be expensive.

SigFig data shows that investors who work with advisors are almost twice as likely to pay load fees for the mutual funds they own: 37% of IRA investors with an advisor pay load fees, compared to 21% of investors without an advisor.

A load fee is a fee paid on the purchase of a mutual fund. It is essentially a form of commission–a fee that goes to the advisor you have paid to help you choose a fund. These fees range widely. The average IRA investor pays 0.46% in fees on their investments, but 28% pay 0.8% or more in total fees. That means a substantial number of investors are paying almost double the average in fees. And even small differences in fees can cut thousands of dollars out of your nest egg over the course of your investing lifetime.

Higher fees might be worth it if the pricier funds that advisors recommend outperformed the market. Unfortunately, they typically do not. Investors who use advisors in their IRAs are paying more, but they are not getting more: the median trailing 1-year net return for investors who use advisors is 1.2%, and the median return for investors who go it alone is 1.5%. Investors who have chosen their own investments are actually doing better than investors who have sought pricey advice. SigFig data has shown this consistently: pricier investments simply do not perform well enough to justify their fees.

SigFig’s analysis shows that some firms are more likely to charge certain types of fees than others. Ameriprise Financial, Edward Jones, and American Funds are at least three times as likely as the average firm to charge a sales commission or a type of fund marketing fee known as a 12b-1 fee.

Wherever the fee is coming from, it is hard to justify paying high fees on investments that simply do not outperform the broader market indices. If your advisor steers you towards expensive funds, it is time to ask a few questions about how they make their money and why they are not trying to control one of the only things you can control about your investments’ performance: how much they cost.

If you choose to work with an advisor, it is best to work with someone who is paid on a fee-only basis, or one that charges a small percentage of assets under management, such as a robo-advisor. Fee-only and robo-advisors do not make commissions from selling you pricey products. Look for advisors who hold themselves to a fiduciary standard, meaning they are legally bound to put your interests ahead of their own. Anyone who is not held to this standard can steer you towards investments that are broadly suitable for you, but not necessarily the best, or cheapest, possible option. As SigFig’s data proves, too many investors are already paying the price for bad advice.


Note: SigFig originally published this article on Daily Finance.

Sarah Morgan

Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.

To Plan for Early Retirement, Tweak Your Strategy for Longer-Term Portfolio Growth

Most of us have occasionally daydreamed about early retirement. Have you gone a step further, crunching some numbers to figure out how much money you would need and cutting back on your spending so you can max out your savings rate?

How would early retirement actually work? How would you structure your investments to throw off income for 40 or 50 years? Here are five tips from financial advisors on how to prepare your portfolio for a long retirement:

1. Be ready to take some risk

If your money needs to last 40 or 50 years, it will have to keep growing after you retire. That means you will need to continue investing somewhat aggressively. The exact balance of stocks versus lower-risk investments will depend on your age and risk tolerance, but investment professionals recommend keeping a minimum of 50% of your portfolio in stocks, and some advise 70% or 80%. A risk questionnaire, such as the one by investment firm SigFig, can help you determine what portion of your portfolio should be in stocks, given your investment horizon and risk tolerance.

2. Keep some cash on hand

For younger retirees, financial planners recommend keeping about two years’ worth of living expenses in cash or short-term instruments like money market accounts or CDs. “You don’t want to get in a position where you’re selling into a down market just to maintain your standard of living,” Kresh says. Sitting on some cash will allow you to sell chunks of stocks when the market is strong, not when you have to pay the cable bill.

As for the balance of your portfolio–whatever is not in stocks or cash–the pros recommend shorter-term bonds for now, because interest rates are so low. “Even though the rate is not fair to savers, it’s still something to get a safe return and hedge the risk of the equity side of your portfolio,” says Mickey Cargile, the president of Cargile Investment Management.

3. Do not overspend

The general rule of thumb for someone living off an investment portfolio is to keep withdrawals to 4% a year. Some experts now say that even that is too high, but it is still a reasonable place to start, Cargile says. “Some years it’s going to erode your principal some, and some years it’s going to grow much more,” he says. “If you can withdraw less early on, that’s great,” Cargile adds. In those early years in particular, you still want your total portfolio to be growing faster than you are spending it.

4. Watch out for friends with investment ideas

This is a common trap for people who are successful early in life, says Michael Kresh, CFP, the chief investment officer of Creative Wealth Management: A friend or family member approaches them with a supposedly can’t-miss investment or business idea, and, overconfident because of that early success, they put too much money behind a risky venture. “You think because you’ve been successful early that you can understand other businesses that you have not been involved in,” Kresh says. Even a large nest egg will not last a lifetime if you start throwing money at ill-advised schemes.

5. Find something to do

Investment managers say that being emotionally prepared for retirement is a challenge for their clients at any age–and one that often takes people by surprise. “I think as human beings we weren’t meant to sit around and watch Jeopardy for 30 years,” Cargile says. Idleness may appeal now, when you are stuck in an office, but people who work with retirees say the ones who enjoy their retirement find a purpose for all that free time. “You need to have something to get up for,” says Roger Streit, a certified financial planner with Key Financial Solutions. Volunteering for an organization or cause you are passionate about is one good option, Streit says. “I think it definitely helps to have a cause, to be involved in giving back,” he says.

Retiring at 40 may be nothing more than a pipe dream for most of us, but even those of us who do not plan to retire early should plan for a long retirement. If you stop working at the traditional retirement age of 65, investment managers say you should plan to make your money last about 30 years. That may mean you will need to work, or work part-time, longer–or take some of the tips we just shared.

Note: SigFig originally published this article on Daily Finance.

Sarah Morgan

Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.