A simple flip of the calendar – one day – can make a big difference for tax and financial planning decisions. Holding an appreciated asset for one extra day – from 365 days to 366 – magically transforms gains from short-term to long-term in nature. For those in the 32% bracket, the ordinary income rate of 32% drops to just 15% for long-term capital gains, equivalent to a massive 17% one-day return for the investor’s bottom line.

Taxing Decisions
Similarly, the value of recognizing short-term losses is worth more than hesitating and selling when they reach long-term status. Since gains and losses are netted on a calendar year basis, periodically harvesting short-term losses can make a big difference when the books close on the year. This year’s strong equity market means most investors are sitting on gains, but to the extent that unrealized losses exist, there’s still time to harvest them.

In December, most mutual funds distribute their capital gains to shareholders. These are the net gains resulting from the portfolio manager’s trades during the year. They are distributed annually to shareholders – who are obligated to pay the taxes. In a best-case scenario, the fund had positive performance for the year and the investor’s shares appreciated. But the pooled nature of mutual funds means shareholders who simply hold the fund on its “record date” may owe taxes on gains they never participated in. Fortunately, mutual fund companies publish their capital gains estimates well in advance of the record date so investors can make informed tax decisions.

For taxable investors, separately managed accounts (SMAs) and direct indexing strategies can be more tax advantageous than mutual funds. These vehicles give investors more control over their tax bill. Individual tax lots allow the manager to selectively harvest short-term losses, defer gains until they become long-term, and donate appreciated stock. These three tactics, unavailable to mutual fund shareholders, can have a meaningful impact on an investor’s after-tax returns.

New Rules for Retirement Accounts
The flip of the calendar from December 31 to January 1, 2024 also ushers in a new set of rules for retirement accounts. These rules stem from the SECURE 2.0 Act, which was passed in late 2022 but delayed implementation for many of its features until 2024. Here are some highlights of those changes, along with the retirement plan contribution limits for 2024.
  • Required Minimum Distributions (RMDs) will no longer be required from a Roth 401(k). This brings the rules in alignment with Roth IRAs, which had already been exempt from RMDs. In 2024, the RMD age is 73, and in 2033 it will increase to 75.
  • Employers will be able to pay a company “match” into a 401(k) even if the employee didn’t contribute to the 401(k). This benefit targets younger employees who often have student loan payments that prevent them from contributing to their retirement plan. To qualify for this benefit, the employee must attest that they made student loan payments in lieu of contributing to their 401(k).
  • A defined contribution retirement plan can offer a “pension-linked emergency savings account” to hold up to $2,500 of the participant’s money. These dollars must be invested in a stable value or money market fund and sit in a Roth sub-account. The money is available for general “emergencies” and won’t need to fall under any of the existing categories for hardship withdrawals (medical expenses, loss due to a natural disaster, or to prevent foreclosure or eviction). This should encourage participants to contribute to their plan with greater confidence, knowing that in a pinch they can withdraw $2,500 tax- and penalty-free.
  • 529 plan assets can be rolled into a Roth IRA for the account’s beneficiary, subject to the annual contribution limit and $35,000 lifetime limit. The 529 account must be open for at least 15 years and contributions in the last 5 years won’t be eligible for rollover. Because the beneficiary must have income to be eligible to contribute to the Roth, this will give younger workers with unused funds in their 529 a head start on retirement savings.
  • In 2024, IRA and Roth IRA contribution limits increase by $500, to $7,000 (under age 50) and to $8,000 (age 50 and older).
  • In 2024, 401(k) contribution limits increase by $500, to $23,000 (under age 50) and $30,500 (age 50 and older).
As we’ve written before, the Health Savings Account (HSA) is arguably the most tax-advantaged investment account in existence. If you have one in place, you still have time to max it out. The contribution limit for 2023 is $3,850 for self-coverage and $7,750 for family coverage. In 2024, those limits bump up to $4,150 and $8,300, respectively.

As the holiday season quickly approaches, stay focused on time-sensitive tax and financial planning opportunities that only exist until the calendar flips to January 1, 2024.
Sources: IR-2023-203, IRS Rev. Proc. 2023-23

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