Today’s essay applies to anyone who invests in stocks. Or even cryptos.
It can make you hundreds — even thousands — of dollars. (I mean it.)
But it’s December already. You don’t have much more time.
So, let’s get right into it…
It’s Time to Get Ready for 2021
2021 is nearly upon us.
As an investor, you should do some things before that.
To be clear, you must do some of these before the new year … or they won’t be valid.
The list is simple:
- Assess and address your tax situation.
- Review and plan.
Assess and Address
2020 was a tough year in many respects. I don’t have to tell you that.
But it was actually rewarding for investors:
If you bought stocks at the end of last year and held them, you made money.
The Nasdaq composite (CCMP), S&P 500 Index (SPX) and Dow Jones Industrial Average (INDU) are all in the green this year.
You could have made a 41% return by simply buying a Nasdaq exchange-traded fund this year.
But if you somehow knew to avoid stocks at the start of the year and bought in March, you did even better. These three indexes have earned between 65% and 84% since March 23.
And bitcoin more than doubled.
That’s great! You made money.
But if you sold, you have to pay taxes on that. (It’s what I call a good problem to have.)
If you have realized gains in a taxable account, you should determine if you have losses to offset against them to lower your tax bill.
If you do, it may make sense to sell one or more of those names.
This is your call, of course. But if you aren’t optimistic about the prospects of a loser you own, selling it can create losses to net against your gains.
Let’s say you have a cannabis stock that is worth less than you paid for it.
If there is a similar stock that you would like to own, you may want to sell your loser stock and replace it with the other name. (This applies to any other industry as well.)
That way, you can reduce your taxable gains by the amount of the losses. And you’ll remain invested in the space.
Does that make sense?
If you have realized losses, but haven’t sold any of your winners, that’s a more difficult question.
After all, your winners are your winners for a reason. If they believe their winners still have upside, most people don’t choose to sell them just to create a gain to offset against their losses.
For most, the main reason they invest is to make money — not to sell high-flying stocks to reduce their taxes with. Those highfliers can often keep flying.
And you should know … you may not even need losses from the current year. You may already have losses from a prior year.
If you had more losses in prior years than gains, it’s called a “capital loss carryover.” You can deduct those past losses from your current gains too!
If you file a Form 1040, for example, and the number on line 6 is negative $3,000 (or negative $1,500 if you are married and file separate returns), you likely have capital loss carryovers.
These are losses in excess of the $3,000 (or $1,500) you’re allowed to take on your return:
That amount of past losses may be enough to offset your realized gains from this year.
As I said, I want to make you aware of the potential benefits of offsetting losses against your gains. Your decision to buy or sell stocks is your personal choice.
I should be clear though: I’m not a tax professional.
I mention these as common-sense ideas that may make sense for you. If you have more questions, please research them or reach out to a tax professional.
Also, don’t forget to max out your 401(k) or other retirement contributions if you can.
Since most people do this directly from their paychecks, it shouldn’t be an issue. But if you don’t, or if you want to invest more, 401(k) contributions are generally due at the end of the year.
You can often fund individual retirement accounts up until the tax filing deadline though. That’s April 15, 2021, in the U.S.
And please know, if you’re over 50, you can save more in a 401(k) or certain other plans than those yet to reach that age. This is meant to help people closer to retirement age “catch up” on their contributions.
Finally, do you try to hold a certain weighting of investments? For example, 70% stocks and 30% bonds.
If you want to maintain this weighting, you may need to rebalance. The end of the year is a solid time to do that.
If you want to sell some names that create a net loss to get your assets in balance, it may help you offset some of your other gains — and thus, reduce your tax bill.
Review and Plan
These are just a few types of moves you can make before the end of the year.
This is not meant to be a complete list. I just want to make sure you can think about and address them before it’s too late.
Once you’ve done these, consider your goals.
Check to see how you did versus your goals this past year.
See how your returns measured up.
Then, write down your goals for next year.
These goals are important.
If you don’t have tangible goals, how do you assess your performance? How do you know you’re on track?
Doing this can also help you frame your investing goals.
If you are investing for retirement, how much do you need?
How are you doing with respect to reaching your goal?
Have any of the assumptions changed since you made these goals?
For example, many people are living longer today. That’s great, but you still need to fund your lifestyle as long as you live.
Assessing and planning for your goals can help make investing more logical.
You aren’t just buying stocks aimlessly.
Does that make sense?
It’s not possible to assess all of your questions in a short essay like this.
But I encourage you to consider them.
And please make sure you take any steps necessary before the end of the year. There isn’t much time left.
Many of us want to say goodbye to 2020 … but make sure you take care of business first.
Editor, Profit Line