Year-end is approaching. If you act before Dec. 31, you just might be able to cut down on your clients' 2014 tax bills. While many of these strategies can be very labor intensive, technology can come to the rescue.
1. Harvest tax losses with your portfolio accounting system or re-balancing software. I'm a big believer in harvesting tax losses. Although this is just a “timing difference” (since the tax piper will need to be paid in the future … unless the positions are held until death), clients hate to pay taxes. And since, capital loss carryforwards never expire, I like stockpiling these to offset future gains, especially from re-balancing. Your portfolio accounting system (for example, Orion, Morningstar, PortfolioCenter or TPX) can identify loss positions. From there, select particular funds with significant losses and simply swap out for something similar. Sophisticated re-balancing software (such as TRX or iRebal) can automatically produce transactions for only those clients and positions with savings of more than minimums established by you.
2. Consider Roth conversions. If your client will be in a low tax bracket in 2014, considering switching some or all of their individual retirement account funds to a Roth IRA. The amount converted will be subject to tax, but not much if they are in a low bracket. Your custodian can handle this easily. However, if you want to change strategy for location optimization, rebalancing software can produce tax-efficient trades to move from the IRA's fixed income investments to higher-return investments more appropriate for Roth IRAs.
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3. Consider harvesting gains. If your client is in a zero or low tax bracket, they can actually pay zero tax on some long-term gains. So, rather than harvesting losses for these clients, you will want to harvest gains on positions held for more than one year. Your portfolio accounting system as well as your rebalancer can produce reports showing appreciated positions.
4. Encourage clients to use appreciated securities for charitable donations. Many organizations are set up to receive shares of stock or mutual funds transferred from investment accounts. As long as the shares have been held for more than a year, clients will get to deduct the full fair market value of the shares donated and not pay tax on the gain. This is a great way for clients to get more bang for their charitable buck. Since you are identifying appreciated shares, your portfolio accounting system or rebalancer can identify the shares for you just like for tax gain harvesting.
5. Avoid capital gain distributions. Sometimes funds distribute disproportionately large capital gains at year-end. (I would wager that Pimco will be doing this in 2014.) Rather than having your clients get surprised with a higher tax bill, consider selling out of the fund prior to the distributions and replacing the position with a similar fund or ETF not posting high capital gain distributions. Watch out for potential gain recognition on the sale — you want the translation to result in a net plus for the client. This strategy is extremely labor intensive without technology. Re-balancing software can handle this is minutes.
One big caveat: Be sure to work with your clients' accountants to get it right!
Sheryl Rowling is chief executive of Total Rebalance Expert and principal at Rowling & Associates. She considers herself a nontechie user of technology.
