The last weeks of the calendar year are nothing if not hectic. But if you want to stay on the nice list where your investments are concerned, it’s important to make time for a portfolio review. Doing a little fourth quarter housekeeping can help set you up for the year ahead. If you’re not sure where to start, here’s a simple year-end checklist with some suggestions.
1. Checking Your 401(k) Contributions
The deadline for making contributions to your 401(k) is December 31. If you haven’t maxed out your plan for the year, that means there’s still time to top it off.
Review your most recent account statement to see how much you’ve contributed so far, then calculate how much more you can add to reach the annual contribution limit. For 2021, that’s $19,500. If you’re 50 or older, you can make an additional $6,500 on top of that in catch-up contributions.
Unable to max out your contributions for the year? Consider putting in whatever additional amount you can. Any additional contributions will add up over the years, thanks to compounding returns.
While looking at your annual 401(k) contributions, check your contribution rate. If you’re saving 5% of your pay, for example, do the math to see if you can afford to bump that up to 7% or even 10%. At the very least, consider saving enough in your plan to qualify for the full matching contribution from your employer, if one is offered.
2. Reviewing Your IRA Contributions
If you’re saving in an Individual Retirement Account (IRA) alongside a 401(k) or in place of one, check your total contributions for the year so far. For 2021, the annual contribution limit for traditional and Roth IRAs is $6,000 ($7,000 if you’re 50 or older).
Remember, you technically have until the April tax filing deadline to make IRA contributions for the tax year. But if you have a bonus coming your way from work or some extra cash to spare, you might consider making a contribution before the calendar flips to January.
3. Harvesting Tax Losses
Investing through a taxable brokerage account, like our Self-Directed Trading and Robo Portfolios, has its advantages. For one thing, you’re not limited by annual contribution caps and you likely have a broader range of investment choices to choose from, like individual stocks and ETFs (exchange-traded funds).
Year-end is a good time to consider harvesting losses in your brokerage account in order to minimize your tax bill. Tax-loss harvesting means selling investments at a capital loss to offset capital gains.
Just be sure to watch out for the IRS wash sale rule, which says you can’t buy a “substantially similar” investment to the one you’re selling either 30 days before or 30 days after the sale. Wash sale transactions don’t count for tax-loss harvesting purposes.
Since Ally Invest doesn’t provide tax advise, when considering tax matters, please consult with your tax advisor or other tax professional to determine the best course of action for you.
4. Rebalancing Your Portfolio
So, say you prefer an 80/20 portfolio split, with 80% of holdings in stocks and 20% in bonds. But over the course of the last year, the stock portion of your portfolio has grown to 85%. If you want to stick with the 80/20 balance, you’d need to sell off some of the stocks or buy more bonds.
Rebalancing is something you can do manually, but it may be done for you automatically if you use a robo advisor, like our Robo Portfolio. Robo advisors can review your investment goals, then periodically rebalance your assets so you don’t deviate too far off-course.
5. Reviewing Investment Fees
Fees can be a drain on your portfolio. The more you pay, the fewer returns you have to build wealth.
Start with your 401(k) and/or IRA to see what kind of expense ratios you’re paying for the different funds you invest in. Mutual funds, index funds and exchange-traded funds (ETFs) have expense ratios, which reflect the annual cost of owning the fund and are expressed as a percentage. The higher the percentage, the more it costs you.
Does that mean you should banish any funds that are on the more expensive side? Not necessarily. You can compare the fee to the fund’s performance over the past year to see if it’s justified. If you’re not getting the kind of returns you were hoping for, then you may want to consider selling it.
Next, consider what you pay to trade investments in a brokerage account. Some online brokerages, including Ally Invest, have adopted commission-free trading for U.S. stocks and ETFs. Based on what you pay to your current brokerage, you may want to move your portfolio elsewhere in the new year.
Check out Ally Invest’s commission and fee information.
Don’t wait until the last minute.
As the year winds down, it’s easy to get caught up in the hustle and bustle of holiday fun. But you don’t want to miss out on investing opportunities before the clock strikes 2022. This checklist can make it easier to ring in the New Year with less financial stress.
Make this the year you invest how you want.