With 2022 rapidly drawing to a close, so are your opportunities to have an impact on your investments and potentially your taxes for the year. Since this time of year is often a time for celebrations and family togetherness, it can get easy to forget just how important it can be to get your investment-related finances in order.
With that in mind, three Motley Fool contributors stepped up to share investment moves to make before the year ends. They pointed out the importance of diversification, the value of tax-loss harvesting, and of getting money into an IRA. Read on to see why those moves are worthy of your consideration and decide for yourself whether they're ones you should take advantage of while you still have a chance to impact 2022.
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Balancing a portfolio can provide diversification benefits
Parkev Tatevosian (Diversify portfolios): My recommendation for readers is to diversify your portfolios. Much has transpired in 2022, and valuations of assets have fluctuated wildly. It's essential to visit your portfolio of assets to consider if you have too much exposure to an asset class or assets within a class. For instance, say you own a portfolio of three stocks, including Amazon, Apple, and Tesla.
This collection of assets is not fully benefiting from the risk-reduction attributes of a diversified portfolio. These advantages include reducing risk by spreading investments over several assets in different industries. If one stock or asset price does not fare well in a given year, another one might fare better. Consumer decisions on where they spend money often change. One year, buying Apple's iPhone might be extremely popular. In another year, iPhones may be out of favor, but Tesla's cars all the rage. The important thing as an investor is if you are diversified across assets and stocks, you will reduce your exposure to one company or product.
Experts recommend holding between 15 and 30 stocks across various industries and geographies to get optimum diversification. Investors heading into 2023 will do well by reviewing their investments to determine if they are taking full advantage of the benefits of diversification.
Three small letters that can bring massive benefits
Eric Volkman (Channel funds into an IRA): An individual retirement account (IRA), is a great place to park some cash floating around in your portfolio, or the proceeds from end-of-year stock sales. The IRA is an investment vehicle that confers significant tax breaks over time for people channeling investments into it.
Not every investor and saver is created equal, of course, so there is a variety of IRA types available. The traditional IRA is the classic model, still popular after all these years as it grants account holders a double tax benefit.
It's a tax-deferred account, i.e., taxes are due only after qualifying withdrawals are made from the account. Now with a retirement account the goal is to make withdrawals only when a person is close to, or at, the end of their working life. Broadly speaking, retired or semi-retired people have much lower income bases than those who are fully employed, so they end up paying far less to the tax man when the time comes.
Benefit No. 2 is that a traditional IRA account holder can deduct the contributions to their account, provided certain conditions are met. That can be quite the benefit, as the maximum annual contribution is $6,000 for the current year for an individual. Now who doesn't appreciate a four-figure deduction on their tax return?
It's important to note, though, that the deduction a traditional IRA contributor can claim starts to diminish at certain annual income levels. For 2023, this kicks in at $68,000.
Another note: While the deadline for making contributions is the same as that of filing (April 18, in the case of 2023), it's wisest to do so along with your other end-of-year portfolio housekeeping. You'll be busy enough getting material together for the tax return.
Entire books and scholarly tomes have been written about IRAs; this is only a taste -- I haven't even gotten into the other types of these accounts! For more about these superb investment vehicles, check out The Motley Fool's extensive coverage of IRAs and other retirement instruments.
You might as well get some benefit from 2022's rough market
Chuck Saletta (Tax loss harvesting): If there's an upside to the tough market investors have faced throughout much of 2022, it's that you might have the opportunity to lower your taxes thanks to it. Due to a concept known as tax loss harvesting, you can close investment positions for losses and use those losses to offset gains you've taken -- and potentially up to $3,000 of ordinary income for the year.
There are a few key rules you need to understand in order to make it work. The biggest is something known as the wash sale rule. In essence, if you rebuy the shares or other "substantially identical securities" within 30 days of making your sale -- either before or after -- you can't claim the loss on your taxes. Instead, the loss is added to the basis of your new investment.
In large part because of the wash sale rule, it's generally a good idea to make sure that when you're closing out positions for losses they're positions you actually want to exit. After all, a lot can happen in that window around your sale date. If a recovery were to happen before you are able to buy back in, you'd probably kick yourself for selling for a tax loss, especially if you really believe in the investment's long-term prospects.
Beyond that, it's important to realize the importance of closing your positions for a loss before the end of 2022 in order for them to help offset your 2022 gains. If you end the year with net capital gains from your closed positions, you're taxed on those net gains. If you end the year with net losses from your closed positions, the first $3,000 ($1,500 if you're married filing separately) can be deducted from your ordinary income. If that happens, the rest of your losses will carry forward into 2023.
Ultimately, of course, you want to make money from your investments, and over the long haul, it's better to pay taxes on gains than save tax money by claiming losses. Still, when years as rough as 2022 come around, it's nice to get some benefit from a tough market.
Time is running out -- make your year-end moves now
There is exactly one holiday-shortened market week left in 2022 to get your moves in place before time runs out on most of the tools at your disposal. If you haven't set yourself up to address your year-end goals, right now is your last, best hope to do so. Make today the day you get your plans ready so that you can actually make them a reality while there's still time. Because once the clock runs out, your chance to have that impact on 2022 will quickly vanish.
