Tax Management Tips in Volatile Markets

It is the goal of every investor to maximize total after-tax return given the risk level they are willing to accept. Unfortunately, we do not control how markets will perform. That would be nice. But we do control three other important variables that can have a direct impact on your after-tax results:
    Our emotions
    Fees and expenses

Since we are approaching the end of 2011, let's focus on some valuable tax tips before time runs out. Even though there are plenty of uncertainties about the future of the tax code, today's market provides some very specific opportunities for tax-smart investors.

     Take losses when you have them

    With significant losses in this year's market, you may want to sell some of your losers to offset gains even if you had limited chances to realize gains in this volatile market. Remember, harvested losses can offset your gains and up to $3,000 of net capital losses can be deducted from your ordinary income. Net losses above that $3,000 can be carried over to future years until they have all been used up by future portfolio gains.

     Create your own gains

    If you don't have realized gains to offset you realized losses, you can create your own. Let's say you have a stock that you bought a long time ago for $10 a share and it is $100 a share today. You can take that gain by selling the stock, which will be offset by the losses you have. Because the wash-sale rule doesn't apply to gains, you could then buy the stock back at $100 and have the benefit of a higher cost basis, a bonus given the potential that capital gains tax rates could increase in the future.

     Diversify your retirement plans

    Having taxable (401k, IRAs) and non-taxable retirement accounts (Roth IRA) to draw from at retirement makes a lot of sense, especially in an uncertain tax environment. Because we are looking at potential tax hikes in the future, it is possible that an investor's income could decrease in retirement, but that the tax brackets might be adjusted such that he/she would be paying higher taxes on that lower income. Therefore, for added flexibility it may be wise to have both taxable and non-taxable retirement accounts to draw from in retirement.

     Convert your Traditional IRA into a Roth IRA

    While a Roth IRA income qualification limits may prevent some investors from opening an account, on January 1, 2010, the income limits for converting IRAs and 401(k)s into Roth IRAs were removed. Before this change, only investors with a modified AGI of $100,000 and below could convert. Although you may not qualify to invest directly into a Roth because of income limits, you can convert some of your retirement assets from an IRA to a Roth regardless of income. The amount converted will be added to your taxable income, increasing your overall tax liability. On the other hand, a Roth IRA will provide you with tax-free growth that is especially attractive if you believe tax rates are on the way up. A Roth IRA will provide you with tax diversification offering you flexibility when it is time to draw income from your retirement accounts. And finally, a Roth IRA is not subject to the 70 ½ mandatory distribution rule, leaving an even bigger financial legacy to your heirs.

     Donate your IRA to a charity

    This year only, IRA owners and beneficiaries who are age 70 ½ or older have an interesting charitable opportunity to make a tax-free distribution (up to $100,000) of otherwise taxable dollars from their IRAs to a qualified charitable organization. There are a few important rules that govern the tax-free treatment for this qualified charitable distribution (QCD): it must be a qualified charity, not gift annuities or donor-advised funds; your QCD check has to be payable directly to the eligible charity; and if you accept a gift from the charity in return for your QCD, your entire contribution will not qualify as tax-free.

At a time when emotions are running high due to dramatic market swings, your ability to take advantage of some of these tax management tips are within your control. Consult your tax professional or CPA before implementing any such strategies.

Danilo Kawasaki

Gerber Kawasaki Wealth Management
2716 Ocean Park Blvd #2020
Santa Monica, CA 90405


Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services and fixed insurance offered through Gerber Kawasaki, Inc., a registered investment advisor and separate entity from LPL Financial.

This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Investing involves risk including potential loss of principal.

This material is for informational purposes only and does not constitute investment or tax advice and it should not be relied on as such. It does not take into account any investor's particular investment objective, tax status, or investment horizon. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based in such information.

Registered principal offering securities through LPL Financial, Inc. Investment advisory services and insurance services offered through Gerber Kawasaki, Inc. , not affiliated with LPL Financial, Inc.