Year End Planning Tips

With the end of 2010 right around the corner, I offer the following year-end financial planning tips:
  • Contribute to your state’s 529 Plan by the end of the year. Many states, such as Michigan, offer a state income tax deduction if you make contributions to the plan that the state sponsors.
  • Convert your Traditional IRA to a Roth IRA by year end. The IRS created a special election for conversions made in 2010 that will allow you to spread the income from the conversion over 2011 and 2012. You can learn about Roth conversions at Vanguard and use its Roth IRA Conversion Calculator to decide if conversion is right for you.
  • Lock-in capital gains and pay at current capital gains rates. Long-term capital gains rates are scheduled to increase in 2011 unless new laws are enacted. If you have unrealized capital gains in a taxable investment account, consider selling your long-term winners and pay at the 15% rate (or 0% if you are in the 10% or 15% ordinary income tax brackets). You can even sell and immediately re-buy the same security to reset its cost basis. The wash sale rule does not apply to gains. You can learn more about this strategy and whether it is in your best interest by reading this article at
  • Avoid buying mutual funds in a taxable account late in the year. Mutual funds are required to distributed realized gains each year, and you should avoid paying taxes on distributions when you were not around to participate in the gain. Many fund companies report their expected distributions prior to year-end. Check for planned distributions before you buy or wait until the new year.
  • Take Required Minimum Distributions (RMD) from your IRAs or employer-sponsored retirement plans if you have reached age 70 1/2. Failure to take a required withdrawal can result in a 50% penalty on the amount not withdrawn.
  • Make annual exclusion gifts before year-end. You can give $13,000 in 2010 to an unlimited number of individuals free of gift tax. You cannot carry over unused exclusions from one year to the next.

Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Trading Costs Continue to Fall

If you’ve ever talked to me about investing, you’ve likely heard me stress the importance of keeping your costs low. Part of your investing costs are the commissions you pay to buy and sell.

I encourage my clients to use a broker, the firm that holds your investments, that offers low cost investments and low to no trading fees. One of the brokers that I often suggest is Vanguard because it offers a broad array of its own index mutual funds with no transaction fees.

Follwing other discount brokers, Vanguard recently announced that it is lowering its commissions for stocks and exchange traded funds (ETFs.) Vanguard clients will now pay no commission for Vanguard ETFs and will pay $2 t0 $7 per trade for non-Vanguard ETFs and stocks.

This is good news for investors for a few reasons:

  • Trading costs for self-directed investors continue to fall and are becoming trivial for investors who trade infrequently.
  • Vanguard becomes a viable option for investors who like to buy ETFs and individual stocks.
  • Investors can build well-diversified portfolios at Vanguard using ETFs for less initial investment than they can using Vanguard mutual funds, most of which require a $3,000 minimum investment.

Still, many other brokers are now offering very low trading costs for stocks and ETFs. Below are links to stock and ETF commission schedules at other well-known brokers:

When choosing a broker, keep in mind that there are other factors to consider such as its customer service reputation, the ease of use of its website and statements, and any other costs like per account or low balance fees.

Want to know the main differences between mutual funds and ETFs? Check out a Vanguard presentation on the subject at this link.