Year-End Investment Strategies to Maximize Your Returns

As the year comes to a close, it’s a great time to review your investment portfolio and implement strategies that can help maximize your returns while positioning yourself for financial success in the year ahead. Whether you’re looking to minimize taxes, rebalance your portfolio, or take advantage of opportunities in the market, there are several year-end investment strategies that can help boost your financial outcomes.

Here are some practical steps you can take before the year wraps up to optimize your investment strategy.

1. Max Out Contributions to Tax-Advantaged Accounts

One of the most effective ways to maximize your returns is to take full advantage of tax-advantaged retirement accounts, such as 401(k), 403(b), and IRA accounts. Contributing the maximum allowable amount to these accounts helps reduce your taxable income and allows your investments to grow tax-deferred or tax-free.

2024 Contribution Limits:

• 401(k), 403(b), or 457 plans: Up to $23,000 (or $30,500 if you’re age 50 or older).
• Traditional or Roth IRA: Up to $7,000 (or $8,000 if you’re age 50 or older).

If you haven’t maxed out your contributions yet, consider increasing your contributions before year-end to reduce your taxable income and potentially qualify for a Saver’s Credit. For self-employed individuals, consider contributing to a SEP IRA or Solo 401(k) for additional tax advantages.

2. Rebalance Your Portfolio

Throughout the year, your portfolio’s asset allocation may have shifted due to changes in the market. Rebalancing your portfolio at year-end ensures that your investments are still aligned with your financial goals and risk tolerance.

How to Rebalance:

• Review your target allocation: Assess your portfolio’s target allocation between stocks, bonds, and other assets based on your risk tolerance and time horizon. For example, if your target is 60% stocks and 40% bonds, check whether your portfolio still reflects that balance.
• Sell and buy accordingly: If your portfolio has become too heavily weighted toward one asset class (e.g., stocks), sell off some of the overperforming assets and reinvest in underperforming areas to bring your portfolio back in line with your goals.
• Consider fees and taxes: Be mindful of transaction fees and potential capital gains taxes when rebalancing. If selling investments, try to offset gains with losses to reduce your tax burden (more on that below).

Rebalancing at year-end ensures that your portfolio remains well-diversified and aligned with your long-term strategy.

3. Harvest Tax Losses

Tax-loss harvesting is a smart way to reduce your tax liability by offsetting capital gains with losses. If you’ve sold investments at a profit this year, consider selling underperforming assets to realize a loss, which can be used to offset those gains.

How Tax-Loss Harvesting Works:

• Offset capital gains: If you’ve realized capital gains from selling investments earlier in the year, you can sell investments that have decreased in value to offset those gains, reducing your taxable income.
• Carry forward losses: If your losses exceed your gains, you can use up to $3,000 of losses to offset ordinary income in 2024, with the remainder carried forward to future tax years.
• Avoid the wash-sale rule: Be aware of the wash-sale rule, which prevents you from claiming a tax loss if you repurchase the same or a substantially identical security within 30 days of the sale. To avoid this, consider investing in a similar but not identical asset or waiting 30 days before buying the same investment again.

Tax-loss harvesting is a powerful strategy to minimize taxes and improve the overall efficiency of your investment returns.

4. Take Required Minimum Distributions (RMDs)

If you’re age 73 or older, you’re required to take Required Minimum Distributions (RMDs) from your tax-deferred retirement accounts, such as a traditional IRA, 401(k), or 403(b). Failing to take your RMDs by the end of the year can result in hefty penalties (up to 50% of the RMD amount not withdrawn).

RMD Strategy:

• Calculate your RMD: Your RMD is based on the value of your retirement accounts as of December 31 of the previous year and your life expectancy factor. The IRS provides tables to help calculate this.
• Timing: Ensure that your RMD is taken out before December 31 to avoid penalties.
• Charitable donations: If you don’t need your RMD for living expenses, consider making a Qualified Charitable Distribution (QCD). By donating your RMD directly to a qualified charity, you can exclude the distribution from your taxable income while fulfilling your RMD requirement.

Taking RMDs on time not only avoids penalties but also provides an opportunity to explore charitable giving and tax-saving strategies.

5. Make Roth Conversions

If you’re in a lower tax bracket this year or expect to be in a higher bracket in the future, consider converting part or all of your traditional IRA funds into a Roth IRA. A Roth conversion allows you to pay taxes on your contributions now, but enjoy tax-free withdrawals in retirement.

Benefits of Roth Conversions:

• Tax-free growth: Once converted, your Roth IRA grows tax-free, and withdrawals in retirement are also tax-free, making this a smart long-term tax strategy.
• Lower future taxes: By converting now, especially in a low-income year, you can potentially reduce your tax burden in future years when tax rates may be higher.
• No RMDs: Unlike traditional IRAs, Roth IRAs do not require you to take RMDs, giving you more flexibility in how you manage your retirement withdrawals.

Keep in mind that a Roth conversion is a taxable event, so you’ll need to pay taxes on the amount converted in the year of the conversion. Consult a financial advisor or tax professional to determine if a Roth conversion is right for your situation.

6. Take Advantage of Tax-Deferred Growth with an HSA

If you have a Health Savings Account (HSA), it’s one of the most tax-efficient ways to save for both healthcare and retirement expenses. HSAs offer triple tax benefits: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free.

2024 HSA Contribution Limits:

• Individuals: Up to $4,150.
• Families: Up to $8,300.
• Catch-up contribution: An additional $1,000 if you’re 55 or older.

Maxing out your HSA contributions before year-end allows you to lower your taxable income and grow your savings tax-free. Additionally, you can invest unused HSA funds in stocks, bonds, or mutual funds for long-term growth, making the HSA a valuable tool for retirement planning.

7. Charitable Contributions for Tax Savings

If you’re feeling charitable, making donations to qualified organizations before the year ends can reduce your taxable income, especially if you itemize your deductions. In addition to direct cash donations, there are other creative ways to give:

Charitable Giving Strategies:

• Donate appreciated assets: Instead of donating cash, consider donating appreciated stocks or other investments. By doing so, you avoid paying capital gains taxes on the appreciation and still receive a full deduction for the fair market value of the asset.
• Donor-Advised Fund (DAF): If you’re unsure where you’d like to donate, consider contributing to a Donor-Advised Fund. You receive the tax deduction in the year you contribute to the fund, and you can recommend grants to your chosen charities over time.

Charitable donations provide a win-win situation by supporting causes you care about while reducing your taxable income.

8. Review Tax-Deferred and Taxable Accounts

Year-end is an excellent time to review how your tax-deferred accounts (401(k), IRA, HSA) and taxable investment accounts are performing. Each type of account has its own tax implications, so structuring your investments strategically can maximize your after-tax returns.

Tax-Deferred vs. Taxable Strategy:

• Hold tax-efficient investments in taxable accounts: Index funds, ETFs, and municipal bonds tend to be more tax-efficient and are better suited for taxable accounts. These investments generate lower capital gains distributions and may offer tax advantages.
• Hold higher-growth investments in tax-deferred accounts: Since you don’t pay taxes on gains within tax-deferred accounts until withdrawal, consider holding growth-oriented investments like stocks in these accounts.
• Review dividends and distributions: Taxable accounts can generate dividend income or capital gains distributions at year-end. Consider timing your buying or selling decisions to avoid unexpected tax consequences.

Optimizing where you hold different types of investments can help you manage taxes effectively and maximize returns.

9. Plan for 2025 Tax Strategies

As you prepare for year-end, it’s also a great time to look ahead to 2025 and identify any tax-saving opportunities or adjustments that will benefit your portfolio in the future.

Look Ahead Strategies:

• Adjust your withholding: If you received a large tax refund this year or owed more than expected, review and adjust your tax withholding to ensure that you’re paying the right amount throughout the year.
• Maximize tax-deferred savings: Plan to increase your contributions to 401(k), IRA, or HSA accounts in 2025, especially if contribution limits rise.
• Explore estate planning: If you have a high-net-worth portfolio, consider working with an estate planner to develop tax-efficient strategies for wealth transfer or gifting.

Thinking ahead helps you maximize tax benefits and investment returns in the years to come.

Final Thoughts

Year-end is the perfect time to review your investment portfolio, take advantage of tax-saving strategies, and ensure that your financial plan is aligned with your goals. Whether it’s maximizing retirement contributions, harvesting tax losses, or rebalancing your portfolio, these strategies can help you make the most of your investments and enter the new year with confidence.

By being proactive and taking these steps before the year ends, you’ll be better positioned for long-term financial success in 2025 and beyond.