With changes looming in 2016, year-end tweaks to your retirement account can help prepare for what's ahead.
Interest rates will likely rise and Medicare costs will increase while Social Security payments remain flat, said Lawrence Sprung, president of the Hauppauge wealth management firm Mitlin Financial Inc. Rates rising "is a matter of when, not if," he said. "As we enter this point where rates are going higher, people should make sure that their portfolios are positioned appropriately to withstand that increase." One way to do that is to choose shorter-term bonds, he said.
A math major in college, Sprung, 41, is a certified financial planner. He worked for Salomon Smith Barney and Bank of America before starting Mitlin in 2004.
What's a good strategy for hedging your bets if interest rates rise or remain the same?
There is a good chance [the Federal Reserve] will raise rates come the December meeting. I don't think they're going to go up at an alarming rate. I think it's going to be a slow and steady process, which will allow people to plan appropriately to be prepared for rates increasing. There's really no way to hedge your bets and be 100 percent safe, or free from any volatility, but people should make sure their portfolios get reviewed to make sure that they're not going to get whipsawed if rates were to go up quickly.
How would you do that?
Longer-term, higher-quality bonds will be more affected when rates rise, so you want to make sure that you're not invested too long on the yield curve. Thirty-year bonds have much greater volatility if rates rise very quickly than if you're in a portfolio of 5-year bonds.
Why is that?
Because bond prices and interest rates are inversely proportional. So if interest rates rise, bond prices or principal values go down. If rates decrease, they go up. The longer the term of the bond, the more volatile that will be to the up or downside depending upon what goes on with rates. What'll happen is when they go to sell that 30-year bond that they own, the value that they get upon the sale is going to be less.
What else should people keep in mind for their finances at year's end?
First, those 70½ or older must take their required minimum distributions or they'll get taxed 50 percent of what they were supposed to take out. So, if I'm supposed to have an RMD of $10,000 and I don't take it out before the end of the year, I owe $5,000 tax on that.
And for those still working?
If you have a 401k, 403b, or IRA, look at how much you've contributed year-to-date and see if it would make sense for you to max it out if you haven't already, if you need the deduction prior to the end of the year. The deadlines for 401ks and corporate plans are Dec. 31. If it's a SEP [Simplified Employee Pension] or IRA account, you have until the tax filing deadline.
What's your year-end
See if there's an opportunity to do any tax-loss harvesting. Let's say you have a couple thousand dollars' worth of gains this year so far and there are some items in your portfolio that are not doing too well or haven't been for a while. It may make sense to sell them now so you can offset those previous gains from earlier in the year.
What about capital gains?
For mutual funds in a retirement account, be aware of any capital gains that they're distributing, whether they're short or long term, because most of those distributions start in November and are distributed in November and December. If you're allocating new money to your non-retirement portfolio, you don't want to put money in a fund today and you're going to end up with a $5,000 capital gain tomorrow, when if you waited a day or two, you wouldn't have incurred it.