Welcome to the October edition of FAQs and RAQs!
Here we tackle client questions—some asked Frequently, others Rarely.
FAQ: What year-end portfolio tax strategies might make sense for my situation?
It’s that time of year when “tax strategies” start popping up in conversation. As always, the first thing to do is consult with your tax preparer!
That said, below are several considerations as we approach year-end.
As usual, the first thing that gets tossed out is tax loss selling. But unless we see a significant market pullback before year-end, that strategy might be off the table for most investors.
To complicate things further, we could be staring down another year of hefty capital gain distributions from mutual funds. So the question becomes: What can we actually do? And did the recent tax bill offer any real relief?
Well, here’s what we’ve seen over the years: while there are always headlines about tax cuts or simplifications, the reality is that more limits, phaseouts, and surcharges keep getting layered into the tax code. And they’re not always easy to spot. They’re often tied to different income definitions—Adjusted Gross Income (AGI), Modified Adjusted Gross Income (MAGI), and Taxable Income—each with its own set of rules and thresholds.
As it stands today there are many thresholds to keep in mind. Here is just a partial list (for illustration purposes only):
- $600,000 – Taxable Income
- $533,400 – Taxable Income
- $500,000 – AGI
- $236,000 / $212,000 / $150,000 / $106,000 / $75,000 – MAGI thresholds
- $96,700 / $48,350 – Taxable Income thresholds
Each of these has special meaning, and may or may not apply to your unique situation (again, talk to your tax preparer!). The key point is: the tax code has become more complicated. And we haven’t even touched on tax brackets yet!
So what’s a smart move in this environment?
One strategy we’ve been using is setting up a Donor Advised Fund (DAF). You can fund it with appreciated securities or mutual funds with large capital gains. That could potentially:
- Reduce AGI, which in turn reduces Taxable Income
- Avoid realizing capital gains
- Rebalance your portfolio more efficiently
- Potentially take advantage of the new State and Local Tax Deduction cap.
- And—when paired with tax bracket management—it could create room for a partial Roth conversion.
It’s potentially a win-win-win as it relates to your tax liability, your financial planning, and your giving strategy. (The only "loser" might be the IRS when it comes to tax receipts!)
Again, please consult your tax preparer for advice specific to your situation.
RAQ: What is a securitized bond and are they right for my portfolio?
A securitized bond is backed by a pool of loans—like mortgages, auto loans, or credit card receivables—rather than a single borrower. Payments from borrowers flow through to investors, which are sliced into different “tranches” with varying risk. These bonds can sometimes look attractively priced because investors demand extra yield for complexity, less trading liquidity, and the uncertainty of these bonds. The 2008 crisis also left a lingering stigma. In short, securitized bonds may offer higher yields simply because many investors avoid the homework!
Are they right for your portfolio? That question can only be answered with your Financial Advisor. Generally speaking, however, we think securitized bonds might be best owned through a mutual fund or ETF structure rather than purchased individually--again, due to the complexity involved.
Have a question?
Drop us a line at carlsongroup@rwbaird.com. We’d love to hear from you!
All investments carry risk, including loss of principal. Past performance is not a guarantee of future results. Baird does not give tax advice. Please contact your tax preparer.