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Ponderings For the Week of December 9 to 15, 2019

Upbeat Jobs Report Salvages the Week for Stocks

A surprisingly strong November employment report issued last Friday allayed fears about the economy’s waning strength and the delay in reaching a tariff accord with China. The unemployment rate declined to 3.5%, a 50 year low. High consumer spending was icing on the cake, although the pundits preferred to ignore record consumer indebtedness. Auto loans are a canary in the coal mine of looming repayment problems. Car loan amounts average over $32,000 and loan duration is north of six years.

Friday’s whopping gain made up for steep losses earlier in the week. Large cap stock indexes barely managed to move, but small- and mid-cap indexes rose a bit more than ½% as did overseas stocks. So diversified investors enjoyed small gains overall. Despite a troubling start to December, investors can breathe a little easier as we enter the second week of the month.    

Late Year Tax Smart Strategies

Taking action to reduce your income tax bill is one of the easiest ways to increase your wealth. Taxes likely take a sizeable chunk out of your hard-earned income. Here are some last minute suggestions that will reduce your taxes either this year and/or in future years.

  • Charitable contributions. Legitimate charities both need and deserve your support. You’re better off financially donating appreciated securities than cash, but cash is still going to fetch you a tax deduction. There still may be time to donate any useable but unneeded clothing and furniture as well.
  • Additional contributions to retirement plans. Any additional contributions you can make this year to retirement plans that are made with pre-tax dollars or are tax deductible will reduce Uncle Sam’s exaction from your coffers. Even if you don’t get a tax break this year, it still makes a lot of sense to put some money away for retirement and enjoy tax-deferred buildup in your retirement accounts in future years.
  • Sell losing investments. While stocks have generated some boffo gains this year and in past years, you still may have some losses among your taxable brokerage account holdings. This is a good time to sell some of those losers. You can buy the same investment back 31 days later without running afoul of the wash sale rules or if you sell a losing mutual fund or ETF, you could replace it immediately with a similar fund. If you can’t use all of the losses you take this year to offset other investment income, you can use up to $3,000 additional to reduce your other income and you can carry any unused losses forward to later years.
  • Roth IRA conversions. While a Roth IRA conversion will cost you money when you make it, the tax savings in future years can be stupendous. While you have until next April to contribute to a Roth or traditional IRA, the deadline for a 2019 Roth IRA conversion is December 31.



Smart Money Tips

  • Too much money in a single stock can be harmful to your financial health. While stocks have risen substantially this year, some individual stocks have had large losses. Even several of the mighty have suffered, including Alcoa (-22%), Deutsche Bank (-11%), Pfizer (-9%), and Walgreens (-12%). No stock is immune from such a fate and that’s why you should avoid investing too much money in a single or just a few companies, even if they are leaders in their industries - unless you plan to hold onto them for a long time to come. For those who have substantial holdings in their employer’s stock or who have inherited or accumulated a large position in a single stock, one often-used rule of thumb is to hold no more than 10 to 15% of your total investments in a single issue unless you truly could afford to lose a large portion of the money.
  • If you have income from self-employment, set up a Solo 401(k) plan before year-end. Solo 401(k) plans, also called Self-Employed 401(k) plans or one-participant 401(k)s, are the best way for most people with income from full or part-time self-employment to make tax-deductible retirement plan contributions. In fact, if you are currently contributing to a Keogh plan or Simplified Employee Pension (SEP) plan, you’ll probably be better off with a Solo 401(k). Ask your tax preparer or visit your mutual fund or brokerage company website for information on plans that they may offer. They’re easy and probably free to set up, but you have to do so by the end of the year even though you can make the contributions next year before you file your income tax return and still take a 2019 tax deduction.



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