A checklist for year-end financial reviews

Now is a great time to take steps to finish 2009 and begin planning for 2010. With a few months left, there is still time to make intelligent financial decisions, assessments, and adjustments before calendar year-end. Be sure to consult with qualified tax, estate planning, and financial advisors before implementing the following ideas and strategies.

Reassess your asset allocation policy
If you do not have a strategy for your investments, now is the time to put one in place. If the market roller coaster of the past 18 months has sent you on frequent visits to your cardiologist or therapist, perhaps now is a good time to reassess what you are trying to accomplish and how much “pain” you’re willing to endure to get there.

Portfolio rebalancing
Are your brokerage and retirement plan statements sitting unopened in a drawer somewhere? Investment accounts that have been left unmonitored throughout the turmoil of 2008 and the strong rebound since early March may be seriously out of line with your objectives. Rebalancing the portfolio assumes that you have an investment plan in place that is truly aligned with your time horizon, risk tolerance, and return objectives. Open your statements and consider rebalancing the portfolio to an appropriate target asset allocation.

Tax-loss harvesting
The financial storm of 2008 and early 2009 has a silver lining: significant tax-planning opportunities surfaced as a result. Harvesting losses involves selling losing positions to avoid being taxed on some or all of any capital gains realized from selling other securities at a profit. If you have unrealized losses in a taxable portfolio, consider swapping out of existing positions to “realize” the tax loss, and replace the position with a comparable, but not identical security. Known as a “tax-swap”, this strategy allows an investor to take the loss on the investment sale, and utilize that loss against gains in other investments (including businesses, real estate, collectibles, etc.) that are sold at a profit. Losses over and above the amount of any realized capital gains can be used to offset up to $3,000 of ordinary income or carried forward to offset capital gains or ordinary income (not to exceed $3,000) in future years. In addition to the potential tax benefits, you’ll take advantage of an opportunity to clean up stale, underperforming positions and move into more promising areas. Be aware of the “Wash-Sale Rule”, which negates the tax benefit taken from a security sold at a loss and then repurchasing the same, or a substantially identical investment before 31 days have passed.

Consolidate your accounts
Do you have multiple investment accounts, 401k plans from previous employers, or IRAs at various financial institutions? Consider the benefits of a consolidated investment portfolio, such as a well structured and coherent asset allocation strategy, fewer statements and 1099 forms, and potentially reduced
investment expenses.

Consider converting a traditional IRA to a Roth in 2010
A Roth IRA may be attractive because qualifying distributions are tax-free, account owners are not subject to required minimum distribution (RMD) rules, and because they provide tax and estate planning flexibility. Currently, only taxpayers below a certain income level (Modified Adjusted Gross Income below $100,000) are able to convert a “pre-tax” traditional IRA to a “post-tax” Roth. Beginning on Jan. 1, 2010 the $100,000 income ceiling will be eliminated. The assets that you convert are subject to federal and state income tax – to the extent that the converted amount represents pre-tax assets. For conversions made in 2010, you can choose to have the amount reported in equal instalments over a two-year period. Half the income will be reported on your 2011 tax return, and the remaining half in 2012. However, the fact that you will qualify to convert assets to a Roth IRA doesn’t necessarily mean that you should. The time to begin thinking about and planning for this opportunity is now.

Review beneficiary designations
Beneficiary designations are applicable to Life Insurance Policies and Qualified Retirement Plans (401k Plans, IRA/Roth IRA Accounts, and Deferred Compensation/LTIP Plans). A beneficiary designation determines how these assets will be distributed upon the death of the owner. As life changes, your desired transfer of assets may have changed as well. Make sure that your designations are in line with your wishes and your overall estate plan.

Time flies, and 2009 will be over before you know it. Be proactive and take action now to get your financial house in order. An end of the year financial review may uncover a number of issues and opportunities. Don’t be afraid to ask for advice and insight from advisors you trust to ensure things are done properly.

John Sammut helps individual investors, families and corporations protect their purchasing power and improve investment results. You can reach Sammut by telephone at (800) 343-3036, or visit him at www.johnmsammut.com

The opinions expressed in this report are those of the author and are not necessarily the same as those of RBC Wealth Management or its research department. RBC Wealth Management did not assist in the preparation of this report and makes no guarantees as to the accuracy or the reliability of the sources. This information should not be construed as a research report, as it is not sufficient enough to be used as the primary basis of investment decisions. Clients should work with their financial consultant to develop investment strategies tailored to their own financial circumstances.

RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax implications of your investments should be made in connection with your independent tax advisor.

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