Yellowstone Financial, Inc.

Clear your financial deck before the holidays

Investors have been so preoccupied with the gyrations in world markets that we risk neglecting the end of year financial strategies that can have measurable impact.

Of course, the right moves for your situation may not apply to another investor. Rather than making hasty moves amidst the holiday rush, take action now.

Harvest capital losses

The wildly oscillating market has a silver lining: There may be days when at least one of your taxable investments can be sold for a loss. By selling stocks and mutual funds that have declined in value, you generate capital losses that can offset capital gains in other parts of your portfolio.

You also can use up to $3,000 of capital losses to reduce taxable ordinary income. Whatever capital losses that go unused this year can be carried forward to future years. When harvesting capital losses, make sure you don’t buy identical investments within 30 days in order to avoid a disqualifying wash sale.

Roth conversions

Converting a traditional IRA to a Roth IRA introduces invaluable tax diversity into your portfolio. Once you get funds in a Roth, they can grow tax-free as long as you live. Anything left to your heirs will get tax-free growth over their lifetimes.

When you convert to a Roth IRA, generally the amount converted is added to your taxable income. In almost every case, it makes sense to increase your taxable income to at least to the top of the 15 percent tax bracket with a conversion.

For those married filing jointly, this means you can bring your taxable income after deductions and exemptions up to $69,000 for 2011.

Charitable donations

In order for donations to be deducted from your 2011 taxes, they need to be completed by the end of the year. If this is a high income year and you have a charitable intent, you can start a donor advised fund with Vanguard or Fidelity that permits you to donate a large lump sum, take the immediate charitable deduction, and then use this fund for years to come to meet your philanthropic goals.

If you are over 70 and take required distributions out of your traditional IRAs, you have until the end of January to direct those funds to go directly to charity free of tax for 2010.


This is the season of giving, and each of us has $13,000 annual allowance for gifts to non-spouses. If you are married and are giving funds to a couple, you can multiply the allowed gift to $52,000.

If you’re generous enough to be gifting more than this amount, then you can still avoid usurious estate taxes by using the $5 million lifetime gift limit per individual. Just make sure you file the gift tax return if you go above the annual allowance.

College savings plans

In Colorado we have an unusually generous tax break for putting funds into a 529 college savings plan. You get the upfront state income tax deduction with few limitations, and then when funds are used for higher education expenses, the earnings are not subject to federal and state income tax.

Take required IRA distributions

If you are older than 701/2 and have an IRA or other retirement plan or have a so-called inherited IRA, you should be aware of the required distribution that must be taken from the account by the end of the year. If you fail to do so, the IRS levies a monstrous 50 percent penalty on the required distribution.