Year End Preparation

As the year draws to a close it is a good time to take a look at the strategies you used in a difficult year for the market and see if you would make changes. Often changes can be made that will lower your taxes in the present year and still keep your overall plan in effect. This article will review some easy items you can do now.

Sell Losers and Buy a Similar Investment

The Nasdaq 100 trust, QQQ, has traded between $60 and $120 this past year.

Lets say you bought QQQ at $90 and it is now at $70. You can sell QQQ and buy a similar index like XLK or IYW and take the short-term loss in QQQ on your 2000 taxes. They are similar but not identical so this strategy should pass muster with the IRS. If you really, really want to own QQQ over XLK or IYW for the long term, then you can buy back QQQ in 2001 after you wait the required 30 days (see a tax expert to get the exact details and if this strategy makes sense for you).

This chart shows just how close they track.

Notice that the iShares, IYW, are new and don't have a full year of history.

This link will give you more information for Index Shares on Sector Indexes.

Switch to Index Funds

Many have significant assets outside IRAs and 401Ks so tax efficiency is of key concern. I sold a managed European Mutual fund this year and bought a similar amount in a European Index fund. This was done with taxable money. I did it this year as the fund was down and switching will have lower capital gains when funds are down.

Also, many high technology funds will pay a huge distribution this year. Maybe you don't want to sell the fund and pay taxes on the appreciation, but you can invest the distributions in a tax efficient index fund. Tell the fund to send you the money and then buy an appropriate index or sector spyder. Feel free to ask us for help here on what would be an appropriate, tax efficient fund to do this trick with.

You can do these exchanges any time, but now is a really good time because the funds are mostly down now and you pay less capital gains when you sell to move to an index or tax managed fund.

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