PIMCO Education

Year-End Planning Opportunities for Investors

The fourth quarter is a great time for investors and their advisors to connect on strategies for the year ahead. Join John Nersesian, head of Advisor Education, as he shares topics worth considering for these conversations: tax planning, structuring family meetings, charitable giving and more.

Looking for additional year-end resources, including CE and materials for investors and financial professionals? Visit pimco.com/yearendplanning

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Text on screen: PIMCO

Text on screen: TITLE - PIMCO EDUCATION, 5 Year-End Planning Opportunities for Investors, with John Nersesian, (x minutes)

Text on screen: John Nersesian, HEAD OF ADVISOR EDUCATION

Nersesian: Welcome everybody. I'm John Nersesian. Thank you for spending some time with us today to discuss some potentially relevant year-end financial planning strategies. Concepts that you may discuss with your financial advisor between now and December 31.

Text on screen: TITLE – For today: Planning Opportunities for Year-End

Image on screen: The diagram provides a list of five year-end planning opportunities, each highlighted in a rectangular box. The first on the list, in blue, is labeled “Recognize capital gains/losses.” Next, in blue, is “Rebalance portfolios.” Three more round out the list: “Fund retirement accounts” in blue, “Make annual gifts, in blue, and “Fund charitable giving, in blue.

We’re going to discuss the potential recognition of capital gains and losses in our investment portfolios as a way of saving current tax dollars.

Rebalancing portfolios a disciplined approach to instilling a quality investment management program.

We’ll discuss the funding of retirement accounts as a way of not only building our retirement preparedness but potentially lowering our taxable income in the current tax year.

We’ll examine the concept of annual giving, a way of removing assets from our taxable estates and transferring these assets to intended beneficiaries.

And then we’ll conclude by introducing the concept of charitable giving. As a way of providing benefit to those who might be less fortunate and a potential tax deduction that we can take advantage of in the current taxable year. 

Let's get started. The first strategy is to recognize

Text on screen: TITLE - Recognizing capital gains and losses as a way to save current tax dollars

where appropriate capital gains and losses. We realize that long-term capital property is taxed at a more preferential rate.

Text on screen: TITLE – 2023 Long-term capital gains and qualified dividends

Image on screen: A table shows the IRS long-term capital gains tax rates for various tiers of income. The first row shows the rate of zero for married couples filing jointly making up to $89,250, and single filers up to $44,625. Next is the rate is 15% for married filing jointly making $89,250 to $553,850, and single filers earning $44,625 to $492,300. The rate is 20% for married couples making more than $553,850 and single filers making more than $492,300. The table also notes that a 3.8% net investment income tax applies to adjusted gross income over $250,000 for married filing jointly, and $200,000 for single, creating an additional effective rate of 18.5%, increasing the 20% rate to 23.8%.

0% rate for income up to about $90,000, a 15% rate up to $550,000, and the maximum capital gain rate of an attractive 20%. Now, in addition to these statutory rates, we also have two other rates that clients should be aware of.

The ACA taxes instituted about 10 years ago.

The 0.9% rate on earned income and an incremental 3.8% on passive activities, including the recognition of short-term and long-term capital gains. The process of realizing gains and losses in our portfolios can help to save us current taxes. We know that the recognition of losses in our portfolios can be used to offset realized gains on a dollar-for-dollar basis.

Any losses in excess of the realized gain amount can be carried forward indefinitely.

Text on screen: TITLE - Rebalancing portfolios requires investors to do what is emotionally uncomfortable, but financially productive.

The second strategy that we'd like to discuss is the idea of portfolio rebalancing.

We all start our investment approach with an intended asset allocation that fits our objectives and our other constraints. But what happens when market performance begins to shift.

Text on screen: TITLE – Benefits and considerations of rebalancing portfolios

Image on screen: The diagram uses to bulleted lists to highlight the benefits and additional considerations for rebalancing portfolios. On the top, four benefits are listed, and include how rebalancing addresses unintentional portfolio allocation drift. Another benefit is how rebalancing ensures adherence to stated investment policy guidelines, reduces overall portfolio volatility with the potential for higher returns, instills a disciplined approach to investment decisions, minimizing behavioral tendencies. On the bottom half of the diagram, additional considerations include the impact of taxes and fees, sources of funds, for example deposits and withdrawals. There’s also methodology to consider, such as whether rebalancing inspires an opportunity to revisit strategic asset location.

And our portfolio allocations begin to deviate from our intended policy?

Portfolio rebalancing is the idea of bringing our portfolio allocations back in line with our original intentions, rebalancing forces us to do what's typically emotionally difficult, but financially productive.

Rebalancing ensures a sense of discipline in a very complex investment management landscape, and it has a tendency to potentially lower our volatility and to enhance our returns.

Text on screen: TITLE – Portfolio rebalancing after market decline

Image on screen: A diagram displays two pie charts and accompanying tables to show the required portfolio rebalancing after a market decline. A pie chart on the top left shows the initial allocation of a $1 million portfolio in January 2008 to hold 30% in fixed income, 25% in large growth, 25% in large value, 10% in small capitalization stocks, and 10% in international stocks. A table in the top center shows the roughly 35% to 41% declines in the equity categories and a 6% gain in fixed income in 2008. A pie chart on the top right shows the resulting allocation in January 2009 for a portfolio now worth $753,525 after the decline: 42% in fixed income, 20% in large growth, 21% in large value, 9% in small cap, and 8% in international. A table at the bottom of the diagram shows how $91,883 needs to be moved out of fixed income and spread among the other four asset classes to bring the allocation percentages back to their January 2008 percentage levels.

To illustrate, let's take a look at a hypothetical example.

Going back to the year 2008 and 2009, many of you remember that to be a very volatile period in the equity markets.

You can see a hypothetical portfolio of a million dollars back in January of ‘08, a 70:30 mix between equities and fixed income. Take a look at the returns in the middle of the slide. Performance during the year was very challenging. Most risk assets declined by over 30% or more.

We can see the resulting balance at the end of the year given these market returns. What started as a million dollar portfolio declined to approximately 750,000, a 25% overall decline in our portfolio, but just as importantly, look at the shift in the mix of assets. We are now at the end of the year, given these divergent returns, overweight fixed income and underweight equities. So, I ask a rhetorical question. After enduring such significant drawdown, how many investors were interested in buying more equities in reallocating their portfolios to an asset class that had generated such disappointing results over the prior 12 months?

A rebalancing methodology would've ensured a disciplined approach to our portfolio structures and would've potentially increased our returns during the subsequent rebound.

Text on screen: TITLE - Funding Retirement Accounts (IRAs) and Employer Plans (401ks)

Our next strategy is to fund retirement accounts. We realize that there are a variety of different ways that we can do this.

Text on screen: TITLE – 2023 contribution limits for IRAs and 401ks

Image on screen: A table shows contribution limits for six different types of retirement accounts, along with catch-up contributions amounts for taxpayers 50 and older. For the traditional individual retirement account (IRA) and Roth IRA, the regular contribution amount is $6,500, with a catch-up provision of $1,000. For 401(k) and 403(b) plans, the limit is $22,500, with a catch-up provision of $7,500. For a SIMPLE IRA – short for savings incentive match plan for employees – the limit is $15,500, with a catch up contribution limit of $3,500. For simplified employee pension (SEP) plans, the limit is $66,000, with no catch-up contribution, and for total defined contribution plans, the limit is $66,000, with a catch-up limit of $7,500. The table also lists phase out ranges by adjusted gross income, applicable to traditional IRAs, Roth IRAs, and SEP plans.

Traditional IRAs and Roth IRAs have a maximum contribution limit of $6,500. Of course, please recognize that only under certain AGI limitations, do we receive an income tax deduction for our IRA contributions and Roth contributions are also subject to similar AGI limitations?

For those of us who participate in employer-sponsored plans, the good news is that the amount to contribute in a given year is $22,500, often through automatic payroll deductions. And for those of us over the age of 50, there's an incremental opportunity to contribute an additional $7,500 as a way of catching up in our retirement preparedness.

For the self-employed individuals, there are even greater opportunities to save. SEP-contribution limits today are over $60,000, and for those who want to be even more aggressive with their retirement funding, individuals can consider a defined benefit program, which may afford the opportunity to contribute hundreds of thousands of dollars to our retirement accounts.

In most instances, these retirement account contributions serve not only to build our retirement nest egg, but to lower our taxable income, saving us tax dollars in the current tax year. Our final strategy

Text on screen: TITLE - Making annual gifts to family and other beneficiaries

is to consider annual gifting among family members or other intended beneficiaries.

Text on screen: TITLE – Considerations for making gifts

Image on screen: Using a bulleted list of items, the slide breaks down the rules and considerations for making annual gifts, and includes an example. The annual gift exclusion is now $17,000 per donor per year. Gift splitting is allowed for married couples to increase the limit to $34,000 per year. Direct payment of medical and education expenses are not included in the annual limit. Amounts in excess of annual limit require form 709. The annual gift also reduces the value of current taxable estate without impacting unified credit. Gifts also shift future appreciation out of the estate.

The annual gift exclusion for 2023 is $17,000 per donor per recipient.

Text on screen: TITLE – An example – Annual gift to married couple with children and grandchildren

Image on screen: Using a bulleted list of items, the slide breaks down the rules and considerations for making annual gifts, and includes an example. The example is to consider one of a married couple with three married children, each with three children. This allows for annual gifts of $510,000 by using gift splitting.

So a husband and wife who hypothetically want to support their children or their grandchildren, can give up to $34,000 in a single calendar year to an unlimited number of recipients.

This premise of making an annual gift helps to lower our estate tax liability in the future and may potentially transfer any appreciation out of our taxable estate as well.

Text on screen: TITLE – An example – Annual gift to married couple with children and grandchildren

Image on screen: Using a bulleted list of items, the slide details the rules and considerations for funding 529 college savings plan as follows: provides tax-free growth for distributions used for qualified educational expenses; allows for qualified distributions for tuition only for grades K-12, limited to $10,000 annually (subject to state provisions); flexibility to change beneficiaries; Provides front loading of annual gifts: 5 X $17,000 = $85,000; reduces taxable estate for parents/grandparents; may provide state income tax deduction; may avoid financial aid impact depending upon timing, example: $85,000 at 7.00% for 17 years = $268,499.

Many families leverage the annual gifting that they do, by using these dollars to contribute to 529 plans as a way of providing a tax sheltered way to increase dollars for future educational needs.

Text on screen: TITLE - At year end, strategically funding charitable giving

Our final year-end strategy is to consider funding our charitable giving.

We know that annual giving in the year 2022 reached almost $500 billion here in the United States.

Text on screen: TITLE – Charitable Giving

Image on screen: The graphic, which is displayed as arrows pointing toward the right for each structure, moves left to right in the order of least to most complex structure. The first column, on the left-hand side, features direct gifts, with an icon of an upward facing palm and dollar sign, with a bulleted list underneath. It’s the least complex charitable structure, and includes cash, personal property, life insurance, real estate, and qualified charitable distributions. Moving rightward, the next column represents philanthropic structures, represented by the icon of a building. This category includes donor advised funds, community foundations, and supporting organizations. Next is split interest vehicles, represented by an icon of arrows pointing up and down, and includes charitable remainder trusts, charitable lead trusts, and pooled income funds. The most complex structure, furthest to the right, shows an icon of a house, representing private foundations, which include family and operating foundations.

So we know that many individuals are expressing their charity by giving money or property directly to intended recipients. There's a number of reasons as to why we as a country remain so philanthropically inclined. It's this opportunity, of course, to provide assistance to those who are less fortunate. It's the idea that charitable gifts are one of the few itemized deductions that are still available to us in the tax code. It's also this idea that charitable giving may provide, an intended tax benefit in the year of the completed gift.

We encourage you to have a conversation with your financial advisors around the most effective way to fulfill your giving, the type of property to be given, the timing of your gift and the amount of your gift. To consider a variety of different strategies for the most simplistic of giving cash to the most complex, including split-interest vehicles or maybe even private foundations.

Text on screen: To continue the conversation speak with your financial advisor or visit pimco.com/yearendplanning

We hope that you've learned something from our conversation today and we encourage you to speak with your financial advisor for additional consideration of these valuable strategies.

Text on screen: PIMCO


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