.png)
By Michael Mooney, Financial Advisor
LOOK BACK: Investing at all-time highs, one of the most bullish forward-looking indicators.
The highlights:
The market seems expensive, but as history has shown us, we believe that investing at all-time highs is often considered one of the most bullish forward-looking indicators.
Exiting the market because it is at an all-time high can potentially be a big mistake. On 1/19/24, the S&P 500 closed at a then-high of 4,840. If you sold and went to cash at that time, you would have missed a return of over 17% from then until Halloween.
As it has seemed the case over the past three years, the words and actions of the Fed will likely have a significant impact on the markets in 2025. I don’t see a catalyst for a major selloff on the horizon, but a correction (a pullback of 10% from the market’s recent high) can happen at any time.
On average, the S&P 500 has a correction once per year, with the last one in Q4 2023. It is possible we could see volatility early in 2025 given the fresh new tax year.
Whether 2024 was a record year for your business or you had investment gains/income, See our 12 tax saving tips to capture before year-end and prepare for the upcoming tax season.
Come & gone, the anticipation and uncertainty of the election.
2023 was a bounce back for the markets after a down 2022, and that momentum has carried forward into this year.
Despite cutting interest rates on two occasions for a total of 0.75% (0.50% in September and 0.25% in November), the 10-Year Treasury rose steadily from a recent low of 3.6%, immediately before the first rate cut, to over 4.4% following the election.
On average, the S&P 500 has a correction once per year, with the last one in Q4 2023. In the chart below, you can see that it is part of the natural trend when looking historically. It is possible we could see volatility early in 2025 given the fresh new tax year as well.
How frequently are market corrections following all-time highs?
See the upside as a long-term investor.
Unlike recent rises in the 10-Year Treasury, the stock market has remained resilient during this time and is up over 6% during that same period.
You may feel fear over downturns. The below, chart shows that whether it is all-time highs or lower-growth years, investing throughout could still provide overall growth.
YOUR GAME-CHANGING QUESTION ANSWERED: How do I capture tax savings before year-end and prepare for the upcoming tax season?
Given the back-to-back positive years in the market, many investors are coming into year-end with large unrealized gains across positions in their portfolio. For investors looking to raise cash or just rebalance their portfolio, the prospect of selling prior to year-end and paying capital gains within four months of taxes being due seems less appealing than to kick the can down the road to 2025. It is possible we could see volatility early in 2025 given the fresh tax year, so we believe it's best to do a heavy look at tax implications.
1. Meet with your financial advisor.
Review your investment plan; adjust your investments to align with financial goals while considering tax implications. This can help optimize capital gains and losses.
2. Maximize retirement contributions.
Contribute to your 401(k), IRA, or other retirement accounts. The 2024 contribution limits for 401(k) plans are $22,500 (or $30,000 if you're 50+ taking advantage of the catch-up contribution). For IRAs, it's $6,500 (or $7,500 if you're 50+). If this is a high-income year for you, we recommend making pre-tax contributions (401(k), Traditional IRA, etc.). If you are expecting future increases in income, we recommend Roth 401(k) or Roth IRA contributions, if applicable.
3. Harvest tax losses.
While this is easier said than done, after years like 2023 and 2024, you can offset capital gains by selling underperforming investments. You can deduct up to $3,000 in losses against other income if your losses exceed gains. We also recommend checking with your accountant to see if you may carry forward losses from previous tax years.
4. Donate to charity.
Here is a great article and quick-hit guide on charitable giving. If you itemize your deductions, make charitable contributions to qualified organizations. Keep receipts to claim deductions. If you do not normally itemize, you can also look to “double up” contributions in order to itemize alternate years (i.e. contribute $10,000 every other year to charity versus $5,000 each year).
5. Use Flexible Spending Accounts (FSAs).
Spend any remaining FSA funds before year-end to avoid losing them unless your plan has a rollover or grace period.
6. Review tax witholdings and pay estimated taxes.
Check if you've withheld enough taxes for the year. Adjust through your employer to avoid penalties or overpayments (or through Ascend Advisory if you have taxes withheld from your retirement accounts). If you're self-employed or have significant non-wage income including investment income, ensure you've paid enough in quarterly taxes to avoid penalties.
7. File with FinCEN.
The Corporate Transparency Act (CTA) was enacted in 2021, and went into effect on January 1, 2024. If you own or operate a small business, you are required to “File with FinCEN” by year-end in order to avoid fines and penalties, up to $10,000 per violation. The filing deadline is January 1, 2025.
8. Complete required minimum distributions (RMDs).
Review with your financial advisor if you are 73+ or if you have an Inherited IRA, make sure that you complete your RMDs for 2024. If you have an Inherited IRA that is subject to the 10-Year rule, you may also want to start taking distributions to avoid taking large lump sum distributions in future years.
9. Invest in a Health Savings Account (HSA).
If you have a high-deductible health plan, contribute to an HSA. For 2024, the limits are $4,150 for Individuals and $8,300 for families (plus $1,000 extra if you’re 55+). Contributions are tax-deductible, and withdrawals for medical expenses are tax-free. Additionally, if you are 65+, you are able to take penalty-free distributions from your HSA for any reason. We believe there is no reason to ever stop contributing (as long as you are eligible) even if the account is larger than your future medical needs. Read more on benefits tips here.
10. Check for tax credits.
Explore potential credits, such as the Child Tax Credit, Earned Income Tax Credit, or education credits, if you qualify.
11. Make 529 contributions.
Contribute to a 529 plan to save for education expenses; Many states offer tax deductions or credits for contributions, and the earnings grow tax-free if used for education.
12. Organize records.
Gather receipts, W-2s, 1099s, and other tax documents early. Use this time to ensure you're prepared to file or provide your accountant everything they need.
*S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.
Wells Fargo Advisors Financial Network is not a legal or tax advisor.
Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.