There are several strategies to help you take advantage of any remaining opportunities to enhance your flexibility to manage your future tax liabilities as we get closer to year-end. (UBS)

1. Enhance your tax diversification
There's no way to perfectly plan for future tax rates, but there are several strategies that investors can use to manage their tax liabilities. As we get closer to year-end, you can use these strategies to help you take advantage of any remaining opportunities to enhance your flexibility to manage your future tax liabilities.


Tax diversification is one key strategy for managing the impact of changing tax rates. Building a diverse mix of taxable, tax-deferred, and tax-exempt assets will allow you to draw from each account type strategically and dynamically, allowing you to manage your taxable income—and thus your tax burden—on a year-to-year basis.


During your working years, we recommend using our Savings waterfall worksheet and our report on Traditional versus Roth accounts to direct your hard-earned savings toward the account types that are likely to give you the highest after-tax growth potential.


During your retirement years—especially in early retirement, in the “gap years” before you collect Social Security income and need to take required minimum distributions (RMDs)—you may want to consider partial Roth conversions as a strategy for increasing your tax diversification.


Roth conversions allow you to move some of your wealth from tax-deferred accounts—such as a Traditional IRA/401(k)—into a Roth IRA/401(k). 1 Although you will need to pay income tax on any Roth conversion, Roth IRAs and 401(k)s offer the potential to provide you with tax-free growth and income in retirement.


For an overview of how we recommend deciding how much to convert in a given year, please see our report, Last chance: You should consider a partial Roth conversion this year. We recommend discussing this decision with your financial advisor and tax advisor, who are best positioned to help you make this decision in light of your family's unique circumstances and objectives.


2. Give to others, not the IRS
In our recent report, Give to others, not the IRS, we outline several strategies that can help you to enhance the after-tax impact of your hard-earned savings.


One such strategy—which may be appropriate if you need to take an RMD from your IRA and you are at least age 70½—is a qualified charitable distribution (QCD). 2 Each year, you and your spouse may each donate up to USD 100,000 from your respective IRAs toward your RMD, and it won’t be subject to federal income tax. This strategy effectively allows you to make a tax-deductible distribution from your IRA, without needing to itemize your taxes.


It’s important to note that this gift must be made directly from a Traditional IRA to the charitable organization, and it must be completed by year-end.


While QCDs cannot be made to donor-advised funds or private foundations, you are allowed to make a one-time election of up to USD 50,000 (indexed for inflation) per individual to a transfer via a QCD to a charitable gift annuity (CGA), charitable remainder unitrust (CRUT), or a charitable remainder annuity trust (CRAT). But there are restrictions on the type of CRUTs and CRATs that can receive a QCD. For instance, they must be funded exclusively by the QCD. If you are charitably minded, and you also want more of your investment assets into tax-exempt accounts for noncharitable objectives, we recommend pairing QCDs and Roth conversions in the same year. But keep in mind that RMDs aren't allowed to be converted to a Roth IRA, so make sure you satisfy that year's RMD first (your RMD dollars have to go to a taxable account, not a Roth IRA). For more information on QCDs, please see Three strategies to improve your after-tax wealth potential.


3. Harvest capital losses
Over time, investments in your taxable accounts (your savings outside your IRA, 401(k), and other tax-advantaged accounts) will accumulate significant capital gains. When you transition from your working years into retirement and begin to tap into your portfolio growth to finance your spending, it will likely trigger capital gains taxes.


Tax loss harvesting—which involves realizing capital losses while staying fully invested—can help you to reduce this tax burden, and it can help add to the after-tax return potential of your taxable assets. It may seem counterintuitive to sell investments after they’ve experienced a drawdown—after all, this goes against the adage “buy low, sell high”—but there are three good reasons why tax loss harvesting can be an effective strategy:


  • To lower your taxes this year
  • To keep your “tax dollars” growing
  • To (possibly) avoid capital gains taxes altogether

We recommend implementing tax loss harvesting throughout the year as opportunities present themselves. If you are invested in a well-diversified portfolio, it's likely that there will be a few opportunities each year. Importantly, we don't see any reasons not to harvest capital losses in your taxable accounts, as long as you are able to implement loss harvesting without taking on extra risk. But make sure you're watching out for the “wash sale” rule: You cannot have both “buy” and “sell” trades in the same security (or any investment that the IRS considers “substantially identical,” including warrants and call options) within 30 days of one another.


To learn more about tax loss harvesting see our report Tax loss harvesting: 3 reasons, 3 tips, and 3 strategies to help improve after-tax returns. You may also refer to Exchange-traded funds: ETF tax swaps, which outlines replacement securities to consider when implementing a tax loss harvesting strategy.


Main contributor: Ainsley Carbone


Read the original reportModern Retirement Monthly: Year-end priorities and a preview of 2024 , which was published on 29 September 2023, and visitubs.com/retirementguidebook for the UBS Chief Investment Office's one-stop shop of retirement planning advice whether you are saving for, transitioning to, or already in retirement.


1Not all 401(k) providers allow participants to implement an in-plan Roth conversion. If they do not, you may need to consider rolling your 401(k) into an IRA (if you're eligible) to implement the Roth conversion. Please refer to the UBS IRA Rollover Guide, available here, for key considerations prior to deciding whether to roll your 401(k) to an IRA.


2It's important to note that QCDs are only an option if you are at least age 70½, can generally only be done with Traditional IRA assets, and cannot exceed the annual limit (USD 100,000 in 2023). Another limitation is that, if you are also planning to make deductible contributions to your IRA during any tax year beginning with the year you turn age 70½, that deductible contribution may reduce the portion of QCDs that you're able to exclude from future taxes.