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By Jason Stipp | 09-30-2010 05:28 PM

Five Key Moves for the Fourth Quarter

Morningstar's Christine Benz recommends investors consider tax planning, IRA conversion opportunities, and energy credits before year-end.

Jason Stipp: I am Jason Stipp for Morningstar, and welcome to the Friday Five.

It's Oct. 1, and it's the beginning of the fourth quarter. We all know how time flies, so to make sure that you get everything done that you need to, Morningstar's Christine Benz, director of personal finance, is here to tell us about five key portfolio maneuvers to undertake in the fourth quarter.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So, today Christine, we're going to talk a little bit about tax planning and your purchases and sales.

We are going to talk about maximizing those tax-sheltered accounts.

We are going to talk about not forgetting your estate plan.

Making any Roth conversions that you think would be a good idea for you.

And finally taking full advantage of those energy efficiency credits that are out there.

So, number one, Christine, I think this is something that you might recommend on any given year as something to consider, a strategy to consider, but it could be particularly important in our current environment and that's considering your tax plan and your purchases and sales. Why is that so important this year?

Benz: Yes, Jason, it's arguably something you should do anytime in the fourth quarter, but with tax rates set to go up in 2011, I think it's a particularly good time to take stock of any holdings that you have, where you have big gains in those holdings and you were considering selling anyway, for whatever reason. So, you can take the gain now and pay taxes at a lower rate than would be the case in 2011, which would be a really smart move.

Stipp: Particularly, if that's a long-term gain anyway, so go ahead and take it when the rates are likely to be lower.

Then on the selling side, because you may have a bigger tax bills in the future, an important tool for you to potentially have to give you flexibility is harvesting tax losses, so how would that work?

Benz: Right. So, I always say scour your portfolio for tax-loss candidates, so things that you had wanted to sell anyway and so you can use those losses to offset capital gains or if you don't have any capital gains, you can use them to offset ordinary income and they can also be carried forward into subsequent years. So, those losses can be really valuable from a tax-planning perspective.

Stipp: This also brings up an important point about keeping track of your cost basis, which is something that can be a headache, especially if you haven't been as meticulous about it as you should be.

Benz: Well, especially if you are dollar cost averager it can really get to be a headache. So, I say, keep a simple spread sheet in which you are tracking your cost basis, so when you make purchases or sales or have dividends or capital gains reinvested, keep track of that. Increasingly I am finding that fund companies and brokerage firms are making it easier for clients to keep track of cost basis, too, so that's a help.

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