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By Jason Stipp | 12-16-2011 03:00 PM

Tax-Saving Tactics for Your December To-Do List

Morningstar's Christine Benz offers tips on tax-loss selling, required minimum distributions, 401(k) contributions, and energy credits.

Jason Stipp: I am Jason Stipp for Morningstar.

2011 is heading toward the history books, but investors still have time to do a little maneuvering to help maximize their tax savings and bolster their retirement accounts.

 Here with me to offer some tips and a short list of year-end 'to-do' items is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: People have a lot of lists, a lot of things that they need to get done before the end of the year.

But there are some important, and in some ways, not too difficult tasks they can do to really get their financial house in order. The first one has to do with some tax savings that you can get by tax-loss selling or tax harvesting. It sounds like a complicated concept. Can you break it down for me?

Benz: Well, it's been a volatile year in the market if you are an investor. So the goal of tax-loss selling is that you're actually looking for securities in which you have a loss within your taxable account. So you are holding them at a price that’s below what you paid for them. And you can actually sell the security, book a loss, and use that loss first to offset any capital gains elsewhere in your portfolio, and if you've cleared out your capital gains and zeroed those out, if you still have money left over [from the tax-loss selling], you can use that tax-loss to offset ordinary income. If you have done all that and still have tax losses left over, you can apply them to future years' capital gains and, in turn, income.

Stipp: So this is primarily a tax-saving maneuver, it’s something that you'd likely be doing in your taxable accounts. What if you have some losses in tax-advantaged accounts like IRAs? Would you want to do something similar in those accounts or is it more complicated?

Benz: It's definitely more complicated. First of all you cannot do any tax-loss selling in 401(k). So just take that off the table.

There is a possibility to do tax-loss selling in your IRAs, but you do really need to make sure that it's worth your while. So you would need to clear out or sell all of the IRA type, all together. So if you have a large IRA asset pool, that’s probably not going to make sense for you, because you’ll only be able to recontribute $5,000 or $6,000 a year depending on your age. So that’s one hindrance to using tax-loss selling in an IRA.

The other is that those losses are only deductable to the extent that they exceed 2% of your adjusted gross income. So they're not going to be nearly as valuable for you as will those losses from your taxable accounts. [For more, click to read: Should You Take a Loss in Your IRA?]

Stipp: So doable in an IRA but definitely some caveats there.

Christine, I think you would also agree that you don’t necessarily want to have the tax cart before the horse in your investments. So you don’t want to always have taxes dictating your plans. If you have a portfolio plan and you see some losses in a certain area, but you still want to have exposure to that area in your portfolio, how should I manage that? Should I just sit tight and say, "I'm going to deal with these losses and forget about any tax advantages I could get."

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