Your Late-Year Money To-Do List: 5 Steps to Finish Before 2027

Christine Benz outlines how investors can handle portfolio rebalancing, charitable giving, and retirement savings before year-end.

Key Takeaways

• Rebalance to help keep portfolio risk at the right level.
• When rebalancing, begin with tax-advantaged accounts and stay alert to mutual fund capital gains distributions.
• Use required minimum distributions as an opportunity to reduce positions you were already considering selling.
• Explore tax-efficient ways to give appreciated investments to charity.
• Strengthen cash reserves and review retirement contributions for the year ahead.

Valentina Djeljosevic: Hi, I’m Valentina Djeljosevic for Morningstar. As the year draws to a close, Christine Benz joins us with a rundown of financial tasks to complete before the calendar turns. Christine co-hosts The Long View podcast and wrote How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. Christine, thanks for joining us.

Christine Benz: Valentina, it’s great to see you.

How to Rebalance Your Portfolio Before Year-End

Djeljosevic: Let’s begin with portfolio rebalancing. What are the main advantages and what should investors keep in mind as they adjust their allocations near year-end?

Benz: Rebalancing is a useful way to reduce risk in a portfolio because asset mixes naturally drift over time as different holdings rise and fall at different rates. In a normal market environment, the riskier parts of a portfolio, especially stocks, tend to occupy an ever-larger share. Most people are investing toward a goal, and retirement is the big one for many. As you get older and closer to using the money, it generally makes sense to take some risk off the table. That is the basic idea behind rebalancing.

I think it matters especially for older adults, particularly those over 50 who are nearing retirement, because the easiest thing to do is often to let winning stocks keep running. If you have not rebalanced in several years, equities may now make up a much larger portion of your portfolio than you intended. A 60/40 portfolio from several years ago could now look much closer to three-quarters stocks. Even without adding more to equities, market gains can do that. So older investors should consider dialing back some stock exposure and taking advantage of the higher bond yields available now.

Younger investors should also check in on their portfolios and look not just at how much stock exposure they have, but what kind of stock exposure it is. If you have many years until retirement, stocks should still make up most of your retirement assets, but it is worth making sure you are not overly concentrated in whatever has recently performed best. Over the past several years, U.S. large-growth stocks have significantly outpaced much of the market. That has eased somewhat lately, but it is still a factor worth reviewing when you examine the mix of your equity holdings.

How to Handle Taxes While Rebalancing

Djeljosevic: With the year winding down, tax issues also deserve attention. What should investors be watching for?

Benz: Rebalancing is one place where taxes matter a lot, so it is important to be thoughtful about where you do it. In general, the best place to start is with tax-sheltered accounts. If your portfolio is out of balance, use IRAs and 401(k)s first to move toward your target allocation. You usually do not want to rebalance inside taxable accounts, because selling appreciated securities there often creates a tax bill. It is better to make changes in the accounts where taxes are deferred.

Mutual fund investors, especially those in actively managed funds, should also keep an eye on capital gains distributions. Strong market performance has left many funds with gains on their books, and at the same time investors have been moving out of active funds and into lower-cost index funds and exchange-traded funds. That shift is generally a healthy one, but shareholders who remain in some active funds have often been hit with distributions in recent years.

Watch for estimated capital gains announcements, which funds usually begin releasing in the final quarter. The actual payouts often arrive later in the year. There is often not much you can do to avoid the tax impact, because selling a fund to sidestep a distribution can trigger your own taxable gain. Unless you are unusually unlucky, your equity investments likely have some appreciation, and a sale could create a tax bill even as you try to avoid another one. Still, it is important to know what is coming because the tax consequences can be meaningful.

Year-End RMD and QCD Moves for Retirees

Djeljosevic: We have been talking broadly about investors, but what should retirees focus on as the year ends? I suspect some important abbreviations are coming up.

Benz: Yes, two of the biggest ones are required minimum distributions, or RMDs, and qualified charitable distributions, or QCDs. If you are over age 73, you need to take RMDs from tax-deferred retirement accounts such as traditional IRAs and 401(k)s. Roth accounts are different. Those withdrawals must be completed by year-end. The penalties for missing an RMD have changed, but they are still steep, so there is no reason to ignore them. Figure out how much needs to come out of those accounts and make sure you meet the requirement.

While doing that, it can make sense to combine the RMD process with a little portfolio cleanup. If you need to take a distribution, think about taking it from holdings you wanted to reduce anyway, such as a concentrated position or a highly appreciated stock. That way, you are using the distribution requirement to improve the portfolio at the same time.

The other acronym is QCD, which stands for qualified charitable distribution. The age rules are different: RMDs apply after age 73, while QCDs are available starting at age 70½. A QCD allows you to give to charity directly from an IRA and reduce your tax bill at the same time. The annual limit has been rising with inflation and is now $111,000. For older adults who are charitably inclined, it can be more appealing than taking money out, selling securities, writing a check, and then trying to claim a deduction. It is a very attractive strategy.

Tax-Smart Charitable Giving Ideas

Djeljosevic: Staying with charitable giving, what should people understand about the tax side of donations?

Benz: One especially useful strategy is to donate appreciated securities through a donor-advised fund. This can be a smart move if you own positions with large gains, especially if those holdings also create extra risk in your portfolio. A stock that has done extremely well can be a great candidate. By donating it to a donor-advised fund, you can avoid the capital gains tax that would be due if you sold it first, and you may also receive a deduction for the donation amount. It is a powerful tool for many investors.

There are also a couple of other tax details worth mentioning. For people who do not itemize deductions, there is still a modest deduction for cash gifts. It is $1,000 for single filers and $2,000 for married couples filing jointly. That may be worth knowing because many taxpayers now take the standard deduction and do not itemize. It gives them some tax benefit for their charitable giving.

Another change to keep in mind is that charitable deductions now have a floor. To be deductible, contributions must exceed half a percent of adjusted gross income. That matters most for smaller donors who itemize and want to make sure their gifts clear the threshold.

Djeljosevic: There is certainly a lot to think about.

Benz: There is a lot.

How to Set Up Your Finances for 2027

Djeljosevic: We will have to do an episode devoted entirely to taxes, which is good news. Before we wrap up, you have said this is a great time to prepare for the coming year. What should investors do now?

Benz: I would focus on two main things. For retirees, I would think about building or topping up cash reserves for the next couple of years of expected spending. This is the bucket approach I often talk about. I like setting aside one to two years of anticipated withdrawals in cash so you do not have to worry about where your living expenses are coming from in the moment. Knowing that money is already reserved can make spending feel much more secure.

For people who are still working and saving, it is a good time to check how you are doing with contributions to tax-advantaged accounts for the current year. The deadline for 401(k) contributions is the end of the year. You have until the tax-filing deadline in the spring to fund an IRA or HSA, but it is worth reviewing your progress now. You may still be able to boost contributions late in the year. It is also smart to look ahead, since inflation adjustments often increase the amount you can contribute to these accounts in the next year. Making those plans now can help you contribute as much as possible going forward.

Djeljosevic: Thank you, Christine, for walking us through this year-end financial checklist.

Benz: Thank you so much, Valentina.

Djeljosevic: For practical financial guidance and insights throughout the year, subscribe to Christine’s newsletter. And when you are ready to get started on your year-end financial checklist, visit morningstar.com. Thanks for watching.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.