Ponder Year-End Financial Moves Now

This year I’ve decided not to procrastinate. So I’m giving my annual sermon against procrastination early, while there’s still plenty of time to act.

I’m talking about the year-end maneuvers to make you richer. I’ll come back to some of these in more detail through the fall, but here’s a list of things to keep in mind over the next three months.

Families with children in college or headed there should remember that financial aid is based on the family finances in the “aid year” that ends Dec. 31 of the year before the school year starts - this December for the 1998-1999 school year, for example.

The more income you have this year, the less aid you’re likely to get when awards are made next spring. Selling profitable investments increases income, and a dollar of income counts more heavily against you in the aid formula than a dollar held in an asset like a stock or mutual fund. So it’s best not to take profits during aid years.

Parents of high school juniors might consider selling profitable investments this year, so those gains won’t show up as income next year. Parents of students entering or continuing college next fall can avoid inflating income by postponing profitable sales until the last aid year, which ends in the student’s junior year. In some cases, it’s desirable to borrow against financial assets and then pay off the loan by selling assets after the last aid year.

Generally, investors come out ahead by postponing taxes as long as possible, leaving more money in their accounts to grow. That means delaying until after the first of the year sales of profitable investments that will be subject to capital gains tax. At the same time, you might want to go ahead and sell losing investments so you can declare the losses on your 1997 return.

However, if you expect to be in a higher tax bracket next year, it might pay to take profits this year.

People who have been investing in old-fashioned IRAs should start thinking about whether they want to convert them to the new Roth IRAs that will be available in January. To convert, individuals and couples must have no more than $100,000 in adjusted gross income.

If you convert, you’ll have to pay income tax on profits earned in the old IRA, but the tax can be spread over four years. Regardless of your gains in the Roth, there will be no tax on withdrawals, as there is with traditional IRAs.

Mutual fund investors should see how year-end dividend and capital gains distributions in taxable accounts will affect their taxes before making trades late in the year.

Funds collect dividends paid by stocks in their portfolios, and they earn profits on stocks and bonds sold during the year. Dividends and capital gains are usually paid to fund shareholders in November or December. Even if you continue to hold your fund shares and have the distributions automatically reinvested, you owe income tax on dividends and short-term capital gains, and capital gains tax on medium and long-term gains.

To avoid this, buy fund shares after the distributions are made. The share prices will drop to reflect the distributions, so your money will buy more shares.

If you’re thinking of selling shares, consider doing it before the distributions are made. The value of the distributions is reflected in the share price, so you will receive the distributions in the form of increased net asset value, and you won’t miss anything by selling early.

If you’ve owned the shares for at least 18 months, your profits will be taxed at the maximum long-term capital gains rate of 20 percent rather than the income tax rate. Dividends and short-term capital gains are taxed at income tax rates, which for most investors range from 28 percent to 39.6 percent.

Ask the fund company for the distributions’ “record date.” People who own shares on that date receive distributions; people who buy later do not.