Tax Strategies for Smart Investing

June 16, 2021

Topics: Tax tips | Taxes

Media type: Article, Podcast

Tax Strategies for Smart Investing

4.7 minute read • 

June 16, 2021

Everyone wants to pay less tax, right?

We all invest to achieve a specific goal. What we want to achieve varies from investor to investor, but we can probably all agree that we want more of our returns to go towards our goals – not the IRS.

You do not know where to start ? Consider the following questions:

What investments should I choose? Where should I place my investments?

When should I sell my stock?

How can I get the most out of my charitable donations?

In what order should I withdraw my investments?

Here are 6 of my favorite strategies for reducing your investment taxes, no matter where you are in life. 1. Consider tax-efficient funds

There are many factors to consider when choosing investments for your portfolio. When it comes to your non-retirement accounts, two key considerations are investment performance and tax efficiency.

An important goal may be to maximize your portfolio’s after-tax returns. Choosing investments with built-in tax efficiency, such as index funds — including some mutual funds and ETFs (exchange-traded funds) — is one way to reduce tax losses. ETFs may offer additional tax advantages. The way trades are settled allows ETFs to avoid capital gains.

Because ETFs offer the best of both worlds – low cost and tax efficiency – I often use them as the basis for some client portfolios.

Please note:

Index mutual funds track a benchmark, so their goal is to match the performance of the benchmark. If you want to outperform your benchmarks, these investments may not be what you are looking for. 2. Evaluate the use of actively managed funds with a focus on tax efficiency

Some of the clients I work with want an active management approach to their investments, but don’t want the tax implications of that approach. When building these clients’ portfolios, I can choose funds from Vanguard’s tax-managed investments. They offer active management with an emphasis on tax efficiency.

For clients in higher tax brackets, we may consider investing in tax-exempt bond funds that offer lower interest rates but maximize after-tax returns. *

When I work with my clients, I incorporate tax-efficient asset allocation strategies into their personal financial plans so they can retain more of their returns. 3. Allocation of assets between accounts

Choosing tax-efficient investments is one way to maximize your after-tax returns, but you also need to choose the right type of account to hold your investments.

At the highest level, asset allocation is a method of reducing taxes by dividing assets into taxable and non-taxable accounts. So you deposit tax-inefficient investments in tax-deferred accounts, while keeping tax-efficient investments in taxable accounts.

When I work with my clients, I incorporate tax-efficient asset allocation strategies into their personal financial plans so they can retain more of their returns. Take advantage of tax-efficient asset locations

Asset tracing is a method of reducing taxes by dividing assets between different types of accounts. It could look like this:

Taxable accounts must hold tax-advantaged assets such as:

index mutual fund

Index ETFs

tax free mortgage

to share

Non-taxable accounts should hold less tax-advantaged assets, such as:

actively managed mutual funds

taxable mortgage

4. Look for opportunities to offset gains

As an investor, you are only taxed on net capital gains, which is the amount you earn less any investment losses, so any realized losses help reduce your investment bill. tax. So if you know you’re going to make a profit, it might be a good idea to look for opportunities to make losses to offset your losses.

For example, if your fund’s units or shares have fallen in value since you bought them, you might want to consider selling them. This intentional practice of selling investments at a loss to reduce taxes is known as tax-loss harvesting. **

If you have a year in which your capital losses are greater than your capital gains, you can use up to $3,000 of your net loss each year to offset ordinary income for federal income tax. You can also “carry” losses to future tax years. As with any tax-related topic, tax loss collection has rules and limitations, such as wash sale rules, that you should be aware of before using this method.

5. Optimize your withdrawal order

When you start withdrawing money from your wallet, make sure your withdrawal strategy takes taxes into account. Once you start withdrawing money from your non-retirement accounts, consider paying out all income (dividends, interest, and capital gains) generated by your money market investments rather than reinvesting them so you don’t not have two taxes forever. If you reinvest and then sell for a profit, you will be taxed on the income generated and capital gains tax on the appreciation. Strategies like this are one way I make sure my clients keep as much money as possible in their pockets.

decision tree

Depending on your inherited goals, this order may vary.

6. make the most of what you give

If philanthropy is part of your “financial goals,” you can give in ways that reduce taxes.

Consider the following strategies to get the most out of your donation:

Designate cash gifts on your return to take advantage of tax deductions, up to a certain limit.

Appreciate securities, such as mutual funds, ETFs or individual stocks, to reduce future capital gains. (Not all charities accept investment donations, so I often advise my clients to give through a donor-advised fund, which is easy.) Learn more about donor-advised funds.

Contribute up to $100,000 per year from your IRA directly to qualified charities through qualified charitable distributions. (As long as certain rules are met, such as you are at least 70.5 years old at the time of the donation and the check is paid directly to a qualifying charity, the distribution should not be taxable income.)