Taxes make many good things possible in our society. Few of us want to pay the government more than our fair share…especially by accident. I’m proud to pay taxes, but I could be just as proud for half the money.
Investment mistakes can cost you unnecessary taxes. Thankfully, there are several areas where smart tax strategies can make a big difference.
Tax-loss harvesting by selling securities
Tax-loss harvesting involves selling securities that have declined in value, usually near year-end, to “realize” those declines as losses. You can use this approach to offset any capital gains in your portfolio and lower your personal tax liability.
The term “realized” refers to the gain or loss on a security that was purchased and subsequently sold. Gain or losses are either short or long term. Short-term means you held the security for less than a year, and long-term means more than a year.
A security that was purchased, but not yet sold, may have risen or declined in value. But that increase/decrease is not a capital gain or loss until the security is sold. Learn more about tax loss harvesting here. The rules are complex and specific; they will require the assistance of your tax and investment professionals.
Investment selections are one reason why taxes matter
Your assets will influence how much money you owe at the end of the fiscal year. Portfolio turnovers and trading volume of actively managed mutual funds results in more capital gains taxes than index or asset class funds. Why? Because index funds and asset class funds, by their very nature, do less trading during the year. Fewer trades mean fewer realized capital gains.
Mutual funds are required to distribute realized gains annually, usually in December. Your mutual funds buy and sell throughout the year, even if you don’t actively make new investments of your own. Having such gains reinvested in more shares of your fund does not relieve you from being liable for the taxes on those gains.
Exchange Traded Funds (ETFs) are also subject to these kinds of year-end distributions.
Asset location makes a difference
Asset location is a tax minimization strategy based on the different tax treatments of various types of investments. For example, an investor determines which securities should be held in tax-deferred accounts and which securities should be held in taxable accounts in order to maximize after-tax returns.
Asset selection is about what investments to own. Asset location is about how and where to own them.
Work with a financial advisor and a tax professional
Everybody’s situation is different. You should consult with your financial advisor and your tax professional to make the right investment decisions for your own financial needs.
The benefits of working with a financial advisor are that you get the skills, the knowledge, and the experience that they have to offer. Financial advisors understand the different types of assets you can invest in and the taxable costs that come with those decisions. They’ll coach you on how to strike the right balance between growing your investment portfolio and minimizing the amount of tax you’ll owe.
Get Started Today
Financial planning, like everything else, is easier when you have an experienced guide to show the way. Let us be that guide.Reach out today and find out how to get started. You deserve to retire comfortably. You deserve to be confident that you’ll have enough money to buy everything you need for a lifetime.