Act Nimbly to Minimize Your Tax Bill

Jul 5, 2023

By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies
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As we roll into the summer of 2023, pundits continue to argue whether we are in a recession now, whether we are facing a recession soon, or perhaps we won’t have a recession at all.  While economic fears often create angst, it’s important to remember that if you strive to maintain a well-diversified portfolio you can hopefully weather through any near-term economic storms.

Due to these market fears, we continue to see volatility with investments.  You must continue to face decisions like whether you should invest in a stock vs. a bond, growth vs. value; all while being mindful of industry trends, sectors, etc.  To add an extra layer of complexity, you also need to consider another deciding factor:  taxes.  While taxes should not be the primary component in your decision making, efficiently managing your portfolio to help control the amount of tax you may face can lead to better outcomes.  As you may have heard before, it doesn’t matter how much you make, it matters how much you keep!

As you navigate your investments, review your allocation to assure you are aligned with your risk tolerance.  Should you need to make changes, consider which assets you may need to buy or sell, and review the “location” of those assets.  For example, investments that are tax-efficient, like tax-free municipal bonds, may be better for a taxable account.  Moreover, long term “growth” style assets are an example of investments that fit well in either taxable or tax-deferred accounts.  Tax-inefficient investments, such as those that generate high dividends or that may have shorter holding periods, may be better suited in a tax-deferred account like an IRA or 401(k).  If you’re considering a rebalance of your portfolio, try to execute your transactions in these various locations to minimize any tax liability.

For example, we recently had a client that was overexposed to large cap value stocks in both their taxable accounts and their IRA.  The client was looking to invest in more growth minded, smaller companies.  To achieve this goal we worked to rebalance the gains in their large cap value stocks by executing the trades inside their IRAs vs. their taxable accounts so there were no immediate tax consequences to the reallocation.

Remember, though, don’t let the tax tail wag the dog.  If you have gains, you will owe taxes.  Taxes aren’t always a bad thing!  Make sure your portfolio is properly allocated, designed to meet your financial goals, and tailored to your risk tolerance.  On top of all of that, you should be well diversified with your investments.  Work with your tax advisor and your Benjamin F. Edwards financial advisor to make sure your portfolio meets your planning needs while maintaining tax efficiency.


IMPORTANT DISCLOSURES:  The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.