Summer Savings: Considerations to Minimize Your Tax Bill

By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies

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With inflation skyrocketing, supply chain issues mounting, stock markets in bear territory and COVID still lingering, taxes may be the last thing on your mind. That said, despite all the “noise” out there you should still strive to maintain a well-diversified portfolio. During that management you may face decisions like whether you should invest in a stock versus a bond, growth funds as opposed to value funds, or following industry trends, sectors, etc.

Making these decisions can become overwhelming, especially in these times of market volatility.  To add an extra layer of complexity, you also need to consider another deciding factor: taxes. While taxes should not be the primary factor in your investing, making sure you are tax efficient in your planning certainly should be a significant consideration. As the old saying goes, it doesn’t matter how much you make, it matters how much you keep!

With this in mind, your asset location may help your tax situation. Investments that are tax-efficient – like tax-free municipal bonds, for example – may be better for a taxable account. Moreover, long term “growth” style assets are another example of investments that fit well in either taxable or tax-deferred accounts. Investments that are not tax efficient, 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).

When looking at your overall asset allocation, or considering changes to your portfolio, carefully consider which assets and which accounts may be best to execute your planning. As an example, we recently consulted with a client nearing retirement who wished to reduce her exposure to aggressive equities. By making changes in her tax-deferred accounts, we avoided some significant capital gains taxes during the reallocation.

Remember, though, don’t let the tax tail wag the dog. If you have gains, you will owe taxes. It’s not 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 financial advisor to make sure your portfolio meets your planning needs while maintaining tax efficiency.

 

Benjamin F. Edwards does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.