Summer Savings Strategies: Minimize Your Tax Bill

Jun 5, 2019

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

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There are lots of components to investment decisions:  stock vs. bond, growth vs. value, industry trends . . . the list goes on and on.  While taxes should not be a driving factor in investment decisions, making sure you are tax efficient in your planning should certainly be a significant consideration.  When you can keep investment-related taxes to a minimum, your overall net investment return can increase.

Investments that are tax-efficient, like tax-free municipal bonds, 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.  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).

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

It is important to make sure, however, that the tax tail doesn’t wag the dog.  It is important that your portfolio is properly allocated, designed to meet your financial goals and is 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.