By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies
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We find ourselves in unique times. War in Eastern Europe, protests in the United States, and tax legislation expected this year. With all of that said, despite all the “noise,” 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.
During that management you may face decisions like whether you should invest in a stock versus a bond, growth versus value, 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 a 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, 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 if 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.
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 & Co. is not engaged in rendering legal, accounting or tax preparation services. Tax-free municipal investment may be subject to state tax, local tax or the alternative minimum tax (AMT). Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.