Boost Your Wealth with These Ultimate Investment Tax Hacks

Who doesn’t want to reduce their tax burden, right?

We’re all in the game of investing with our unique goals and aspirations. While those goals may vary from one investor to the next, there’s one thing most of us can agree on: we’d rather see more of our hard-earned returns supporting our aspirations and less of it going into the IRS’s coffers.

Feeling a bit lost on where to kick things off? Don’t worry, dear reader. We will provide you with the knowledge you need to make tax-efficient investment decisions. So, let’s dive in and uncover the secrets of tax planning for investments.

Choosing Tax-Efficient Investments

When it comes to nonretirement accounts, two key considerations are investment returns and tax efficiency. Maximizing after-tax returns for your portfolio is crucial. One way to achieve this is by choosing investments with built-in tax efficiencies, such as index funds, including certain mutual funds and ETFs.

ETFs may offer an additional tax advantage. Their transaction settlement process allows them to avoid triggering some capital gains. Because of their low costs and tax efficiency, ETFs often form the foundation of many clients’ portfolios.

Actively Managed, Tax-Efficient Investments

Some investors prefer an actively managed approach to their investments but are wary of the tax burden that can accompany this approach. In such cases, tax-managed investments can be a viable option. These offer active management with a focus on tax efficiency.

For clients in higher tax brackets, tax-exempt bond funds can be considered. These funds pay lower interest rates but maximize after-tax returns.

The Art of Tax-Efficient Asset Location

Asset location is a strategy used to minimize taxes by dividing your assets among taxable and nontaxable accounts. This means placing investments that aren’t tax-efficient in accounts where you can defer taxes, and holding tax-efficient investments in taxable accounts.

Try to incorporate tactics for tax-efficient asset location into your custom financial plan, so you’ll keep more returns.

The Power of Realizing Losses

As an investor, you’re only taxed on net capital gains—the amount you gained minus any investment losses. Therefore, if you’re going to have realized gains, it may make sense to look for opportunities to realize losses to offset them.

This intentional selling of investments at a loss to lower taxes is known as tax-loss harvesting. If you have a year when your capital losses are greater than your capital gains, you can use up to $3,000 of net losses a year to offset ordinary income on your federal income taxes. You can also ‘carry forward’ losses to future tax years.

Crafting a Tax-Efficient Withdrawal Strategy

When you start taking money out of your portfolio, it’s important to ensure your withdrawal strategy factors in taxes. Once you start drawing down from your nonretirement accounts, consider taking all income produced from the investments and moving it to the money market, rather than reinvesting it, to avoid paying taxes twice.

If you reinvest the income produced and then sell the shares for a gain, you’ll owe taxes on the income produced and capital gains taxes on the appreciation. A strategy like this is one way you could make sure you keep as much money in your pockets as possible.

Working with a Personal Advisor

Working with a personal advisor gives you anytime access to advisors who are fiduciaries—always acting in your best interests. You can also receive a custom financial plan with built-in strategies to help minimize your tax burden.

Remember, the services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor.

Understanding the Risks

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications.

We recommend that you carefully review the terms of the consent and consult a tax advisor before taking action.

Final Thoughts

Any mention of tax-related information in this content is based on a complex and ever-evolving landscape of tax laws, regulations, judicial decisions, and other guidance. It’s important to note that additional tax regulations not covered in this content may also be pertinent to your specific circumstances.

For personalized advice, we strongly recommend seeking consultation with a tax and/or legal advisor who can provide guidance tailored to your unique situation. Your financial peace of mind is worth the investment in professional expertise.