Part 2: Timeless Tax Tactics
In our last post, we covered some of the latest, timely topics to freshen up on as you sharpen your pencils for this year’s tax season, including: reviewing the IRS’ latest “Dirty Dozen” tax scams, noting what’s changed for the current tax season, and contributing as warranted to your tax-sheltered investment accounts.
Today, let’s consider a few ways you can integrate your ongoing tax planning with your broader wealth interests.
Tax Tactics YOU Can Take
One way you can take charge of your taxes due is by engaging in year-round tax-wise investing. What do we mean by that? Tax-wise investing includes several ongoing best practices:
- Have a plan … and follow it. Investing according to a plan makes everything else easier to prepare for and stick with over time. A detailed investment plan also serves as your reliable guide for resolving any conflicting priorities when weighing tax efficiency against other considerations within your overall wealth plans.
- Avoid hyperactive trading. Bottom line, the more trading you do in your taxable accounts, the more “opportunities” you create to be taxed on the proceeds. See how sticking to a patient, long-term plan is already coming in handy?
- Make good use of tax-sheltered accounts. As we touched on in Part 1, it stands to reason: The more assets you can hold in tax-sheltered or tax-free accounts such as IRAs, Roth IRAs, 401(k)s, 529 college saving plans and health savings accounts (HSAs), the more opportunities you have to avoid or at least postpone taxes due.
- Invest in tax-efficient funds. Consider the individual investments you’re holding in your taxable accounts. Even if two similarly structured funds are otherwise “equal,” one may be considerably better than the other at tax-efficiently managing its holdings on your behalf. Seek out managers who exhibit best tax-management practices such as avoiding hyperactive trading within their funds (just as you do when you buy and sell those funds) and appealing to similarly minded shareholders (so you are less likely to get dinged by other investors’ bad habits).
- Give away your gains. Our prior advice still stands, gifting appreciated securities can make onerous capital gains magically disappear, leaving more to be donated to charity or grandchildren.
Tax-Efficient Teamwork: You AND Your Wealth Manager
Beyond adopting best practices within your own investing and fund manager selection, there are two other important ways you can improve on your taxable outcomes: your investment portfolio’s tax-efficient management and your advisers’ tax-efficient teamwork.
- Discover the art and science of asset location. Fortunately, we’ve covered the subject before, so you can revisit our still-relevant post on asset location, and how it contributes to overall tax-efficiency. Bottom line, some kinds of investments are inherently more tax-efficient than others. By placing the least tax-efficient funds within your tax-sheltered retirement accounts, you can essentially wash away some of those inefficiencies. But, while the concept is simple enough, implementation can be tricky. A tax-savvy wealth manager can help you arrive at – and maintain – an asset location strategy that best serves you and your unique circumstances.
- Ensure that your advisers are playing well with others. Are your investment adviser, tax professional, estate planning attorney, insurance provider and other key members of your financial team acting in isolation or in concert? Even if each is seeking to best manage tax-related events within his or her area of expertise, taxable gaps or overlaps can occur when critical communications break down. Since optimal tax efficiency is found at the intersection between your accounting, your investing and your financial planning, your best bet is to coordinate all of them in an organized fashion. That’s a role that you and your wealth manager both contribute to.
As I expressed in one of my past blog posts, “It can be money well spent to work with an adviser who is experienced at implementing these and other tax-wise investment strategies.” And I’m just warming up! For more tax planning tips, feel free to be in touch with us directly.
SAGE Serendipity: Having an Oscar party or just watching with the family this Sunday? It’s fun to have a few party games to get in the spirit. Here’s a link to print out Oscar Bingo 2017, and here is an Oscar pool sheet so you can make guesses before the show begins. For snacks, delish.com put together 17 Dishes Inspired By The Oscar’s Must-See Nominees. Gotta say, sipping a “Jackie” Vodka Gimlet, snacking on “LaLa Land” Chicken & Waffle Sliders, while playing Academy Awards bingo sounds like a fun Oscar night! Or maybe it will at least keep you awake until the Best Picture award.