April 15th is coming again this year, right on schedule but not necessarily welcomed. How can you take some of the dread out of Tax Day? Here are some ways to improve the tax picture for the investment side of your ledger. They’re simple, but not always easy to execute properly. Read on…
Many investors, aided by their advisors, pay far too much in taxes on their investment portfolios. Too much on poorly managed capital gains, and too much on all kinds of investment income because those investments should be grouped in tax-deferred accounts. It doesn’t have to be that way.
Don’t ever do this
How can you and your advisor be more tax savvy? Let’s be clear right now in saying: Don’t ever own a mutual fund in a taxable account. Mutual funds were great last-century investment vehicles but are hopelessly out of date now. Why? Because when you buy a mutual fund you are buying everyone else’s tax bill. The day you buy a mutual fund you buy every previous investor’s basis, and their eventual tax.
Do this instead
Complete tax optimization is simple to say and hard to do. Since everyone is different the details of execution are important. Let’s start with six simple concepts:
- Defer gains to the next generation – If you don’t sell, you don’t pay gains. VTI, the Vanguard ETF that holds all 3400 public US stocks, is a good core holding for any portfolio. You can hold it forever and get the US stock market return. VTI has never made a capital gains distribution, so you don’t have to pay capital gains tax.
- Practice asset location – Group your tax hungry investments, like interest bearing bonds or high dividend stocks in tax-deferred accounts like IRAs or SEPs. Asset location determines taxation, so use it appropriately.
- Swap when desirable – There is a silver lining when markets drop. Tax loss harvesting realizes losses to offset current or future gains. Take the loss by selling the position, and buy a similar security to maintain your asset allocation. Two caveats: It’s got to be done correctly or IRS fines apply and it works fine with ETFs, but not individual stocks.
- Grab low-hanging fruit – Back door Roths and legacy 529s are the two sweetest tax deals out there, both fully supported and encouraged by the government. You can do more than you think, so investigate fully or ask your advisor.
- Cue your CPA – Make sure your CPA knows all your tax moves and stays fully in synch with your investment advisor. Both experts need complete information to provide optimal advice and make sure any strategies and transactions comply with tax rules.
Next steps are up to you
If you are not already suppressing your taxes, discuss this article with your investment advisor and your CPA. Call us if you are not getting the answers you deserve. Don’t pay more than your fair share.
John Osbon – email@example.com
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.