Tax Strategies for the Savvy Investor November 28, 2018
By: Steve Economopoulos, CFP®, ChFC, CMT
There is a saying in the investment advice world – “Don’t let the tax tail wag the investment dog”. Investors that take a focused view of tax implications of their investment strategy often make decisions that may hurt a long term plan of making money. It reminds me of how my father would refuse to sell a stock that was up from where he bought it since he “would have to pay tax on the gain”. I thought that is why you buy the investment in the first place?!
It’s often best to seek advice from your CPA or Tax Advisor and Attorney about tax decisions. It is also important to communicate your current and future tax considerations to your Financial Advisor. Often one with a CFP designation has had training in this exact sort of planning. And from my own experience of working with clients for the past 20 years, here are a few strategies that you can consider if they apply to your investment and tax situation.
Appreciated Assets may be appreciated by others
One great benefit of passing assets to others is that there are a few ways of doing so that could minimize the tax implications to all involved. If you move appreciated stock or other assets to a charitable foundation or give them directly to a charity, you will avoid paying tax on the gain. In addition, you can receive some potential tax deductions on your own personal return. If you are in need of replacing this value so your beneficiaries still have a pot of money from your lifetime of accumulation, consider a life insurance policy to replace that value. The death benefit received by your beneficiary is often received free of tax. If you are less inclined to use a charity, you can still pass them on at your death and the asset will receive a step up in cost basis to the value of the asset at your date of death.
Your Loss is Your Gain
Not selling a stock that is up in value just to avoid paying the tax is akin to not selling your stock that is down and hoping it comes back so you don’t lose. The savvy strategy would be to sell your losers and move the money into other areas that could be better positioned to make money. You could also offset the winner that you actually did sell by selling the loser that didn’t work out so well. Thus, your tax situation could improve by taking a loss and swapping into another investment. Be careful if you buy or sell the same investment again within a 30 day period – that involves consideration with the wash sale rule that the IRS has in place. If you work this process in the right manner, you should be in a position to build a diversified group of holdings that you plan to hold for more than 12 months. This creates a better long term situation for your overall portfolio since you can take advantage of the long-term capital gains rules that is written in the IRS code.
Tax Free and Defer
One of the best gifts we have been given by the IRS is the Roth IRA. What can be better than tax free money in retirement? A back door IRA is now a common planning tool that can be used for those with income above certain limits that are unable to contribute to the Roth directly. There are a few other ways to receive funds tax free through the use of Municipal Bonds and with some planning that involves Life Insurance. Other IRA’s and deferred compensation plans offered at your job may be an important long term planning tool. High income wage earners and Executives may have access to supplemental retirement plans (often know as a SERP). Those with small businesses can set up profit sharing plans integrated to benefit owner as well as reward employees. Money within these retirement plans will defer any tax on gains until withdrawn, usually after the age of 59 ½.
Any time of year is a good time to plan for your tax situation. Year end is an especially important time to do so as many of the strategies discussed here (among many others) are important to complete by December 31 of each year. Although we are often frustrated with having to pay taxes, savvy investors can take solace in the fact that some tax planning tools are still available to all of us. Gifting, swapping portfolio holdings, planning for your family beneficiaries and making the most of your retirement income plan can be some of the best ways to maximize the use of your money in a tax efficient manner over the course of your lifetime.
Past performance may not be indicative of future results. No current or prospective client should assume that the future performance of any specific investment, investment strategy (including investments and/or investment strategies recommended by the adviser), will be equal to past performance levels. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's investment portfolio. The information presented herein is intended for educational purposes only, and is in no way intended to be interpreted as investment advice. In considering the information presented, readers should consult their own professional advisers, as there is no substitute for personalized investment or tax advice. Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Econ Wealth Management. Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach. Only your professional adviser should interpret this information.