The importance and benefits of tax efficient investing are often overlooked. For many, it’s far more appealing to spend time picking investments as opposed to considering the tax implications of those investments. Though taxes should not be your only financial consideration when choosing investments, they can have significant financial implications. They should therefore be considered when creating a holistic financial plan.
At Firenze Wealth Management, our financial advisors can help you understand the tax implications of your investments and discuss your options as part of your comprehensive financial plan. Learn more below, and contact us today to request a consultation.
Perhaps the simplest strategy for investing in a tax efficient manner is investing in accounts with tax advantages. Many common retirement accounts, for instance, have tax advantages.
Contributions made to 401(k)s are made with pre-tax dollars, so your taxable income is smaller. Other accounts that offer tax advantages include 529 plans and Health Savings Accounts (HSAs). These tax advantaged accounts may create more opportunities for both current and future tax efficiency.
Creating the most tax efficient strategy requires more than simply investing in tax advantaged accounts. It also means investing in those accounts as efficiently as possible. You should consider which investments you have in which accounts. For example, if an investment is more likely to regularly generate taxable income, it may be most appropriate to have that investment in a tax-deferred account.
It’s important that your asset allocation is appropriate for your needs, risk tolerance, time horizon, etc. but each account does not necessarily have to line up with this asset allocation. Instead, ensure that your overall asset allocation among your entire portfolio is appropriate, but consider having some accounts with larger percentages of each asset. This can give you a better chance of fully taking advantage of the tax opportunities of each account.
When it comes to retirement, diversifying your income streams by having various retirement accounts may help provide you with more flexibility. By having a mix of different account types as income sources, you can draw income from a combination of accounts in the most tax advantageous way. Any retirement savings is helpful, but setting up and contributing to multiple retirement accounts now can open up more options in the future.
When buying and selling securities, consider the impact on your taxes. For example, you can use the losses from securities to offset realized investment gains (tax-loss harvesting). You may also have the ability to carry forward some of those losses. Investment decisions should not be made exclusively due to the tax implications, but taking taxes into consideration when buying and selling securities can be a useful strategy for tax efficient investing.
The government incentivizes donations to charity by allowing you to deduct your gift from your taxable income. You may be able to take even greater advantage of charitable gifting rules if you donate something other than cash. For example, if you donate appreciated stock, you can typically deduct the fair market value and potentially also eliminate capital gains taxes.
Tax laws are complex and regularly changing. A professional tax advisor can review your plan and help you understand strategies that may increase the tax efficiency of your investments. Contact Firenze Wealth Management today to request a consultation.