By Rina Pineda, Director of Tax Consulting
Investing, if not done correctly, can produce an unwanted tax consequence. To guide clients through the complex world of taxes and investments we work with them on several key tax-related strategies.
1. Maximize Tax-Advantaged Accounts
Utilize Retirement Accounts: Encourage clients to contribute to tax-advantaged retirement accounts like 401(k)s, IRAs, and Roth IRAs. These accounts offer tax deferral or tax-free growth, depending on the type.
Health Savings Accounts (HSAs): HSAs provide a triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.
2. Consider Asset Location
Place Investments in the Right Accounts: Advise clients to hold tax-inefficient investments, such as bonds and real estate investment trusts (REITs), in tax-deferred accounts. Meanwhile, tax-efficient investments, like index funds and growth stocks, are better suited for taxable accounts.
3. Harvest Tax Losses
Tax-Loss Harvesting: Clients can offset capital gains by selling investments that are underperforming at a loss. These losses can also be used to offset up to $3,000 of ordinary income per year, with any remaining losses carried forward to future years.
4. Utilize Long-Term Capital Gains
Hold Investments for the Long Term: Encourage clients to hold investments for more than a year to benefit from lower long-term capital gains tax rates, which are typically lower than short-term rates.
5. Strategic Charitable Giving
Donate Appreciated Assets: Instead of cash, clients can donate appreciated stocks or other assets to charity. This allows them to avoid capital gains taxes and still receive a charitable deduction for the full market value of the asset.
6. Roth Conversions
Convert Traditional IRAs to Roth IRAs: During low-income years, clients might consider converting part of their Traditional IRA to a Roth IRA, paying taxes now to benefit from tax-free withdrawals in retirement.
7. Municipal Bonds
Invest in Tax-Free Municipal Bonds: Municipal bonds generate interest that is often exempt from federal and sometimes state income taxes, making them a good option for clients in higher tax brackets.
8. Review Investment Portfolio Regularly
Rebalance Portfolios Tax-Efficiently: Clients should regularly review and rebalance their portfolios, being mindful of the tax implications of selling assets. Tax-efficient funds or exchange-traded funds (ETFs) may be used to minimize taxable events.
9. Qualified Dividends
Invest in Dividend-Paying Stocks: Qualified dividends are taxed at a lower rate than ordinary income. Ensuring that dividends qualify by holding the stocks for the required period can optimize tax outcomes.
Interested in learning how we save clients from paying thousands of dollars in taxes? Schedule a time to discuss our tax consulting solutions by clicking here.
