Everyone loves earning money, including investment gains—but what’s most important is how much you keep after taxes.
And as you know, taxes are becoming a higher hurdle. The top rate is now 39.6%, plus a 3.8% Medicare surtax on investments for high earners. And that doesn’t include state taxes.
Minimizing taxes, then, is essential for those who want to build real wealth. That’s especially true if we experience more moderate market returns over the next few years. Every dollar counts—and that’s true whether you have a taxable investment account or a tax-deferred account. Eventually, Uncle Sam will want his cut.
At Align Wealth Management, we weave tax management into our investing advice and services. We use the following strategies to help ensure that our clients accrue as little in tax liabilities as possible.
- Asset location. If you hold taxable and non-taxable investment accounts, you can gain a tax edge by strategically distributing your investments across your respective accounts. A simple example: Since tax-exempt municipal bonds have built-in tax protection, putting them in a tax-deferred account like a traditional IRA would be redundant. It can be wiser to tuck those munis into a taxable account, and use your tax-advantaged account to house investments that would otherwise be exposed to taxes. Asset location is no minor matter: Researchers at Vanguard have determined that it can boost your net returns by up to .75%.
- Tax-loss harvesting. Capital gains from your investments are subject to tax. But losses in your portfolio can be used to offset those taxes. Tax-loss harvesting allows us to use realized losses in order to offset taxable gains, and then to reduce ordinary income, up to $3,000 per year. If you harvest losses in excess of $3,000 in a given year, you can use the remaining losses to neutralize gains in future years.
- Long-term investing. When an investment is sold for a profit less than a year after it was purchased, investors are faced with short-term capital gains taxes of up to 43.4%, depending on their tax bracket. It’s vastly preferable from a tax standpoint to hold investments for at least a year, because long-term gains are taxed at a rate no higher than 23.8%. Disciplined, long-term investing is a cornerstone value at Align Wealth Management.
Tax management can also continue to have a significant impact once you’re retired. For example, the order in which you take withdrawals from different kinds of accounts—taxable, tax-deferred and tax exempt—can reduce your annual tax liabilities by thousands of dollars. Research, again from Vanguard, has shown that smart withdrawal strategies can add extra net returns of up to .70% a year.
No one can control the market. But controlling the things that we can—like taxes—can have a powerful impact on our long-term wealth. Please don’t hesitate to get in touch if you’d like to learn more about how to boost your effective gains by lowering your taxes.
Brian Puckett | JD, CPA, PFS, CFP®
13921 Quail Pointe Drive | Oklahoma City, OK 73134
T: 405.607.4820 | F: 405.294.3340
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