Tax Efficiency
By: Cameron Diehl, CFP®
Friends – Admittedly this one may take a couple minutes to read, but I thought it was important to share completely…
On the heels of tax season, I wanted to share a few thoughts on tax efficiency in financial plans, and more specifically a few ideas to help better manage how much you owe (or get back) next April. I’m a big believer in focusing on the things you can control, and while we can’t control tax laws, we can make a big difference in our outcomes through thoughtful, personalized planning.
- Taxes generated by your investments – Not all investments are created equally when it comes to tax efficiency. Most mutual funds distribute capital gains and dividends during the year. And because of the pooled nature of these investments, depending on when you invested, you may owe taxes on gains you didn’t even experience. Exchange-traded funds and separately managed accounts may offer more tax-efficient structures and different types of investments may offer their own advantages (like tax-free income from municipal bonds). That’s not to say any one type of investment is always better than another, you just need to be aware of the pros and cons and fit the right pieces to your situation.
- Tax-advantaged account types – Specialized accounts such as IRAs, 401(k)s, health savings accounts (HSAs) and others can offer significant opportunities to save on taxes. Just like anything else, there are tradeoffs and limitations involved, so choosing the right account types for your situation is critical – and it will likely change over time. There are various complications and strategies that can come into play here, so it is important to get qualified advice.
- Matching your investments to the right account types – Combining the first two points, it’s important to match the right types of investments with the right types of accounts to realize the greatest possible tax efficiency while maintaining a coordinated overall strategy.
- Deductions for child-related expenses – For parents or anyone supporting children, there are additional account types available to help save on taxes. Dependent Care Flexible Spending Accounts can allow for tax-deductible contributions for eligible childcare expenses and 529s can provide tax-free withdrawals for eligible education expenses. Recent legislation opened up the use of 529s to even help fund some K-12 expenses, furthering their usefulness for some while complicating the planning involved to avoid disrupting other plans and tripping over restrictions.
- Harvesting losses (or sometimes gains) – Strategically realizing losses that exist in your portfolio can help offset gains elsewhere or even generate a deduction. Additionally, depending on where your income is projected to fall relative to key thresholds, it can sometimes make sense to harvest gains to better position yourself for subsequent years.
- Strategic charitable giving – If you make any regular or significant donations to charitable organizations, it’s worth a discussion to make sure you’re realizing the fullest possible benefit of those gifts from a tax perspective. Gifting appreciated securities, setting up a donor-advised fund and/or lumping deductions into a single year to overcome the new higher threshold for itemizing deductions are just a few.
As always, if you would like to discuss anything covered above, please don’t hesitate to call or email me. I’m always happy to help.
Disclosure: While we are familiar with the tax provisions of the issues presented herein, as financial advisors of Raymond James & Associates we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Views expressed are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author’s opinions are subject to change without notice. Overall objectives, risk tolerance and asset allocation should be reviewed to determine which investment options might be suitable for an investor's portfolio. Please speak with a qualified financial advisor for any questions specific to investments or accounts that may be suitable for your specific situation. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.
Investors should consider the investment objectives, risks, and charges and expenses of mutual funds and exchange-traded funds carefully before investing. The prospectus contains this and other information about this investment. The prospectus is available from Cameron Diehl and should be read carefully before investing.
