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4 Tax-Efficient Planning Strategies


By the Shone Wealth Management Team

A financial plan is more than just a “game plan” to achieve your goals. It can also be your steady, guiding force during periods of uncertainty. Though we can’t control the stock market or what may happen next regarding the COVID-19 pandemic, we can control how we respond to what lies ahead through disciplined planning and by maintaining a long-term focus.

One element you can also plan for is taxes. But what exactly can you do to become more “tax-smart,” in the context of your personal financial plan?

Below, we will look at different strategies that we implement into your financial plan to improve your tax profile.

1. Contribute to Tax-Efficient Accounts

Contributing to tax-efficient retirement accounts is a great strategy for improving your tax profile and growing your wealth. Traditional IRA, Roth IRA, 401(k), profit-sharing and defined benefit accounts are commonly used.

2. Tax Diversification of Account Types

Diversifying your account types allows you to mix up income sources (and taxation) to fund future goals. Withdrawals from traditional IRAs, Roth IRAs and taxable accounts (i.e., trust accounts) will be taxed differently, so you can manage and limit taxation on future withdrawals. Having tax diversification of your account types at retirement allows you to, in essence, set a cap on the maximum tax rate you will pay.

3. Select Securities with Asset Location Strategies in Mind

Securities have inherently different tax profiles, which can work to your advantage by locating securities in your portfolio according to their tax characteristics. For example, stocks generally pay dividends which qualify for a favorable long-term gain tax treatment, so locating stocks in taxable accounts has tax advantages.

Bonds generally pay interest, which is taxed as ordinary income — so holding taxable bonds in retirement accounts reduces the tax drag of bond dividend income on investment returns. There are also tax profiles for different security types (mutual funds, exchange-traded funds, municipal bonds, etc.), which need to be considered for asset location decisions.

4. Utilize Tax-Loss Harvesting

Tax-loss harvesting is a proactive investment strategy that allows you to harness market volatility to improve your tax profile. The process involves “harvesting” (or selling) losses in taxable accounts and reinvesting the cash raised from security sales. This enables you to realize a loss today, stay invested and offset future capital gains.

By utilizing some or all of these tax-savvy financial planning strategies, you can enhance the strength of your overall plan and be in a better position to achieve your goals.

Have more questions or want advice about how you can improve your tax profile during periods of market volatility? Get in touch with our team.

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