Author: PJ McDaniel
Much like people scramble to shed a few pounds before summer vacation, it’s not uncommon to see people frantically searching for ways to minimize their taxes due as April looms. Inevitably, when the vacation ends or tax season is over, many of the procrastinators look back despondently and think, I could have done better.
This pattern appeared again recently, as I heard steady chatter from investors who ended up paying more taxes than they had anticipated. But could it have been possible for them to save themselves from that unpleasant surprise (and spare a good chunk of change in the process)? You bet—if only they had been planning all year. But don’t just take our word for it. This sketch by our friend Carl Richards sums it up perfectly.
There are, of course, facets of wealth management that lie outside the realm of our control. At first, taxes would seem to fall into that category. Truthfully, though, there are steps all investors can take to minimize their taxes due. But planning can’t wait until the last minute.
Moving forward, here are four best practices to tame your taxes before April.
Tax-Loss Harvesting: Those familiar with tax-loss harvesting may assume that losses are best harvested in April, when taxes are top of mind. In reality, tax-loss harvests can be utilized whenever market conditions and the investor’s best interests warrant it.
Enroll in Tax-Favored Accounts: Examples of tax-favored accounts include IRAs, Roth IRAs, 529 plans, and Healthcare Savings Accounts (HSAs). Opening these accounts as appropriate can keep a lid on your taxes when April rolls around.
Asset Location: To put it simply: minimizing a portfolio’s overall taxes due entails locating the most tax-efficient holdings in taxable accounts and the least tax-efficient holdings in tax-deferred or tax-free accounts.
For example, income from real estate investment trusts (REITs) are best-suited for an IRA where it won’t be taxed until retirement. Alternatively, mutual funds, ETFs, and stocks are best-suited for taxable investment accounts since capital gains taxes are generally lower than typical income taxes.
Tax-Wise Charitable Giving: In addition to helping a cause you believe in, charitable giving is also favorable for optimizing your taxes. Specifically, opening a Donor Advised Fund can enable investors to avoid capital gains tax on their securities and deduct the total value of the contribution from their federal income taxes. Appreciated long-term investments are the ideal asset to contribute to a Donor Advised Fund.
Do you want to get ahead of the curve in 2020 with these tax-planning strategies? I’m happy to walk you through them in detail. Schedule a quick call with me.
In my experience, most people are reluctant to speak to a new advisor. Often, the hesitation is rooted in logistics: the obligatory transition process involving opening accounts and selling their assets sounds daunting. As part of our Hillfolio service level, we’ve built out a sweet start-to-finish process of setting up an account, approving asset transfers, and, most importantly, setting up a monthly contribution. It generally takes about 25 minutes – less time than it takes to watch an episode of your favorite Netflix show. You can set up your account securely and seamlessly from your phone or with a couple clicks of your computer mouse. We are always here to make this process feel effortless for you, every step of the way.
The process boils down to these 4 simple steps
- Answer a few straightforward questions so we can understand your current situation and future goals,
- Choose the account(s) you want to open,
- Electronically sign a form that gives us permission to transfer your assets into a low cost globally diversified portfolio of nearly 13,000 companies,
- Set up a monthly contribution that aligns with your budget and goals,
No paper. No 800 numbers. No sales gibberish. No hidden fees. We’ll also set you up with our app so you’ll get a notification when we rebalance your portfolio (at no extra charge).
Ready to talk? Just pick a time on this calendar.
We love this quote from David Booth, Founder and Executive Chairman of Dimensional Fund Advisors and endorser of Odds On by Matt Hall. Check out more of what Booth had to say in yesterday’s New York Times piece “Forget Stock Market Forecasts. They’re Less Than Worthless.”