SBJ: Tax Manage Your Investments

Industry Insight



Investors and their advisers have a certain amount of control over their tax picture. Here are some basics.

Take advantage of pre-tax workplace retirement plans, especially any company match, and continue tax deferral after retirement by rolling into an IRA. If you’re in a lower tax bracket now than you expect to be in retirement, consider after-tax Roth options if available (no tax due in retirement). Workplaces may also offer Health Savings Accounts or other tax-advantaged programs. Get advice from a tax professional if you have questions.

ETF’s: If your non-IRA investments include traditional mutual funds—large diversified baskets of stocks or bonds—consider switching to exchange traded funds (ETF’s). They’re similar but with some tax advantages. Unlike mutual funds, ETF’s are not required to pay out taxable capital gains (growth) each year. With “index” ETF’s, otherwise known as passive ETF’s, there may be much less trading activity than an “active” mutual fund, which may also reduce capital gains taxes.

Like many of these ideas, this won’t affect IRA’s, which are already tax deferred. This is about taxable (“non-qualified”) accounts, like joint accounts, individual accounts, and trust accounts. Same with…

Municipal bonds: The interest earnings are Federal-tax-free. You’ll still have capital gains tax on the growth in value when you sell, but that’s generally a lower rate than income tax.

“Growth” stocks: Stocks can be classified as “value”, “growth”, and “blend” styles. “Growth” companies tend to plow profits back into the business instead of paying dividends to investors. “Value” companies tend to pay more dividends. These styles grow similarly long-term, but Growth stocks can reduce dividend taxes in non-IRA (individual, joint, and trust) accounts.

Withdrawal Strategies: Try to keep tax deferral going by saving traditional IRA withdrawals for last…because you’ll owe ordinary income tax on all withdrawals. With a Roth IRA you pay no tax on withdrawals if you’ve held it for at least five years. With a non-IRA account, you’ll pay capital gains tax on the growth when you pull that out, but at a lower tax rate than ordinary income tax.

So if your income is on the verge of driving you into a higher tax bracket, you may want to withdraw from a Roth IRA or a non-IRA account instead. Work with your investment adviser and tax professional each year on your withdrawal strategy.

Loss harvesting: If one investment is at a loss (worth less than you paid), and another has gains, you can sell them both to cancel out some or all of those taxable capital gains. This can help reduce your capital gains tax over the long run. Careful though…there are strict rules about turning around and buying back into the same holding, but if you use this technique correctly, you can reset the clock on some of those taxable gains.

Qualified Charitable Distributions: you can donate up to $100,000 of an IRA each year to a qualified charity or church with no tax to you or the receiving organization, as long as it’s a direct back-office transfer. If you’re taking required minimum distributions anyway, and you’re also giving to a church or charity, it will be less taxes for you, and potentially more net money for the receiving organization.

Stepped Up Basis: The “basis” of an investment is how much you put into it, and the growth, or capital gains, is taxable when you sell. But if instead you pass it along to an heir, they start with a fresh basis, so they’ll only owe tax on the growth that happens after they inherit it. Consider this technique in your legacy planning.

Annuities: All annuities are tax deferred, a potential advantage for non-IRA accounts. There are several types of annuities, so work with a professional who understands the pros and cons of each type for your situation. Tax on the growth is deferred until you sell; at that point, the growth is subject to ordinary income tax, not capital gains tax.

529 College savings plans: These provide tax-free growth as long as the money is used for qualified education expenses.

This is a brief overview, there are advantages and potential pitfalls to any technique, so we can’t say it enough: seek professional advice before proceeding!

CERTIFIED FINANCIAL PLANNERTM professional Kenny Gott is President at Piatchek & Associates and author of the book "Bottom Line Financial Planning". He can be reached at