Tax-Efficient Investing Strategies
Using strategies that defer the payment of taxes for as long as possible can make a substantial difference in your portfolio’s ultimate size. Consider the following tax-efficient strategies:
- Minimize portfolio turnover. Carefully evaluate your investment choices, selecting those you’ll be comfortable owning for years. That way, you can let any realized capital gains grow for many years.
- Place investments that generate ordinary income or that you want to trade frequently in your tax-deferred accounts. Since income and realized capital gains inside tax-deferred accounts aren’t taxed until withdrawn, you defer paying taxes on that income. Keep in mind that withdrawals may be subject to a 10% federal penalty if made prior to age 59 ½.
- Analyze the tax consequences before rebalancing your portfolio. Portfolio rebalancing is a taxable event that may result in a taxable gain or loss. You should generally avoid selling investments for reasons other than poor performance. You can bring your asset allocation back in line through other means. For instance, when adding investments to your portfolio, only purchase those that are underweighted in your portfolio. Reinvest interest, dividends, and capital gains in investments that are underweighted. Any withdrawals can be made from overweighted investments, or rebalance through you tax-deferred accounts.
- Utilize losses to offset capital gains. Selling investments at a loss can offset capital gains for that year, reducing your total tax liability. Excess losses may be used to offset up to $3,000 of ordinary income, and the unused portion may be carried forward indefinitely. If you still want to own that investment, you can purchase it 30 days before or after selling it. That way, you will not be subject to the wash sale rules, so your loss will be tax deductible.
Copyright © Integrated Concepts 2015. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.