Tax Efficient Investing

Air Date: October 22nd, 2020

A proper investment plan is a critical component of your overall financial strategy, and as with so many things in the world of money there are multiple facets to investment. An often overlooked component is the interplay between investing and taxation. Creating a tax-efficient investment plan that both maximizes your investment returns while ensuring that you have the most tax-friendly approach possible is important to your overall financial well being. There are a couple of big ideas to consider, and we’ll take a look at them here.

Tax Loss Harvesting

Tax loss harvesting is a potent tool in your arsenal of tax efficient investing ideas. Tax loss harvesting involves selling securities to offset a capital gains tax liability. This is typically done in order to offset short-term capital gains, which are generally taxed at a higher rate than long term gains. However tax loss harvesting may be applied to either short or long term capital gains depending on the circumstances and the desired outcome.

While it may be used at any time, tax loss harvesting is generally employed toward the end of the calendar year. The mechanic behind tax loss harvesting is that an investment which has an unrealized loss is sold allowing a credit against any realized gains which occurred in the portfolio. The sold asset is then replaced with a similar asset in order to maintain the portfolio’s asset allocation balance and risk/return levels.  The overall goal of tax loss harvesting is to allow for a reduction of taxes in order to offset investment losses by directly lessening the impact and severity of the loss in question. Generally speaking tax loss harvesting does not fully offset the loss, but it can go a long way towards restoring the investor’s original position and minimizing the financial drag created by an investment loss.

It’s important to note that there are a few rules around tax loss harvesting. While you are expected to replace the asset sold at a loss, you’re not allowed to buy the same stock back immediately. Under the wash sale rules laid out by the IRS, you have to stay away from that particular stock for at least 30 days before buying back in. This adds an additional complication and strategic element to tax loss harvesting, and creates a space in which professional guidance from a financial professional may be useful even to a seasoned investor.

Maximizing Deferrals

Correctly managing deferrals for retirement accounts such as 401ks can be a tricky affair, and another area in which professional guidance may be useful. A 401k is a tax-advantaged account, meaning that the money you put into is either untaxed or taxed at a limited rate. However those numbers change as inflation takes its toll and retirement becomes more expensive, so the IRS re-evaluates the maximum allowed contribution on a yearly basis. Staying abreast of that is important, as is understanding the balance between employer contributions and individual contributions. While the IRS works hard to make this information accessible and written in plain language, it’s helpful to get professional guidance balancing your retirement goals with your tax burden.

There’s more to the story of course. Other kinds of retirement accounts and savings accounts have their own tax implications, as do a wide variety of investment activities. Professional guidance may be your best route forward as you balance the wide variety of needs and goals that make up your financial strategy and retirement plan. At OmniStar Financial, we understand the multifaceted approach that financial planning necessitates, and we strive to deliver personalized treatment to every client that comes our way. Get in touch today, and let’s begin the next stage of your financial journey.