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As we approach the end of the year, many people are thinking about their finances—holiday budgets, charitable donations, and yes, taxes.
Nobody enjoys paying taxes, but with the right planning, you can reduce the amount you owe and keep more of your hard-earned money working for you.
In today’s episode, I want to focus on a critical area of tax planning: your investment portfolio. Specifically, we’ll talk about how to think strategically about taxes so you’re making the most of your money—not just for this year, but for the years ahead.
Taxes can feel overwhelming, and it’s tempting to put off dealing with them. Some strategies even promise zero-tax outcomes by deferring taxes into the future. But as appealing as that sounds, it’s important to understand what you’re signing up for and how it fits into your larger financial plan.
Let’s start with some key considerations you should think about before pursuing or evaluating any given tax strategy.
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Key Considerations for Tax Planning
Before diving into strategies, it’s important to frame your thinking around a few key areas:
1. Your Goals and Priorities
What matters most to you? Do you want to spend your retirement traveling? Buying a second home? Leaving a legacy for your family? Understanding your priorities is the foundation of effective tax planning.
2. Anticipate Future Expenses
Retirement often brings unexpected costs, such as healthcare or long-term care. Your portfolio should be positioned to handle emergencies without triggering a large and unnecessary tax bill.
3. Your Legacy Plans
If you don’t plan to use all your assets during your lifetime, think about how you want to pass them on. Strategies like charitable giving or inheritance planning can significantly impact your tax situation.
4. Know the Rules
Deferred taxes don’t disappear—they’re simply delayed. When you sell an asset, taxes on capital gains will come due. Be aware of the rules around inheritance, such as the step-up in basis, which can offer tax benefits for your heirs.
5. Avoid Letting Taxes Dictate Your Portfolio
Taxes are important, but they shouldn’t drive every investment decision. A diversified portfolio that aligns with your goals will often outweigh the benefits of hyper-focusing on tax minimization.
These considerations will help you approach tax planning in a way that complements your broader financial goals, rather than creating unexpected hurdles later.
Strategic Tax Timing: Make the Most of Your Money
When it comes to taxes, timing isn’t just about saving money in the short term—it’s about making smart decisions that set you up for long-term success. Whether you’re nearing retirement, already retired, or building wealth for the future, knowing how and when to take action on taxes can make a significant difference.
Let’s explore six key strategies to help you align your tax planning with your financial goals:
1. Capitalize on Low-Tax Periods
Throughout your life, there will be natural fluctuations in your taxable income, creating opportunities to reduce your tax bill. For example:
- In retirement, many people see their income drop, which may put them in a lower tax bracket. This creates a prime opportunity to realize capital gains or withdraw from tax-deferred accounts at a lower tax rate.
- On the flip side, if you’re in a high-income earning phase, you may want to focus on strategies like deferring gains or contributing to tax-advantaged accounts to reduce your current tax liability.
- Be proactive about legislative changes. If there’s a chance tax rates will increase due to new laws, realizing gains now could save you significant money in the future.
The key is understanding your current tax bracket and anticipating how it might change over time. By doing so, you can ensure that taxes take the smallest possible bite out of your wealth.
2. Harvest Losses and Gains Strategically
Tax-loss harvesting is a powerful tool for reducing taxable income by selling investments at a loss to offset gains. This strategy isn’t just about avoiding taxes—it’s about maximizing long-term returns:
- For taxable accounts, you can use losses to offset both realized gains and up to $3,000 of ordinary income per year.
- Meanwhile, tax-gain harvesting—realizing gains intentionally when in a low tax bracket—can lock in profits with minimal tax impact.
- You can even reinvest the proceeds in similar investments to maintain your desired asset allocation, a move sometimes referred to as “tax-savvy rebalancing.”
These strategies work best when applied consistently and in alignment with your broader financial goals.
3. Roth Conversions: A Tax-Efficient Retirement Strategy
Roth conversions allow you to move assets from a traditional IRA or 401(k) into a Roth IRA, paying taxes upfront in exchange for tax-free growth and withdrawals later. While this strategy requires careful planning, it can be particularly effective:
- During lower-income years in retirement or before starting Social Security.
- When you expect tax rates to rise in the future.
One of the greatest benefits of Roth accounts is that they allow you to withdraw funds without affecting your taxable income, giving you flexibility to manage your tax exposure during retirement.
4. Leverage Charitable Giving for Tax Savings
Charitable giving is not only a way to support causes you care about—it’s also a smart tax strategy:
- Donating appreciated investments instead of cash eliminates capital gains taxes on those assets.
- Qualified charitable distributions (QCDs), available to those over age 70½, allow you to donate directly from an IRA, satisfying your required minimum distribution (RMD) while reducing taxable income.
By aligning your giving with your financial goals, you can maximize both the impact of your donations and your tax savings.
5. Plan for Legacy and Inheritance
If leaving assets to your heirs is a priority, tax planning should play a central role:
- The step-up in basis rule resets the capital gains clock on inherited assets, meaning your heirs only owe taxes on gains that occur after they inherit the asset. This makes deferred taxes more manageable for future generations.
- On the other hand, if you expect to use most of your portfolio during your lifetime, it’s better to address taxes systematically while ensuring liquidity for your own needs.
Understanding the rules around inheritance can help you strike the right balance between enjoying your wealth and preserving it for your loved ones.
6. Adapt to Changes in Tax Law
Tax laws are constantly evolving, and staying informed can help you take advantage of opportunities or avoid potential pitfalls:
- For example, if capital gains tax rates are set to increase, realizing gains now could save you thousands in future taxes.
- Conversely, if rates are expected to drop, deferring gains might be the better move.
This is where working with a financial professional who tracks these changes can be invaluable, helping you pivot your strategy to stay ahead.
The key to successful tax planning is recognizing that timing and strategy are interconnected. By understanding how these strategies apply to your specific situation, you can avoid unnecessary surprises and keep more of your hard-earned money working for you.
Absolute Wealth Alignment
At the end of the day, tax planning isn’t just about saving money—it’s about enabling the life you want to live. Whether that means splurging on first-class flights, spending guilt-free on your hobbies, or simply having peace of mind that your finances are in order, tax strategy is a tool to help you get there.
The goal isn’t just to minimize taxes but to manage them in a way that supports your financial goals. So as you plan for the year ahead, think about what matters most to you and how your portfolio can help you achieve it.
One of the things that always strikes me about these types of episodes is that we are really in the shallows of basic financial advice; you’re at the tip of the iceberg of what’s possible. And for people out there that are managing their finances alone, it’s easy to get trapped by a plan that seems “good enough.”
At Plancorp, we’ve perfected a process over the last four decades to bring clients’ wealth into alignment with their goals and values. Would you be interested in seeing it?
If so, visit www.callwithpeter.com so that you can learn more, not just about how tax planning and thoughtful portfolio management can support your financial goals, but how the Plancorp Crafted Advantage can help you achieve absolute wealth alignment.
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The Long Term Investor audio is edited by the team at The Podcast Consultant
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