Investing and Taxes - Important Considerations

By Financial Advisor Hans Smith

Most everyone can agree that we still don't have a tax system that looks like someone designed it on purpose. There is certainly a lot to know, and here are a few tax-related concepts that we focus on at One Day In July:

Taxable Capital Gains Distributions

Actively managed investment funds often have high expenses, and to make matters worse can also be tax inefficient. Significant buying and selling within actively managed funds can produce sizable taxable capital gains distributions, passing the tax bill along to investors.

Index funds, on the other hand, are tax-efficient investment options, a result of limited buying and selling occurring within the fund or ETF. Lower distributions mean investors have less taxable income to report. This is yet another reason why we construct client portfolios utilizing low-cost index funds.

Tax-Loss Harvesting

Harvesting is a strategy that can be used to reduce taxable income and offset future recognized capital gains. We generally recommend staying invested in financial markets while taking advantage of this IRS tax rule, and there are ways to implement such a strategy.

Taxation of Inherited Assets

Over the past few years the IRS has created significant confusion over Inherited IRA distribution rules. We help heirs sort through the distribution rules, meet their yearly requirements, and incorporate inherited assets into their overall portfolio.

Beyond distribution requirements, stepped-up cost basis is an important concept for heirs to understand. This can have a significant impact on tax liabilities associated with inherited assets.

IRA Deductions Limits

Not everyone receives a deduction when contributing to a Traditional IRA. Eligibility is largely determined by filing status, availability (or absence) of a workplace retirement plan and adjusted gross income for a given calendar year.

In many cases, simply increasing workplace 401k contributions can be a more tax-efficient option.

Withdrawing Assets in Retirement

Various investment accounts are taxed in different ways when distributed for living expenses. Utilizing a withdrawal strategy from multiple types of investment accounts has the potential to reduce your overall tax liability.

We can establish electronic links into your personal checking account to provide monthly income from your investments.