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Tax Planning and Your Investments

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Core Group

An investment strategy is incomplete without including tax planning. After all, it is not what you make, it is what you keep that matters. Often brokers and wealth managers leave out the tax ramifications when giving investment advice, which leads to unintended consequences.

Keep reading to learn more about basic things you should consider when selecting your investment strategy.

Qualified vs. Non-Qualified Accounts

When you have a qualified account, such as IRAs or 401ks, you don’t pay taxes on them while you save. You pay tax, as ordinary income when you take money out of those accounts.

There are several changes concerning IRS contributions and distributions in the recently passed SECURE Act. Usually, it makes sense to put income-producing investments in your qualified account, where they don’t cause current income. These investments would be anything generating investment income such as dividends, capital gain, and interest.

Those investments that don’t produce investment income are better kept in your non-qualified accounts (regular, non-retirement). One exception to this is if you are in a relatively low tax bracket, and want to take advantage of the lower capital gains rates.

Remember, the qualified accounts are great because you don’t pay income tax currently, but the downside is that all withdrawals from the account are treated as ordinary income, not capital gains. In some cases, you might be better off paying the lower tax rate on capital gains now. There is so much to consider!

Unrealized Gains/Losses

With investments, you generally don’t pay tax until you sell. The amount that a stock has appreciated (or depreciated) since you bought it is called an Unrealized Gain (or loss). Managing these unrealized gains/losses is key to an effective tax strategy for investments.

For instance, if you’ve sold investments during the year that generated a gain, and you have others that you haven’t sold that you have a loss on, it might make sense to go ahead and sell the underwater investment. This realized loss could be used to offset the gain that you already realized.

You don’t want tax to be the tail that wags the dog; the sale needs to make sense from an investment strategy standpoint. Avoid repurchasing the same asset within 30 days, or you will lose the benefit of the loss, this is the IRS so-called wash-sale provision.

Review your investments throughout the year, but especially in the fourth quarter to make sure you haven’t left any money on the table.

Additionally, if you have a lot of Unrealized Gains in your investments, consider the timing of when you’re going to realize them. You have to consider the relatively new Medicare tax of 3.9% on Net Investment Income above certain income thresholds, as well as regular income tax rates.


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