Tax Efficient Moves for Your Investments

While managing your investments it is critical to contemplate the tax implications – not simply the tax savings from a single transaction; rather, the real issue is whether you’re better off on an after-tax basis (for this year and beyond).

Tax Efficiency is the Key.

Are you thinking that it’s time to make a few changes in your portfolio? If so, consider this to minimize the tax impact of any changes:

Carefully choose how you rebalance your portfolio. 

Perhaps you decided a year or two ago that your risk tolerance and investment needs called for a portfolio of 65% stocks, 25% bonds, and 10% cash or money market funds. But, because of market fluctuations, your portfolio is currently out of sync with your objective. 

If you’re like most investors, you probably have some investments in taxable accounts and some inside of IRAs, 401(k)s, etc. Thus, as you’re rebalancing your portfolio try to (1) limit sales of appreciated stocks and funds to those held inside of tax sheltered accounts and (2) sell assets that have dropped in value from your taxable accounts (so that as much of the loss as possible will be deductible). Then reinvest the proceeds to get back to a ratio of stocks, bonds, and cash with which you’re comfortable. 

Another way to rebalance without triggering tax consequences has to do with future investments. For example, if you’re regularly reinvesting dividends or adding new money to the accounts, you may be able to tax efficiently rebalance your investments simply by redirecting your dividends and the “new” money to the asset categories that are currently underweighted in your portfolio.

For more “year-round” tax planning tips click here to view the complimentary white paper: 

Davis and Hodgdon Associates CPAs has been assisting nonprofits, individuals and businesses with tax, accounting, and financial planning services in the Burlington Vermont Metro area for more than 20 years. If you have any questions or concerns please feel free to call 802.878.1963 or email [email protected].

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