Thinking about taxes? 3 planning strategies to discuss with your advisor

By Stan Dyl


Note: Goldman Sachs PFM is not a tax advisor. Please consult your own tax advisor for matters specific to your own taxes.

Taxes are often top of mind for investors whenever April rolls around. But once returns are filed, it can be easy to not think about taxes again until the next year.

Before you put all your paperwork away, take a moment to evaluate your current tax planning strategy. Are there areas you could fine-tune to help maximize your tax savings down the road?

Many people may not realize the importance of tax planning, which can be critical to the success of your overall financial plan. Having an integrated tax strategy can help you stay on track to achieve your short- and long-term goals, whatever they may be.

While everyone’s tax and financial situations are different, here are three general strategies to consider to help you get the most of out of your financial plan.

1. Building a tax-efficient portfolio

When putting together an investment portfolio, it’s important to take a holistic view of your investments and determine how to locate assets where they can be most tax-efficient, helping you to keep as much of your potential investment gains as possible.

This tax-minimizing strategy is known as asset location.

How an investment account is taxed will depend on the type of account you own. There are three basic types of accounts to consider:

  • Taxable accounts (e.g., after-tax brokerage account) where investment income/gains are subject to taxes.
  • Tax-deferred accounts (e.g., 401(k) plans and traditional IRAs) where taxes can be deferred until you take a distribution.
  • Tax-exempt accounts (e.g., Roth IRA) where contributions are made with after-tax dollars, but there’s no tax on the distribution of earnings at retirement, as long as certain requirements are met.

In building a portfolio, your financial advisor can help you locate assets where they can be most tax-efficient.

Here are a few hypothetical examples:

  • Taxable accounts would generally hold tax-efficient equities and tax-free municipal bonds (if needed to complete your bond allocation).
  • Tax-deferred accounts, like a traditional IRA, will eventually be taxed as ordinary income, so generally you may want to consider slower growth and less tax-efficient assets (such as fixed-income securities) in these accounts.
  • Given that Roth IRAs are generally tax-free, typically you may want these accounts to hold growth assets (such as stocks) to help maximize the long-term value.

2. Tax-Loss Harvesting

This is another strategy that could help you keep more of your potential investment earnings.

When you invest, you may earn a profit or capital gain on your investments. Capital gain is taxable, and the more you have to pay in capital gains tax, the less you have to keep invested. Capital gains taxes can impact your investment performance over time.

This is where tax-loss harvesting can come in.

At the most basic level, tax-loss harvesting is a strategy where you sell an investment that has declined in value at a loss and then use that loss to help reduce any taxable capital gains you earned (up to a certain amount). Any potential tax savings could then compound over time, helping you reach your long-term investment goals. For a deeper dive into this strategy, read our other Spotlight article “How Tax-Loss Harvesting can help maximize tax efficiency.”

3. Roth IRA conversion

Tax planning can be especially critical during this drawdown phase—when there are important decisions to be made about Social Security, pensions, IRA distributions, etc.

One tax strategy that you may want to discuss with your financial advisor is a Roth IRA conversion. Generally speaking, this is where you convert some or all of a regular taxable IRA (like a traditional IRA) into a tax-free Roth IRA. The amount you convert is taxable, but once the money is in the Roth account, qualified withdrawals are tax-free.

This strategy may make sense for individuals who are in a lower tax bracket in the period between retirement and before the start of Social Security and their required minimum distributions.

Roth IRA conversions can be appealing for two key reasons. For one thing, Roth IRAs are not subject to required minimum distribution rules (during your lifetime), which could mean decades of potential tax-free growth. Additionally, these accounts could also be left to your children, making them an attractive vehicle for fulfilling legacy goals.

A final word about taxes

Keep in mind that tax planning can be complex depending on your personal situation. The tax strategies discussed in this article aren’t meant to be comprehensive. When it comes to navigating tax matters, it’s always a good idea to consult a financial advisor or tax professional.

Learn more  about tax-efficient strategies for your financial plan.

For more information about implementing strategies discussed and help creating a tax-efficient financial plan, connect with a PFM personal financial advisor. As a PFM client, your advisor can help you navigate Goldman Sachs’ in-house resources in tax planning, investments and many other disciplines and, acting as a partner in your corner, coordinate with your tax and legal advisors to help maximize your return on life, today and tomorrow.

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ABOUT THE AUTHOR

Stan Dyl

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.

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