Tax Planning in Turbulent Times

The good and bad news about saving for retirement is how many tax-favored savings accounts exist for this purpose. There are a number of employer-sponsored plans, like the 401(k), 403(b) and SIMPLE IRA. There also are individual IRAs you establish outside of work. For both, there are traditional and Roth structures available.

In any of these types of retirement accounts, your dollars have the opportunity to grow tax-free while they remain in the account. This helps your retirement assets accumulate more quickly than if they were subject to the ongoing taxes that taxable accounts incur annually along the way (such as realized capital gains, dividends, or interest paid).

The Health Savings Account (HSA) offers a rare, triple-tax-free treatment to help families save for current or future healthcare costs. You contribute to your HSA with pre-tax dollars; HSA investments then grow tax-free; and you can spend the money tax-free on qualified healthcare costs. That’s a good deal. Plus, you can invest unspent HSA dollars, and still spend them tax-free years later, as long as it’s on qualified healthcare costs. But again, there are some catches. Most notably, HSAs are only available as a complement to a high-deductible healthcare plan.

Last but not least, a bounty of trusts, insurance policies, and other estate planning structures help families leverage existing tax breaks to tax-efficiently transfer their wealth to future generations.

With ongoing negotiations over the tax treatment on inherited assets, families may well need to revisit their estate planning in the years ahead. Come what may, there’s always an array of best practices that aim at reducing your lifetime tax bills by leveraging available investment tools to maximum effect.

It’s one thing to have the tools just described. It’s another to make best use of them.

In short, tax planning is an ongoing campaign, staged on multiple fronts. One of the most powerful ways to ward off excess taxes is to be tax-wise about your investing. And yet, few investors take full advantage of the many opportunities available at every level. These levels include how you manage your investment accounts, select individual holdings, and buy and sell those holdings along the way.

Are you doing all you can to build, manage, and spend down your taxable and tax-sheltered accounts for maximum lifetime tax-efficiency?

• Building: Are you maxing out your contributions to appropriate tax-sheltered accounts? The more money you hold in various tax-sheltered structures, the more flexibility you’ll have to delete or at least defer taxes otherwise inherent in building capital wealth.
• Managing: Are you being deliberate about your asset location, dividing your various assets among your taxable vs. tax-sheltered accounts for overall tax efficiency? Ideally, you use your tax-sheltered accounts to hold your least tax-efficient holdings, while locating your most tax-efficient holdings in your taxable accounts.
• Spending: When the time comes to spend your wealth, have you planned for how to tap your taxable, tax-deferred, and tax-free accounts? There is no universal answer to this critical query. Cash-flow planning calls for a deep familiarity with the particular accounts and assets you’ve got; the particular rules involved in deploying each; and your particular spending goals. All that, while keeping a close eye on any changes that may alter your plans.

Are you being deliberate about selecting tax-efficient vehicles? Even when different funds share identical investment objectives, some may be considerably better than others at managing their underlying holdings. Seek out fund managers with solid tax-management practices, including:

• Patient Investing: Many fund managers try to “beat” the market by actively picking individual stocks or timing their market exposures. We suggest using managers who instead patiently participate in their target market’s long-term expected growth. This not only makes overall sense, it’s typically more tax-efficient as it involves less, potentially taxable action.
• Tax-Managed Investing: For your taxable accounts, some fund managers offer funds that are deliberately tilted toward tax-friendly trading techniques such as avoiding short-term (more costly) capital gains, and more aggressively realizing capital losses to offset gains.

Like the fund managers you choose, are you also being patient and deliberate about your trading? Do you avoid excessive trading and short-term capital gains (currently taxed at higher rates)? Are you guided by a personalized investment plan? Bottom line, the fewer trades required to stick to your investment plan, the better off you’re likely to be when taxes come due.

Having an investment plan also facilities your or your advisor’s ability to identity and make best use of tax-loss and tax-gain harvesting opportunities when appropriate.

Managing for tax-efficient investing is just one way Escient Financial helps families reduce their lifetime taxes. Escient Financial also helps integrate all of the above into your broad financial interests. The following are just a few life events that can pose potential tax-planning challenges and opportunities:

The above scenarios represent only a handful of the tax-planning events you might encounter throughout your life. Whether you’re building, preserving, or spending your wealth, tax-planning remains integral every step of the way. Each financial move you make can and should be leveraged for tax efficiencies as described. Better still, a seasoned tax-planning professional can combine these parts into an integrated whole as you pursue lifelong tax efficiency.

Put another way, ideal tax planning integrates seamlessly with all your greater financial plans. This can get complicated—like a juggling act, in which we must keep an eye on each item as well as the big-picture results.

Could you use an experienced hand to keep your total wealth at play? Escient Financial is here to help! Feel free to...