13 Tax-Smart Investor Strategies to Consider Now
by Gabriel Lewit
Now that New Year’s Resolutions are in full swing, you might be thinking of the next season. While we know Spring is on the horizon – even though Chicago may not seem like it, at SGL Financial, we mean Tax Season.
Here are some tax-smart investor strategies to consider not just during Tax Season, but all year round..
Diversify Your Tax-Advantaged Investing Accounts
Consider participating in a tax-sheltered investing account to maximize tax savings. Before choosing an account, it is important to do your research and talk to your advisor to ensure the account your money is headed to is the best for your holistic financial plan. What types of accounts are out there today and what’s a good diversification approach? Let’s start with Employer-Sponsored Accounts.
Employer-sponsored accounts can lower your taxable income every year. The IRS typically lets you contribute your earned income – up to annual limits – into plans such as 401(k)s, 403(b)s, and 457s.
Individual Retirement Accounts
You may also qualify to open a traditional or Roth IRA (individual retirement account). Depending on your selection, you may deduct your contributions now and pay taxes later. Or, with a Roth account, you can pay taxes on your contributions – and then enjoy tax-free growth and qualified withdrawals in retirement.
Self-employed individuals can hop on the tax-advantaged train, too. Aside from traditional and Roth IRAs, you can select from a menu of SIMPLE and SEP IRAs and even Solo 401(k)s.
Correctly Utilizing the Right Accounts Grants the Most Tax Benefits
The best account(s) for you depends on your financial situation and needs. You may also want to bring in a qualified financial professional to help you sort your options and open one or more accounts.
But make no mistake: if you’re not saving for retirement in tax-advantaged accounts, you’re missing out on crucial tax benefits. And don’t forget to max out your contributions when you are able.
Divide Your Investments Wisely
Aside from choosing the best accounts for your situation, it may be wise to divide your investments into different accounts.
For instance, tax-advantaged retirement accounts make a great place to store stocks, bonds, and ETFs (exchange-traded funds) that pay dividends. Funds that sell and buy their holdings more often should typically go here, too. This way, you can lower your tax bill and reinvest your dividends and profits to boost portfolio earnings.
On the other hand, your “tax-neutral” investments such as tax-managed mutual funds or municipal bonds may be better suited for your taxable accounts. While you may still generate a profit, these securities typically do not come with a high tax bill. As such, you needn’t place them into a tax-deferred account.
Carefully Consider Capital Gains Tax Implications
Turning your investing profits into cash is a tempting idea. But before you run out and sell all your stocks, it’s wise to consider the tax implications of your decision.
Cut Losses to Your Advantage
The IRS allows investors to write off a set amount in capital losses – essentially, selling stocks that have lost value – every year. You can then use this write-off to reduce your taxable income.
Turn on Tax-Loss Harvesting
If you don’t already use tax-loss harvesting, you may be missing out. This feature automatically allocates your investment dollars toward securities and accounts that help you “capture” losses. Then, you can use your losses to lower your total tax burden.
Spread Out Your Withdrawals
If you need the money or want to capture your gains before your portfolio falls, you may consider instead making smaller withdrawals over time. By selling the most tax-efficient investments first and taking partial withdrawals over several months or years, you may pay fewer taxes in the long run.
Donate to Charity
All year round can be a season of good tidings, cheer, and charitable giving. But charity doesn’t just support those in need – it’s also a last-minute chance to optimize your tax strategy.
For instance, many individuals write off cash gifts to qualified charities on their taxes. You can also donate your appreciated investments, such as shares of stocks, to eligible organizations. This strategy not only feels wonderful but also lets you avoid capital gains and potentially take a larger deduction at the same time.
Remember that you’ll need to itemize your deductions to write off your charitable contributions. And if your itemized list doesn’t add up to more than the current standard deduction, you may consider talking to your tax professional about consolidating several years’ worth of contributions.
Consider a Health Savings Account
Another way to lower your tax burden is by opening a health savings account, or HSA. If you are enrolled in an HSA qualified health plan, you can open an HSA and contribute up to $3,650 in 2022 ($7,300 for families with an additional $1,000 catch-up contribution if you are age 55 or older).
The money you put in is tax-deductible against your income and is tax-free if you use withdrawals for approved medical costs.
Consult with a Qualified Professional Before Making a Move
Each of these decisions can have a major impact on your financial life, which is why many people turn to a professional for advice. That’s where our team at SGL Financial comes in.
Our team of qualified financial experts believe in a comprehensive approach to financial planning and are here to help you understand and navigate each of these potentially tricky situations with ease. Even if you’re unable to take advantage of these strategies for 2021, you can make big changes for 2022 – and enjoy the tax-smart benefits for years to come. Contact us at SGL Financial to learn more about how we can help you maximize your tax return.