4 Tax Planning Recommendations You Need to Consider Now
Without a proper tax plan, your investments remain unnecessarily highly exposed to taxation. As such, tax planning encompasses all measures taken to shelter your investments for optimum tax efficiency. These measures are all legal and they're meant to ensure you don't end paying more taxes that you have to. Below are some useful tax-planning tips you should consider implementing as soon as possible:
1. Use Retirement Accounts to Protect Your Interest
Your Investment Advisory accounts can serve as the perfect safety net for your interest. In case bonds are part of your investment portfolio, it makes more sense to have those bonds sheltered in tax-deferred retirement plans like 401(k) plans and IRA's. You realize that, typically, bonds pay occasional interest that's usually taxed at the same rates as normal income tax. However, placing these bonds under a retirement account may exempt interest accrued from current taxation.
2. Revisit Your Taxable Account Investments
Taking a fresh look at your taxable account investment may reveal the need to switch to tax-efficient mutual funds. It could also point to the necessity to adopt separately-managed mutual funds that attempt to minimize the number of potential tax events for your investment portfolio. A Buy-and-hold approach may be what your Debt & Loans plan requires considering that both federal and state capital gains may hit 30% or higher when combined.
3. Leverage Cash Flow to Bring Balance to Your Portfolio
Unless there's no other way around, it's recommended that you avoid selling any existing investments with a view to balancing your portfolio as that may produce taxable gains. It's more prudent to utilize cash flows restore balance. For example, the source of your funds can be dividends and interest the account itself has earned, new deposits, or even tax-loss harvesting gains. It's also possible to minimize transaction costs using this strategy.
4. Realizing Annual Tax Losses
It's possible to yield substantial tax deductions if you sell investments that are at loss. Taxation law allows you to realize net investment losses amounting to $3,000 throughout the year. You can exploit that provision to minimize your taxable earnings or cancel out gains already realized. Be careful to follow "wash sale rules" that dictate how you can reinvest proceedings from selling losing investments.
As you look forward to the year 2018, consider strategizing on how to make your investments tax efficient. That requires careful tax planning that exploits all relevant legal provisions. This way, you'll keep more money to yourself, with less going to the IRA.