Three Ways to Pay Less Tax on Investments

It’s quite common to be surprised by how much you owe at tax time due to inefficient funds. Here are three ways to pay less on your investments so that you can keep more of what you make. 

NUMBER ONE: Utilize TLH, or tax-loss harvesting.

This is a way to strategically time the sale of your investment when it's down in value so that it can generate a capital loss.

Now you might ask: why generate a loss on purpose? It's because you can offset your gain in your portfolio, which helps you reduce your tax bill. Plus, if you do it correctly, then you can actually get that loss and also stay invested the whole time, which is really important. 

There's some rules around this, like the 30-day wash sale that you have to be aware of, so be sure to bring it up with your CPA or your financial planner to just make sure that you're doing it correctly. We do this for our clients throughout the entire year, because as we know things in the market go up and down and there are opportunities throughout the year to do this and there might be for you as well. 

And, if it is done correctly:

• you get to reduce your highly-taxed, ordinary income; 
• you get to increase your after-tax returns in those taxable accounts; and, 
• it also allows you to stay invested the whole time, which is great.

NUMBER TWO: Make sure that you hold the investment for the right length of time.

If you hold your investment for less than a year, you actually pay ordinary income tax rates on it. That is, for any gain that you have, you pay ordinary income tax rates on that gain. But if you can hold it longer than a year, that can make the difference between long-term capital gains rates and short-term capital gains rates. Check out the video to see a chart outlining the differences. 

NUMBER THREE: Know what kind of investments you actually own.

There's a lot of actively-managed mutual funds out there, and they'll sometimes recognize a gain in the middle of the year or at the end of the year, and that's taxable. And that taxable nature of that fund is passed through to the clients actually invested in it, even if the client didn't sell anything. This makes a big difference come tax time, and it's not even in your control, which can be kind of frustrating.

That's why we're big believers in finding the right tax-efficient funds or ETFs so that you can achieve a similar strategy to what you're currently doing and have a similar track record? Maybe. But cost a whole lot less in fees and tax savings? Yes!