Even if you’ve already filed your taxes, now is a great time to think about what you can do to reduce your annual tax liability. While smart tax planning happens year round, here are three things you can do right now to save money:
- Maximize your tax shelters One of the best ways to reduce your annual tax liability is to maximize your tax shelters. This means maxing out your IRA and 401k (especially if you get matching contributions) and then saving additional retirement dollars in a taxable account. Sadly many Americans make the mistake of not maximizing their tax shelters and as a result, pay hefty taxes every year.
- Hold the right investments in the right accounts It’s not just about holding the correct investments, it’s about where you hold them. For example, REITs are a very important component of your portfolio, but they disburse 90% of their income as dividends, which are taxed at your ordinary income rate. This can be nearly 40%, not even including state taxes! That’s why it is smart to hold REITs in a tax-sheltered account, such as an IRA or 401k, as opposed to a taxable account. This is called “tax-efficient asset placement,” and it can save you as much as 10 basis-points per year, which can mean big bucks over 30 years! FutureAdvisor Premium clients get tax-efficient asset placement as part of our Premium Service, at no additional cost. You can read more about Tax-Efficient Asset Placement here.
- Harvest your losses Every year some asset classes go up and others go down. Most people only make money on the ones that have gone up, but smart investors, and FutureAdvisor Premium clients, can make money on the ones that go down too. How? By tax-loss-harvesting (TLH). TLH is the process of selling assets that have decreased in value and rebuying similar assets to maintain the same risk and diversification in your portfolio. It defers the gain into the future and can add up to 1.0% per year to your portfolio. Historically, TLH was only available to high net worth individuals (those with above $5 million in investments.) Now because of technology, this tool has been brought to everyday Americans, for a fraction of the cost. Smart tax strategy is one of the ways the “Rich Get Richer.” FutureAdvisor Premium clients with a taxable account get daily TLH as part of our Premium Service, at no additional cost, with no minimums. Other online advisors require account minimums to get TLH, rather, we believe it should be available to everyone, even those just starting out. You can read more about Tax-Loss-Harvesting here.
As always, the team here at FutureAdvisor is ready to help you with all your financial planning needs.