8 Smart Tax Strategies for Investors | Invest

Investors usually find it more fun and interesting to focus on investment portfolios and stock trading than on tax strategies.

Sure, the stock market is more interesting than the tax code, but investors who overlook tax planning are leaving money on the table rather than putting more money into their pockets.

Here are some last-minute tax tips to keep in mind whether you're finishing your tax return today or requesting an extension to file your tax return.

Most investors don't plan their taxes all year round, taking necessary steps in December to meet year-end deadlines or preparing for taxes to be paid in April.

“It's a good idea to establish a way to continually track everything that happens and its tax implications,” says Chris Urban, founder of Discovery Wealth Planning in McLean, Virginia.

Investors should track all tax-related events, such as asset sales, throughout the year.

“This also helps you proactively plan your year-end taxes because you can see what has already happened for the year,” Urban says. “Based on this readily available information, you can also decide whether to take any action at the end of the year, making it a more proactive process and giving you at least some control over your tax consequences. ”

By maximizing your 401(k) contributions, you can reduce your taxable income, reduce your immediate tax liability, and defer taxes on investment gains.

“To effectively optimize your 401(k) contributions, you should prioritize contributions as much as your plan and financial situation allows,” says Director of Operations at Alix, which helps clients resolve their estates. , says Karin Stiles.

“Additionally, taking advantage of periods of low tax liability presents a strategic opportunity,” she says. “At such a stage, consider working with your tax advisor to roll over a portion of your 401(k) to a Roth IRA, which allows for tax-free growth of investments and tax-free distributions in retirement.” You can do it with

Income earned within a 529 plan is generally free of federal taxes, but also free of state taxes if the funds are used for qualified education expenses, such as tuition, fees, books, and housing. Although your contributions are not deductible by the federal government, some states offer tax breaks to residents who contribute to these plans.

“If saving for your child's college education is an important goal, contributing to a 529 college savings plan may be the best strategy from a tax perspective,” says Ryan Nelson, wealth advisor and founder of RLN Wealth. “I'll get it,” he says.

“Recent tax law changes have made 529 accounts even more attractive. The Secure 2.0 law allows you to roll unused 529 assets into a 529 beneficiary-owned Roth IRA tax-free and penalty-free, with certain limitations. Now we can do that,” Nelson added. .

If you are age 73 or older, you must take distributions from a qualified retirement account, such as a traditional individual retirement account or a 401(k), unless you have rolled them over to an IRA.

Taking these required minimum distributions (RMDs) is critical to avoiding Internal Revenue Service penalties. The idea is as follows. For accounts that have enjoyed tax-free growth, in some cases for decades, Uncle Sam eventually wants to collect his share. Paying taxes is never fun, but don't make things worse by overlooking what you should do in retirement.

Loss recovery is the process of selling an investment at a loss to offset capital gains on other investments. This can reduce your tax liability. This is a commonly used strategy to optimize the tax efficiency of investment portfolios and maximize after-tax profits.

Although many investors and even financial advisors view loss recovery as a year-end activity, these opportunities can be sought throughout the year.

Jeff Delham, president of Delham Wealth Management in Palos Verdes Estates, Calif., says periods of market volatility are especially good times to take advantage of tax loss harvesting.

“If you take March 2020 as an example, the market fell sharply in a short period of time,” Delham said. This allowed investors to sell securities at a loss and move into similar but not identical investments, effectively maintaining market exposure while generating tax assets.

“Under current tax law, investors can use these losses to offset certain gains, resulting in a net loss of $3,000 in a given tax year,” Delham says. “If we incur further losses that exceed our profits, we may be able to carry those losses forward into the future.”

Rebalancing your portfolio means adjusting your asset allocation to maintain your desired risk level and investment goals.

For example, your planning process may indicate that your time horizon and risk tolerance should create a portfolio of 60% stocks and 40% bonds. Periodically sell some assets and buy others to ensure you maintain that allocation.

Rebalancing your portfolio in a tax-advantaged account, such as a Roth IRA, is tax-efficient because you can sell investments that have appreciated in value within the account without any tax consequences. Vanguard says if you want to rebalance within your taxable account, you can reduce your tax burden by adding money to an underweight asset class without selling your current investments.

Remember when you opened your IRA 10 years ago? Probably when you were married to someone different than the person you are now married to. What if her ex-spouse is listed as your account beneficiary and you never change that designation? Even if you die, that person will still be your beneficiary. .

“To ensure that your estate is properly distributed according to your wishes, you need to review your beneficiaries,” Stiles says. “Once designated, the beneficiary remains in place even if circumstances change, such as the death of the beneficiary or a change in relationships.”

Regularly reviewing and updating beneficiary designations will ensure that assets are transferred to their intended recipients, she added.

Investors who itemize their deductions can donate to their favorite charities as a way to reduce their taxes.

“Investors should consider gifting valuable assets, such as stocks or real estate, rather than cash,” Delham says. “This allows them to take the full amount as a deduction, but if they sell the stock and donate the cash, the tax on the increase in value will be borne by the investor.”

People taking the standard deduction may be wise to forego contributions and instead itemize them into a single year, he added.

Delham pointed out that another helpful tool for people over age 70 1/2 who take the standard deduction is to take qualified charitable distributions (QCDs) from their IRA accounts.

“These distributions, if properly made to a qualified charity, can count toward required minimum distributions and are not taxed as they would be with a regular RMD,” he says.