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Educational Resources

By Jeff Wolfe, Esq. Senior Vice President, Manager of Wealth Planning Strategies

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What times we live in. We’ve seen markets quickly bottom in March of 2020 due to COVID fears, then quickly springboard back to record highs. All the while, you are charged with maintaining a well-diversified portfolio that may include decisions like whether you should invest in a stock versus a bond, growth versus value, industry trends, sectors, etc. Making these decisions can become overwhelming, especially in these times of market volatility.

To add an extra layer of complexity, you also need to consider another deciding factor: taxes. While taxes should not be a primary factor in your investing, making sure you are tax efficient in your planning certainly should be a significant consideration. As the old saying goes, it doesn’t matter how much you make, it matters how much you keep!

For example, investments that are tax-efficient – like tax-free municipal bonds – may be better for a taxable account. Moreover, long term “growth” style assets are another example of investments that fit well in either taxable or tax-deferred accounts. Tax-inefficient investments, such as those that generate high dividends or that may have shorter holding periods, may be better suited in a tax-deferred account like an IRA or 401(k).

When looking at your overall asset allocation, or perhaps considering changes to your portfolio, carefully consider which assets and which accounts may make sense to execute your planning. As an example, we recently consulted with a client nearing retirement who wished to reduce her exposure to aggressive equities. By making changes in her tax-deferred accounts, we avoided some significant capital gains taxes during the reallocation.

Remember, though, don’t let the tax tail wag the dog. If you have gains, you will owe taxes. It’s not always a bad thing. Make sure your portfolio is properly allocated, designed to meet your financial goals and tailored to your risk tolerance. On top of all of that, you should be well diversified with your investments. Work with your tax advisor and your financial advisor to make sure your portfolio meets your planning needs while maintaining tax efficiency.

Benjamin F. Edwards does not provide tax advice; therefore, it is also important to consult with your tax professional for additional guidance tailored to your specific situation.