What strategies can I use to reduce taxes on my investments?
There’s no “one size fits all” strategy for tax-efficient investing and wealth planning. However, we believe these general tax moves could potentially help you keep more of what you’ve earned.
Tips for tax-advantaged investing
1. Time, eliminate, and distribute your RMDs
Required minimum distributions (RMDs) are mandatory, but you can time those distributions to your advantage (as long as you fulfill your obligation by December 31 of each year, or utilize the timing exception for taking your first RMD). The best time to satisfy your RMDs depends on your situation, so we recommend talking with a tax professional and a Wealth Advisor.
Individuals who don’t need to use RMDs for expenses can eliminate all or part of them by converting their retirement accounts to Roth IRAs. Roth accounts do not pay tax on distributions—in other words, once you contribute after-tax money, your Roth can potentially grow tax-free for your entire life without being subject to RMDs.
Instead of donating cash or an appreciated security, you can make a qualified charitable distribution (QCD) to distribute your RMDs from your retirement account to a cause you care about.
2. Avoid short-term capital gains
Tax rates for long-term capital gains are 0% to 20%, whereas short-term capital gains rates fall between 10% to 37%, the same rate as ordinary income. You need to hold your investments for more than one year to avoid short-term capital gains.
3. Match gains with losses
No one likes to sell their investments at a loss. But if you no longer believe in the company you invested in or want to hold fewer shares, then selling it at a loss can help offset gains from a tax perspective. This process is commonly known as tax-loss harvesting.
4. Give appreciated securities to charity
When you have a security that has appreciated considerably over a holding period of at least a year, you can donate that security to a qualified charity and receive a charitable income tax deduction for its fair market value. This can help you avoid the capital gains tax you otherwise would have to pay if you sold the stock for a gain.
5. Combine income needs with legacy planning through a charitable gift annuity (CGA) or Charitable remainder trust (CRT)
A CGA is a contract between you, the donor, and a charity. After you make a sizable gift to a charity—in the form of cash, securities, or another acceptable asset—you receive a fixed stream of income from the charity for the rest of your life. Once you pass, the remainder of the gift goes to the charity. A CRT similarly provides income during your life, but instead of the charity being responsible for the annual distributions, the trustee is responsible.
6. Hold your investments in a separately managed account (SMA)
An SMA allows you to own shares of individual businesses, which can offer several tax benefits: individual cost basis, more flexible timing for distributions, the ability to offset gains with losses, and potentially fewer transactions. Read more about the tax advantages of SMAs.
For even more tips, download a free special report from Motley Fool Wealth Management: 9 Savvy Taxes Moves for Retirement
How a Wealth Advisor can help with general tax planning
Along with their investments, taxes are some of the biggest drivers of most clients’ financial strategy. And pulling your general tax considerations into a holistic picture is one of the key benefits of a relationship that includes both financial planning and investment management.
At Motley Fool Wealth Management, our experienced in-house Wealth Advisors work with you to understand your spending and how it may change over time, evaluate your long-term financial plans, and assess risks that could keep you from achieving your wealth goals. We help you determine the cost of your lifestyle through various stages of life, and how to fund it.
Our general tax planning also evaluates ways to defer income and accelerate deductions, including taking into account how new legislation or changes to existing tax rules may affect you, and how to take advantage of tax bracket troughs. We seek opportunities to reduce your taxes—such as when to recognize income, who should recognize it, and where—and help retirees and soon-to-be retirees develop a spend-down strategy that accounts for timing of income streams, as well as tax-diversified withdrawals.
It’s one of the many ways we help you prepare for the future, live the retired life you desire, and design a legacy you can feel proud of.