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The Tax Management Triumvirate

Written by Andrew Roth

As one of our founding fathers once opined, the only certainties in life are death and taxes.

We’ve recently received questions about future taxes considering our changing political landscape. We can’t say for certain what tax changes may be coming down the road but it’s a good reminder that many of the tax-planning concepts we already use will likely become more valuable.

There are three primary levers we can use to affect the tax-efficiency of our client’s finances. These three levers include tax-efficient tools, structures, and ultimately planning.

Tax-efficient Tools

The first lever is using tax-efficient tools in “non-retirement” accounts. Our goal is to make sure these investments maximize their after-tax return. We try to limit taxable dividends or capital gains distribution when it makes sense. This may involve using tax-preferred securities like municipal bonds, mutual funds that employ dedicated tax-managed structures, or passive vehicles like low-turnover funds or ETFs. Therefore, the solutions we use for taxable accounts may deviate from what we use in accounts like IRAs.

Tax-efficient Structures

The second lever is making use of tax-efficient structures. This involves taking advantage of tax-favored accounts like 401(k)s or other qualified plans, IRAs, or Roth IRAs to optimize how clients save for retirement during their earning years. The goal here may be to push taxability into the future, when a person’s tax bracket is expected to be lower, or to maximize deductions in the present.

Financial Planning

The most impactful lever is financial planning. How this can be affected in totality would fill a textbook and some of these ideas are simple while others are complex. As an example, after accounts like IRAs and 401(k)s are maxed out, maybe investing after-tax dollars will give clients more flexibility in the future due to the tax-treatment of capital gains versus ordinary income. How can we tax-efficiently access money during retirement to fund our lifestyle? Planning could involve maximizing charitable gifting by identifying appreciated securities instead of cash, or methodically harvesting losses to offset gains. It could also involve coordinating activities with CPAs each year, or perhaps with estate planning attorneys so we can maximize the wealth transferred to our beneficiaries and heirs.

The tax regimes we are subject to will likely change many times throughout our lives. The basic tools we use however will remain unchanged. Despite our patriotic leanings we would like you to keep as much of your own money as possible. After all, you can always write a charitable gift to Uncle Sam afterward, if you’re so inclined.