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Expert Insights for Smart Financial Planning

5 Questions to Ask Your Adviser About Taxes

Do you know what asset location is? What about tax loss harvesting? Understanding these concepts might help you minimize your tax hit.


As Ben Franklin once said, "There are only three things certain in life: death, taxes… and an annual scramble by investors to try and save money on taxes before the filing deadline."

Okay, maybe he only said two of those, but as we approach another April 15, investors are once again looking for ways to be as tax efficient as possible with their investments. My advice: You shouldn't only be thinking about taxes for a few months out of every year. Tax efficiency is best achieved when there is an ongoing, concerted effort toward achieving it.

See Also: The Most-Overlooked Tax Deductions

Still, this time of year does provide the perfect time to talk to your financial adviser or advisers about how to approach taxes on investments. Here are five questions you should be asking:

1. Am I invested in the most tax-efficient vehicles based on my needs?

The first thing most people look at when choosing an investment product is its overall rate of return. This makes sense as a starting point, but it's not the only relevant factor in investment selection. Taxes can take a considerable chunk out of your gains and leave you with less of a return than expected. There are multiple solutions to minimizing tax implications including tax-managed mutual funds or investing in exchange-traded funds. The important thing is to work with your adviser to find sensible options that don't also minimize returns. Are there better options to minimize taxes while still achieving growth? Go ahead; ask your adviser.


2. Do I have my investments in the most tax-efficient accounts?

Achieving tax efficiency isn't just about the assets you're invested in; it's also about the accounts in which those investments live. One strategy that can minimize taxes is known as "asset location." In this approach, you would hold fewer tax efficient assets in a tax deferred account – such as a 401(k) – and more tax efficient assets in accounts like a Roth IRA, where contributions come from post-tax income, so you don’t pay taxes on it in the future. This helps balance out your tax exposures while leaving your overall asset allocation intact. This is a fairly simple strategy, but it must be executed carefully.

3. How often should I be rebalancing and how do I do it?

A vast majority of investors rebalance on an annual, semi-annual or quarterly basis. There's nothing inherently wrong with this strategy, but it could be costing a considerable amount in taxes and fees. You may want to consider rebalancing more strategically—such as when your portfolio has drifted outside of the acceptable tolerance for the asset classes—and with and eye toward managing taxes. While this would be a nightmare for investors to do on their own, working with an adviser can help achieve lower taxes through more strategic rebalancing. It's not for everyone, but your adviser should be able to tell you if it's a good fit.

4. What are my opportunities for tax loss harvesting?

No one picks winners every time. Especially in down market years, you're likely to have some investments in your portfolio that didn't perform well. While you can't erase these losses, you can take steps to minimize the impact of potential investment losses. One common strategy is to offset taxes on gains and income by harvesting a loss upon selling a security. Maybe you had a good year and didn't have many poor performing assets, but if you did, tax loss harvesting can help minimize the blow.

5. What changes are coming in tax year 2016?

With each new year, comes a new set of updates to tax laws. For example, tax brackets and the amount that can be invested in a company 401(k) or an IRA tend to change annually, although that's not the case this year. While the tax brackets will be shifting, the limits on contributions to 401(k)s and IRAs will remain the same. Having a conversation with your adviser about annual changes will help you develop a comprehensive plan for managing taxes throughout the year. As Ben Franklin actually once said, "Diligence is the mother of good luck."


See Also: 9 Costly Mistakes Taxpayers Make

Phil Simonides, CFP®, is Group Vice President at McAdam, where he oversees the firm's Washington, D.C., metro, New York City metro and Boston offices.

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