Many investors believe they need to make investment decisions with their tax situation in mind, and they’re often right — but not always.
There’s a phrase that goes, “Don’t let the tax tail wag the dog.” That means you should not try to optimize your investment decisions too much for taxes. My philosophy is quite simple and has done me well over the years: Invest money for growth wisely and let the taxes fall where they may.
Some tax-based stock decisions make perfect sense. For example, if you have held a stock in a taxable account for 361 days and you are thinking of selling it, I would strongly be in favor of waiting five more days to establish long-term capital gains treatment.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If a stock is held for 365 days or longer, then you pay a lower federal capital gains tax rate. The tax for long-term gains is 20% for those in the higher income tax brackets. For short-term capital gains (on investments held less than 365 days), you will pay ordinary income tax rates — which for high earners can be as high as 39.6%. Trying to hold for long-term capital gains is certainly worth it, and would help reduce the tax bracket to 20% from what could be over 39%. This is good tax planning.
However, if you need to sell a stock to protect principal, the tax issue should really be irrelevant. Also, whenever we buy a stock, we hope we can keep it for three, five or 10 years or longer — which, of course, would be great from a tax perspective. If you do hold for 10 years, there are no taxes at all (on the gains) over this time period. Of course, once you sell the stock, taxes will be due.
I’m a staunch advocate of investing in growth stocks, which have a lifecycle. Once you have determined that the growth phase is over and the stock has principal risk, then you must act to protect principal, and the only way to do that is to sell.
Yes, you will have to pay a tax, and hopefully by that point it’ll be a long-term capital gains tax. However, this tax cost is simply an overall cost of growing your funds over time. I do not believe you should sell a gain in your portfolio every time you sell a loss. Some investors try to offset all gains with losses to avoid taxes, but doing so may mean you are selling a stock far too prematurely.
Finding great investments is hard work, and keeping them through their ups and downs is a worthy, but difficult goal. Don’t let the potential tax consequences lead you astray when it comes to making investment decisions.
Rob Lutts is president and chief investment officer of Cabot Wealth Management and the author of The Great Game of Business: Investing to Win.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Travel trends you can expect this summerThe Kiplinger Letter Domestic trips will trump foreign travel amid economic uncertainties, though some costs are down.
-
Donating Complex Assets Doesn't Have to Be Complicated
If you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond InvestorsHigh-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
-
I'm an Insurance Pro: How Not to Get Dumped by Your Insurance AgentYour insurance agent or broker might show you the door if you do any of these five things. Being a good customer is about more than paying your bill on time.
-
Two Estate Planning Issues You Should Never OverlookThis estate planning attorney explains why proper asset titling and beneficiary designations make a big difference when it's time to transfer your wealth.
