Advertisement
taxes

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.

Advertisement - Article continues below

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."

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.

Advertisement

About the Author

Phil Simonides, CFP®

Senior Vice President, McAdam Financial

Phil Simonides, CFP®, is Senior Vice President at www.mcadamfa.com, where he oversees the firm's Washington, D.C. metro, Chicago, Boston and central New Jersey offices. As a member of the executive team, Simonides serves as the Chair of Advanced Planning at the firm, specializing in strategies for high net worth individuals and families, and business owners. He joined McAdam in 2011 after having spent the majority of his 29-year career at Ameriprise Financial.
Advertisement

Most Popular

How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020
Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check
Coronavirus and Your Money

Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check

The deadline for seniors and veterans to request an additional $500 stimulus check for a dependent child is approaching fast. See how you can claim yo…
September 25, 2020
High-Tech Aids for Aging in Place
Caregiving

High-Tech Aids for Aging in Place

Apple Watch and other technology provides fast feedback, comfort for older users, and a powerful assist for caregivers.
September 23, 2020

Recommended

With Estate Taxes on Sale Now, You Snooze, You Lose!
tax planning

With Estate Taxes on Sale Now, You Snooze, You Lose!

You may want to consider gifting your home — or maybe a fractional interest in it — as well as using an irrevocable trust before it’s too late.
September 25, 2020
The Annuity With a Tax-Planning Twist
Financial Planning

The Annuity With a Tax-Planning Twist

A qualified life annuity contract helps retirees with guaranteed payments to last their entire lives.
September 21, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020
Most-Overlooked Tax Breaks for the Newly Divorced
tax deductions

Most-Overlooked Tax Breaks for the Newly Divorced

Filing taxes after a divorce can add yet another problem to an already long list of challenges. But here are some tips to make your return to single l…
September 18, 2020