Taylor Schulte

Part 3: Taxes, Taxes, Taxes

Published 3 months ago • 4 min read

Hi Reader,

Today I'm wrapping up our three-part series on investing.

(Need to catch up? Here's Part One and Part Two.)

Specifically, I'm sharing additional ways to ease your transition from chaotic to more orderly investing.

Some steps are purely practical.

Others help you remain calm and confident along the way.

You can mix and match them as needed to improve your investment success.

Before we dive in...did you catch this week's podcast episode?👇

Inflation is Cooling: Why Does Everything Still Feel Expensive?

If inflation is back in line with long-term historical averages, why are consumers still feeling strained? Tune in to learn about the current state of inflation + where we might be headed.

Grab the Free Checklist

If you missed it, grab my free investing checklist to help you take action with getting your investments in order:

Taxes, Taxes, Taxes

Just as location, location, location often dictates where you’ll buy your next home, tax-efficiency is usually integral to your move toward more organized investing.

And when your plan calls for a multiyear shift toward your ideal investment portfolio...

...there are a number of tax-planning strategies you can pursue within your taxable accounts to minimize the damage done.

Here are five to consider:

1.) Mind Your Annual Income

Be mindful of your taxable income as you proceed.

For example, you might experience a low-income year if you’re between jobs or shifting into retirement.

Other years, you might receive a big pay raise, sell your business, or otherwise take on extra taxable income.

You may be able to speed up your transition by deliberately incurring extra taxable gains in lower-income years, but you'll need to move more cautiously in higher-income ones.

» Learn about the benefits of Tax-Gain Harvesting.

2.) Watch for Those Tax Thresholds

Try to avoid the “gotchas” that can be triggered when realized taxable gains add to your overall annual income.

For example, if the extra income pushes you into a higher tax bracket, your overall marginal tax rate may increase.

Access to other government benefits can also be affected by your reportable income, such as whether or not you are subject to additional IRMAA fees when you qualify for Medicare.

3.) Skip the Short-Term Gains

If you sell a taxable position you’ve held for a year or less, gains are taxed at typically higher short-term rates.

It may be worth waiting to sell significant positions until you’ve owned them for more than a year, so the sale qualifies for long-term gain rates.

4.) Harvest Some Losses

Even if your investment plans don’t call for selling securities in your taxable accounts, you may still be able to tap them for tax-loss harvesting.

By selling any positions in your taxable portfolio at a loss—and promptly reinvesting the proceeds in a similar asset—you can generate realized losses to offset realized taxable gains, without altering your overall portfolio mix.

This may free you to realize more taxable gains among the positions you do want to permanently sell.

💥 NOTE: The benefits of tax-loss harvesting are NOT what most people are led to believe. Listen to my three-part series to learn more: Part One, Part Two, and Part Three.

5.) Be Picky About Lots

Instead of selling an entire fund, ETF, or stock holding, you can sell specific tax lots within each.

For example, your earliest lot comes from your initial purchase.

You may also acquire additional lots through dividend reinvestments or by buying more shares over time.

When it comes time to trade, you might sell particular lots with lower embedded gains, keep those that would incur short-term gains, and/or use specific lots to harvest capital losses, as described.

Seizing the Days

As you transition toward your ideal portfolio, life may send you additional opportunities to seize and obstacles to avoid.

Here are a few examples.

Take Advantage of Market Declines: When markets decline, stocks go on sale. If your plan calls for selling some positions and buying others, you may be able to take advantage of market downturns to enjoy lower taxable gains as you sell, and better (lower) prices as you buy.

Add New Money to the Mix: Whenever your plan calls for holding more of a particular type of investment, try to add new money to your portfolio and invest it accordingly (no taxable strings attached!). Have you recently experienced a pay raise, equity compensation event, or inheritance? Any such “found” money can be ideal for this role.

Withdraw Money Mindfully: Likewise, as you withdraw money from your investment accounts, you can deliberately sell securities that have gone up in price to reduce your exposure to them as planned. While you may not avoid taxes by doing this, you are managing your risk appropriately. Remember, don't let the tax tail wag the investment dog!

Shift Money from Taxable to Tax-Sheltered: Each year, you are given fresh opportunities to add new money to your tax-sheltered accounts. You might use these annual opportunities to move assets from your taxable to your tax-sheltered accounts, where trades do not incur taxable gains. This may offer more flexibility for achieving and maintaining your ideal portfolio mix.

Give Your Money Away: If you are charitably inclined or planning to gift assets to loved ones, you may be able to move your portfolio closer to your ideal targets through charitable giving and/or gifting. In short, if you’re planning to give some money away anyway, you might as well be deliberate about which investments you tap for it.

Acting on Your Orderly Resolve

If you're ready to bring more order to your investment universe, keep the following in mind:

  • Decide how fast or slow you’d like to go.
  • Know where you stand as you proceed.
  • Resolve second thoughts you may encounter along the way.

Remember, even the most orderly universe contains some chaos (it fuels the work in progress!).

Investment management is no different.

The more accurately you aim for perfection -- while embracing the essential uncertainties involved -- the more effectively you can pursue your ideal financial goals.

Please don't hesitate to reach out if I can help with your pursuit.

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Stay wealthy,

Taylor Schulte, CFP®

Taylor Schulte

Retirement and tax planning plain English.

I'm the host of the Stay Wealthy Retirement Show and founder of Define Financial, an award-winning retirement and tax planning firm. When I’m not helping people lower their tax bill, you can find me traveling with my wife and kids, searching for the next best carne asada burrito, or trying to master Adam Scott’s golf swing.

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