5 Tips to Get Started With Tax Aware Investing

Leo Maheras |

Ultimately, the goal of investing is to try to make as much money as possible, and of course, you don't want to let taxes eat into your gains. Tax aware investing helps you minimize the effect of taxes on your investment portfolio. Wondering how to get started with tax-aware investing? Take a look at these tips.

1. Consult With a Tax Professional

Tax professionals have the knowledge and experience to answer your questions about the tax implications of all kinds of investments. They can help you decide between different investment options based on their tax status.

For instance, with some investments such as traditional IRAs, the funds are pre-tax dollars, meaning that you don't face income tax on the amount you invest. In contrast, other investments such as ROTH IRAs don't earn you a tax deduction when you invest the funds, but when you withdraw the funds, you don't have to pay income tax on your gains.

In addition to helping you optimize these types of investments, a tax professional can also help you assess the implications of short and long-term capital gains.

2. Find a Financial Professional Experienced With Tax-Aware Investing

While a tax professional can answer all kinds of questions about how various investments are taxed and help you identify valuable deductions, they generally cannot guide you toward the best investments to make. To get help with this aspect of investing, you may want to reach out to a financial professional who is experienced with tax-aware investing.

3. Delay the Realization of Taxable Gains

Generally, when you cash out an investment and you make a profit, you have a gain, and in most cases, gains are taxable. To reduce your tax burden, you may want to delay the realization of taxable gains. For instance, if you have a stock that is increasing in value, you may want to allow it to continue to grow rather than cashing it out and potentially facing capital gains tax on your investment earnings.

4. Don't Sacrifice Gains to Save Money on Taxes

That said, you also need to ensure that you are not sacrificing potential gains in an attempt to save money on taxes. If an investment has earned a lot of money but you believe it's reached its peak, selling it can put cash in your pocket even if you have to deal with some tax liability. On the other hand, if you're worried about taxes so you let the investment sit and it falls in value, you end up sacrificing your gains just to save money on taxes, and ultimately, that reduces your overall earnings. You need to be careful about striking the right balance.

5. Offset Short Term Gains

Generally, you face capital gains tax when you earn gains on long term investments (held for at least a year), but you face regular income tax on short term financial gains from investments that you hold for less than a year. Most people have a higher income tax rate than the capital gains tax rate, and to minimize your tax burden, you may want to look for ways to offset your short term gains.

For instance, you may be able to offset your gains by investing in a tax-deductible investment, or you may want to cut your losses, sell an investment that is losing money, and claim that loss against your short term gain.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.


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