Protecting Your Finances With Tax Management
In today’s market environment the need for active tax management is greater than ever because of high volatility and more modest forward-looking return expectations. Your tax, investment and wealth advisors can work together with you on personalized tax-managed solutions, keeping you on track with your goals for the year.
The power of tech-enabled tax-smart investing
Now is an especially opportune time for U.S. investors to think about incorporating tax-loss harvesting into their portfolios’ ongoing management. Innovations in technology can help you take full advantage of year-round tax-loss harvesting by systematically capturing losses to offset gains, now or in the future, all the while staying close to your objectives.
You can easily make ongoing tax -loss harvesting a feature of how your portfolio is managed. Optimizing after-tax returns in this period of market turbulence can make a difference in how much of your returns you get to keep.
Put assets in their tax-compatible accounts
Your portfolio may not be tax-optimized if (a) all your assets are in one kind of account (i.e. taxable or tax-deferred), or (b) you have all of the same holdings in different types of accounts. The general rule is that, all else being equal, you want to hold tax-inefficient assets (especially those with higher growth potential) inside tax-advantaged accounts such as a 401(k), deferred compensation, IRA, Roth or annuity.
Good candidates for tax-deferred accounts are high-yield bonds, high-turnover equity strategies, hedge funds and other investment products that tend to generate taxation at ordinary income rates via interest or net short-term capital gains.
Look for tax-smart tactics
Consider two tax-efficient moves when donating to charity: public charities/donor-advised funds and qualified charitable distributions.
You can also consider creating a grantor-retained annuity trust to give to your family. Created for a limited time, at the end of the trust’s term while you get back what you put in, any appreciation of the asset over the hurdle rate goes—free of gift taxes—to the trust’s beneficiaries.
Finally, using a line of credit can separate your purchase decisions from your decisions about investments. It can give you time to raise the cash tax-efficiently in your investment portfolio, or the credit line can serve as a bridge until you receive an anticipated influx of cash.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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