It’s Not What You Earn – But What You Keep – That Matters!

Tax Considerations and Comprehensive Wealth Planning

A core principle of successful investing is to minimize the potential tax bite within your portfolio. F.L.Putnam Investment Management Co. provides its clients with personalized wealth strategies designed to mitigate potential tax consequences.

Investors Are Paying More and More in Capital Gains Taxes!

 

The table above reflects the increasing amounts being paid by investors in the form of capital gains taxes. While investment selection and asset allocation are among the most important factors affecting your portfolio’s net returns, minimizing taxes can also be achieved with professional “asset location” advice. Understanding the tax implications can go a long way to ensuring you keep as much of your wealth as possible.

A Proposed Capital Gains Tax Hike?

With speculation brewing over a potential capital gains tax increase occurring sometime later this year, raising the rate to its highest level in 65 years, taking a tax hit this year to avoid a bigger one in future years could make sense for people in special situations or with shorter-term horizons. For most investors, however, paying higher taxes later beats paying lower taxes now; the longer the time horizon you have, the more wealth you should be able to build by deferring capital gains taxes.

 

When It Comes to Taxes, Asset Location Matters Too

In terms of investment returns, what really matters to investors is how much you ultimately get to keep and/or spend. In addition to inflation (which we are beginning to experience yet again), by far the largest “cost” for most investors is taxes.

Your personal balance sheet may include both taxable accounts and tax-deferred or tax-sheltered accounts such as IRAs, Roth IRAs, 401(k)s, 529 college saving plans and health savings accounts (HSAs).  Tax planning opportunities exist in funding each type of account, as well as in the types of securities you hold in those accounts.

After a decades-long bull market and with stock market indices like the S&P 500 hitting all-time highs, you could feel the pinch of capital gains taxes on personal investments that are not in tax-deferred accounts. Many investors may be surprised by the potential tax consequences embedded in their portfolio holdings, impacting the amount you ultimately  get to keep and/or spend.

FLP’s Planning Advice: The Key to Successful Wealth Management

At FLP, we carefully consider tax implications in the management of your wealth.  We employ straightforward principles to guide you toward your well-articulated objectives.  For many clients, we coordinate with their other trusted tax advisors to ensure that portfolio considerations are optimal within a holistic wealth plan.

Clearly defining and documenting what outcomes are important to you (in consultation with your FLP advisor) can help reduce the impact of taxation on your overall portfolio. A thoughtful, detailed plan serves as your guide when balancing tax efficiency versus other wealth planning considerations.

Tax-efficient investing involves choosing the right investments and the right accounts to hold those investments.  In general, investments that lose less of their returns to taxes are better suited for taxable accounts. Conversely, investments that tend to lose more of their returns to taxes are good candidates for tax-advantaged accounts. Your investment time horizon – or expected holding period – is also an important factor to consider.

FLP does not provide tax advice. We work closely with our clients’ outside accounting firms and/or tax counsel who provide ongoing guidance and updates on all relevant tax law. Federal, state and local tax laws are subject to change. FLP is not responsible for providing clients updates on any changes in tax laws, rules or statutes.  Reasons to harvest capital losses, sources of capital gains and the suggestion that mutual funds distribute capital gains are for example purposes only and not meant to be tax, estate planning or investment advice in any form or for any specific client.

At the present time, there are a number of proposals in Congress related to estate and income taxation that could have an effect on a variety of planning techniques. Recommendations may be made in conjunction with your tax and or legal advisors that, once laws have been enacted, may produce a result that was not anticipated. We caution you to understand thoroughly the implications of any actions you may take.

Notes

  1. Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience.
  2. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.
  3. Investment process, strategies, philosophies, portfolio composition and allocations, security selection criteria and other parameters are current as of the date indicated and are subject to change without prior notice.
  4. This communication is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes.

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