Tax-Aware Investing

It’s What You Keep

Just about now as we go through the tax preparation process, we discover what taxes actually cost us! For most of us, focusing on taxes occurs only once a year during tax season. But really, taxes have a year-round, ongoing impact on our lives. And at the end of the day, it’s not what you make, but what you keep that matters most in terms of your long-term wealth. So the real question becomes, “How are my investments and consequently my plans for wealth accumulation and retirement affected by taxes?”

The short answer is that taxes matter—a lot. And they matter because of the very real impact they can have on your long-term wealth. With proper tax management, you may be able to improve your returns by 1%-3% a year, every year.1The cumulative effect is very significant! As it turns out, the most volatile markets create the most opportunities for tax management. As uncomfortable as volatility makes us as investors, there is a silver lining—tax loss harvesting. This strategy entails selling securities for less than the purchase price to reduce the tax liability associated with capital gains (see Capital Gains: Six Strategies to Consider), which can help your portfolio and your tax situation in the years to come.

 You can’t embark upon tax management once a year during tax season. It must be an embedded part of your investment management process and consistently employed. 


Portfolio Adjustments

When you make a decision to change your holdings, it is important to review the tax considerations of your portfolio. You may be making a shift to a new mutual fund manager or to a new asset allocation. At this time, you need to analyze all of your pre-existing holdings. It is important to identify positions with large gains and develop a strategy for liquidating them that takes into account the impact on your personal tax situation. You don’t want to undertake sales of securities or funds that may leave you with a large tax obligation. It is also a great time to review your recent tax return, to understand both the tax rate (as driven by total income), as well as any “tax loss carry forwards” (losses for the current year that you can apply to future years’ gains to reduce tax liability). Understanding and taking into account potential changes in future tax rates also needs to be considered (see Tax Road Ahead:  What You Need to Know to Plan for the Future).

Ongoing Management

As you manage the portfolio on an ongoing basis, it is still important to consistently and actively manage risk and taxes. At this time, it is good to employ a two-tier strategy for managing your tax impact.

TIER ONE:  Allows you to gain returns in a tax-effective way.

  • Manage your overall asset allocation with a consideration for taxes.
  • Use tax-efficient investment managers and tax-managed funds for taxable investment assets, if:
    • they fit into your asset allocation;
    • they provide good overall performance in addition to the tax benefit.

TIER TWO: Helps you manage contributions or withdrawals efficiently from a tax perspective.

Over your investment horizon, you may need to make withdrawals from your portfolio for any number of reasons: you may need to use the assets for plans you have, you may be gifting to children, or you may be planning on making charitable gifts. Implement the following when considering a change in your portfolio:

  • Plan ahead for cash flow needs so you can use a strategy that minimizes the tax impact of withdrawals
  • Target low-basis tax lots for gifting or disbursement when possible
  • Take advantage of opportunities to harvest losses throughout the year.

By consistently implementing this two-tier strategy to manage your portfolio, you will be able to improve your wealth through reduced tax exposure.

Using Tax-Aware Investing Helps You Keep More of Your Assets

As you can see, it is a lot of ongoing work throughout the year to ensure that your portfolio is managed in a tax-aware way! Of course, this is just one part of the puzzle. You will want to continue to make good investment decisions as well. Clearly tax management does not just happen once a year. And, when it is part of your investment program, it can make a significant contribution to your total wealth by increasing what you keep in your portfolio.

Contact us to discuss which tax-aware investment strategies may be right for you and your financial goals.

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Janice Deringer


Janice L. Deringer is a member of Wipfli Financial's Investment Committee and a consultant who focuses on serving individual and corporate clients. She brings over 20 years of institutional investment management experience to her strong interest in educating women and individuals regarding financial decisions, realities and possibilities.


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Tax-Aware Investing

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