This page outlines Tax-Efficient Investing. For a description of Passport Wealth Management’s financial planning services, please click here.
How do your investments impact your taxes? Tax-efficient or tax-aware investing can make a difference in the way your assets are taxed by the government.
Every investment has expenses, and taxes can take a significant bite out of your returns, and not just in present. When your money goes to pay taxes, not only do you lose the money itself, you also lose the growth your money could have generated if it were still invested. In 2019, the Schwab Center for Financial Research examined the long-term impacts of taxes and other expenses on investment returns and concluded that while investment selection and asset allocation are still the most important factors affecting returns, the study found that minimizing taxes also has a significant effect on returns.
Tax-Aware Investing Strategies
Passport Wealth Management takes a holistic approach to financial planning, which includes looking at numerous aspects of a client’s finances, including taxes. We use tax-aware investing strategies to put the right investments in the right accounts. There are two main categories of accounts: taxable accounts and tax-advantaged accounts.
Taxable accounts (such as brokerage accounts or traditional savings accounts) don’t have any tax benefits per se, but they generally let you withdraw your money at any time, for any reason.
Tax-advantaged accounts are generally either tax-deferred (such as traditional IRAs and 401(k) plans) or tax-exempt (such as Roth IRAs and Roth 401(k) plans), and each type of account may restrict how and when you can withdraw your money to realize a tax benefit.
Tax-aware investing is an important aspect of holistic financial planning because some investment strategies are better suited to tax-deferred accounts than to taxable accounts. For example, strategies that target capital appreciation with high portfolio turnover, or that generate a significant amount of investment income, can have heavy tax implications and be less attractive than expected on an after-tax basis. In other words, a higher return on an investment statement may actually be lower than it appears once the tax burden is factored in.
As a financial planning firm that looks holistically at a client’s financial situation, not just investments, Passport Wealth Management uses other tax-aware investment strategies. We work closely with a client’s professional team, including accountants, to determine the right tax planning strategy for each client.
To learn more about the before-tax and after-tax benefits of smart, tax-aware investing, or holistic financial planning with a Fee-Only CERTIFIED FINANCIAL PLANNERTM Professional, please contact Passport Wealth Management at (704) 457-0060. We work with clients around the world from our offices in Cornelius, NC.