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Is Your Investment Portfolio Tax Smart?

Is Your Investment Portfolio Tax Smart?

| March 25, 2019

We are not asking if you have tax-free municipals, IRAs, annuities or other tax-efficient investments within your portfolio. We are asking if your investment portfolio IS tax-efficient. Let me explain:

Too often, investors end up with the wrong investments inside the wrong accounts. Worse, this is exacerbated when you start needing income off your investments. You could end up taking it from the wrong account. If you think about it, there are only three ways to grow the value of your investments:

  1. Increase investment returns
  2. Decrease fees
  3. Decrease taxes

Almost every investment guy and guru out there thinks about the first two day in and day out. Taxes, however, are frequently forgotten. Imagine you have two investments. One investment could fit better tax-wise into an IRA than the other. This could be because of the type of income it produces or the frequency of distributions of income. Too often when we examine existing portfolios, we see that these investments are swapped and not being optimized from a tax standpoint.  

Then you have to question if you are taking income from the wrong place. It may seem like the best option tax-wise, but appearances can be deceiving. You could be setting yourself up for a tax-bomb.

Let’s just look at one retiree that is totally dependent on his investments and Social Security in retirement. He is sixty-five today and takes all of his income from his non-retirement account. He isn’t paying a dime in income taxes today, but that will all change when he turns seventy and one half. The IRS will mandate that he takes around sixty thousand dollars from his IRA that year. Not only will he be taxed on this income, but now more of his Social Security will be taxed and his capital gains will also be taxed. Ouch!

This may seem like peanuts, but over the years a tax-inefficient investment plan can make or break someone’s retirement. Imagine paying six-figures of unnecessary income tax. Sounds crazy, right? People do it all of the time—unintentionally of course, but still…

Money is money. It doesn’t matter if it comes in the way of returns, fees, or taxes. It is all the same. Equally, all three of these contributors to the growth of your portfolio should be managed proactively. So, is your portfolio tax smart? Take advantage of our Second Opinion Service (S.O.S) during tax time to find out.


Kennedy Financial Services does not provide legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation.