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Tax Planning
Tax Efficiency: What it means, why it counts

A little phrase that may mean a big difference. When you read about investing and other financial topics, you occasionally see the phrase “tax efficiency” or a reference to a “tax-sensitive” way of investing. What does that really mean?

The after-tax return vs. the pre-tax return. Everyone wants their investment portfolio to perform well. But it is your after-tax return that really matters. If your portfolio earns you double-digit returns, those returns really aren’t so great if you end up losing 20 percent or 30 percent of them to taxes. In periods when the return on your investments is low, tax efficiency takes on even greater importance.

Tax-sensitive tactics. Some methods have emerged that are designed to improve after-tax returns. Money managers commonly consider these strategies when determining whether assets in an investor’s account should be bought or sold.

Holding onto assets. One possible method for realizing greater tax efficiency is simply to minimize buying and selling to reduce capital gains taxes. The idea is to pursue long-term gains, instead of seeking short-term gains through a series of steady transactions.

Tax-loss harvesting. This means selling certain securities at a loss to counterbalance capital gains. In this scenario, the capital losses you incur are applied against your capital gains to lower your personal tax liability. Basically, you’re making lemonade out of the lemons in your portfolio.

Assigning investments selectively to tax-deferred and taxable accounts. Here’s a rather basic tactic intended to work over the long run: tax-efficient investments are placed in taxable accounts, and less tax-efficient investments are held in tax-advantaged accounts. Of course, if you have 100 person of your investment money in tax-deferred accounts such as 401(k)s or IRAs, then this isn’t a consideration.

How tax-efficient is your portfolio? It’s an excellent question, one you should consider. But this brief article shouldn’t be interpreted as tax or investment advice. If you’d like to find out more about tax-sensitive ways to invest, be sure to talk with a qualified financial advisor who can help you explore your options today. What you learn could be eye-opening.

(Editor’s Note: Jason Parker is the president of Parker Financial LLC, a fee based registered investment advisory firm specializing in wealth management for retirees. His office is located at 9057 Washington Ave NW #104 in old town Silverdale, Wash. 98383. He is regulated by both the Washington State Department of Financial Institutions and the Washington State Insurance Commissioners office. For more information contact Parker at (360) 337-2701 or www.parker-financial.net. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions and information presented do not constitute a solicitation for the purchase or sale of any securities or insurance products. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting, mortgage or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your financial advisor for further information.)

 
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