The Impact of Taxes on Your Client’s Investments

• by secure_financial
• Posted on 26 March, 2021

Good news…the Treasury Department and IRS pushed back the tax filing deadline for individuals to May 17, 2021.  The bad news…it is too late to implement tax-efficient investment strategies for your clients for their 2020 tax returns.  The good news…you are still at a great point in the year to ensure that clients are best positioned for 2021 and beyond.  More good news…Secure Asset Management can help! 

When it comes to investing, every investment has a cost—whether that cost is direct or indirect.  The most overlooked cost by investors, however, and sometimes even by financial professionals, is the cost and impact of taxes.  Especially during the accumulation phases for an investor, the impact of taxes can be instrumental (or devastating) for an investor to obtain their investment goals.  The higher your clients’ tax brackets, the more important tax-efficient investing becomes.  So, with investments, it’s not just how much you make or lose on an investment, it’s how much of it that you keep after taxes that matters most. Most, if not all, financial professionals understand this concept.  It is certainly nothing new in the investment world.  The trouble though can be in the implementation.  Oftentimes, financial professionals do not either have the technology to assist with tax-efficient investing or their existing technology/trading platforms lack the capability of handling efficiently and thus become too much work to manage across hundreds of client accounts.  If you are a financial professional struggling to implement tax-efficient trading strategies, connect with us at Secure Asset Management and let’s begin to have a discussion. 

Taxable Accounts vs. Tax-Advantaged Accounts
Tax-efficient investing can break down into several components.  One of the most important is investment placement into either taxable accounts or tax-advantaged accounts.  Taxable accounts would be brokerage accounts like individual, joint, and trust accounts whereas tax-advantaged accounts are those such as IRA, Roth IRA, 401(k), etc.  This becomes important because of how taxes are imposed on different investments and the tax treatments of these different types of accounts.  Bonds, for example, can have different tax treatments depending on the type of bond.  Municipals are usually considered very tax-efficient as the interest income is not taxable at the federal level and often times is exempt from state and local taxes.  Treasuries are typically exempt from state and local income taxes but are subject to federal taxes.  For this reason, these investments could be best suited for taxable accounts because they already are tax-efficient.  Corporate bonds on the other hand do not have any of the exemptions from federal, state, or local taxes and would be better suited in a tax-advantaged account.  Without the correct systems or technology in place, this process can be very difficult and especially time-consuming. Another important component of tax-efficient investing is short-term versus long-term holdings (short-term being less than one year).  You also hear things like “wash sales” (meaning not to buy back a stock that you sold within 30 days of the last sell date).  Wash sale rules become very important in the role of taxes on investments as does long-term versus short-term investments as taxes on short-term gains are higher than those of long-term gains.  Not saying short-term trading strategies are bad overall.  They can be very effective as long as the strategies are done within the correct account type for investors to maximize the tax implications of short-term trading.  Again, without proper systems or technology, these items can be hard for a financial professional to manage on their own. 

The Bottom Line
For any financial professional, tax-efficient investing should be a core principle of your firm.  No matter your clients’ investing goals, minimizing taxes on investments should be a focus for every financial professional.  A good basis to minimize taxes is investment placement between taxable accounts and tax-advantaged accounts.  Over time, regardless of short-term versus long-term capital gains, if they are placed in the proper account types, the taxes can be minimized.  These are just some of the important components when it comes to tax-efficient trading and investing.   Secure Asset Management is here to help.  Learn more about the technology we use within our models and how Secure Asset Management can assist with your tax-efficient strategies for clients.