Getting Started With Tax Efficient Investing


January 25, 2017

There are two things guaranteed in life: Death and Taxes. While maintaining a healthy lifestyle can seem complicated, we’d argue that understanding the IRS Tax code is even worse. Do you feel like you know for certain that your investment accounts are maximizing their tax efficiency? If so, kudos to you. If you want to go from a mall walker to a marathon runner, keep reading and we will make tax efficient investing as simple as putting on your running shoes.

The first step to tax efficient investing is understanding what type of accounts you have. Break them into two categories: Tax-advantaged (generally tax deferred or tax free) and taxable. Tax-advantaged accounts are inherently efficient. We don’t have to worry about those. Taxable accounts are not inherently efficient. This is where you can make a difference in your investment selection.

Tax-Advantaged (not an exhaustive list)

  • IRAs (Roth, Traditional, Rollover, SEP)
  • 401(k)
  • 403(b)
  • SIMPLE IRA / SIMPLE 401(k)
  • 457 (b)

Taxable (not an exhaustive list):

  • Individual
  • Joint
  • Trust

So how’d you do? Are you naturally efficient because of the types of accounts you already have? Or, do your accounts fall under the taxable category, where there could be room for optimization?

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The second step is to ask questions about these taxable accounts. Whether you work with a financial professional or self-manage, here are some questions you should ask:

  • Are the investment strategies tax efficient? In fact, what is your investment strategy or philosophy?
  • Do you employ tax loss harvesting strategies?
  • What’s your marginal tax bracket? The higher your bracket, the more important it is to be tax efficient.
  • Does your tax strategy match your current stage of life? What worked for you 10 years ago might not work for you now.
  • What are the nuances of long-term and short-term capital gains, and how does that impact me?
  • Do you utilize tax friendly securities like Muni Bonds, Qualified Dividends or REITS?

Now that your taxable accounts have been addressed, step three is to make sure you’re taking full advantage of naturally efficient tax-advantaged and tax free accounts.

  • Are you maxing out your taxable contributions to your tax efficient accounts?
  • Are you self-employed? If so, do you have the right plan in place to maximize your tax break?
  • Have you weighed the potential benefits of a Roth IRA compared to a traditional IRA?

The tax code is constantly evolving and is overly complex. People dedicate their lives to understanding it and playing within the rules.

If you have the time, that’s great. If you don’t, please give us a call to discuss how the information provided here might affect your investment decisions. Over the coming weeks we’ll release additional blogs going into more details with the goal of making you more knowledgeable about tax efficient investing. Sign up for alerts to be sure you don’t miss the series.

make-the-golden-years-golden-saving-for-retirement-part-1_iconMake the Golden Years Golden

Have you been saving for 20+ years? Now is the perfect time to make sure you’re well positioned for the home stretch into your golden years.

Check-up on Your Future Today

The information provided herein is educational in nature, is not individualized, and is not intended to serve as the primary basis for your retirement, investment or tax-planning decisions.

AFAM Capital, Inc. is a Registered Investment Advisor.  Al Frank Asset Management and Innealta Capital are divisions of AFAM Capital. AFAM is editor of The Prudent Speculator newsletter and is the investment advisor to individually managed client accounts and certain mutual funds.  Investing involves risk, principal loss is possible, and there can be no assurance that investment objectives will be achieved. Past performance is no guarantee of future results.

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