Tax Efficient Investments
One common scenario looks at whether a client should hold an investment in a taxable account, such as a brokerage account, or a tax-advantaged account like an IRA/Roth IRA.
a. Taxable accounts are ideal for investments clients plan to hold for more than one year, holdings that pay qualified dividends, and certain bonds.
b. Tax-advantaged accounts are ideal for investments held one year or less, and actively managed funds that generate short-term capital gains.
Tax Bracket Management
In short, this approach is used to reduce taxes in high-income years and fill up the lower tax brackets in lower income years, for instance, by utilizing Roth conversions.
Charitable Gifting
Giving assets increasing in value directly to charity allows for a fair market value deduction without paying capital gains tax. A donor advised fund (DAF) allows for contributions of cash or assets—the tax deduction is allowed in the year the contribution is made to the DAF. The funds in the DAF can grow with a variety of investment options with proceeds being distributed at the client’s discretion to charitable organizations on their timeline.
Roth Conversion Strategies
Tax-efficient Roth conversion strategies consider other approaches such as tax bracket management. For example, if a client is 65 years old and wants to implement Roth conversions annually in order to minimize required minimum distributions in future years and to take advantage of tax-free growth in the Roth IRA. Perhaps a client has $25,000 of room in the 22% tax bracket before jumping into the next tax bracket and anticipates a higher tax bracket in the future; that $25,000 of room in the bracket could be filled via Roth conversion income. Proactive planning helps clients consider higher/lower income years going forward and whether a Roth conversion now makes sense. This allows individuals to stay ahead of tax law changes that could impact tax rates.
Tax Loss/Gain Harvesting
Triggering capital losses can help offset capital gains to bring down tax liability. The reverse strategy can also be used, recognizing gains in a year when there have been large losses to minimize the tax impact.
Legacy Planning
Leaving shares to beneficiaries in taxable accounts allows for a step-up in cost basis. Roth IRAs are also a great way to provide tax-free distributions to heirs.
These tax strategies are just a handful of ways that NorthRock’s comprehensive approach to tax planning and management can help individuals achieve long-term investment goals. To explore further, connect with NorthRock at northrockpartners.com or info@northrockpartners.com.
The information provided herein is general in nature and as of a specific point in time, and it should not be construed as legal, tax, or other professional advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
