Tax Tips for the Private Investor

Winston Churchill once declared, “There is no such thing as a good tax.”  While the argument for or against Churchill’s thoughts on taxes is best left for another article, we would argue that there is such thing as a good tax strategy.  In fact, there are several tax strategies a prudent investor could employ to ensure they are maximizing the benefits laid out by the Internal Revenue Code.

Utilize Tax-Efficient Accounts

Utilizing tax-efficient accounts such as 401(k) plans or personal IRA investment accounts is one of the cornerstones of smart financial planning.  There are both current and future tax benefits to be gained. With appropriate planning, these accounts could be instrumental in building a nest egg for retirement and beyond.

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The current benefit to contributing to these accounts is that it decreases your tax bill for the year in which the contribution is made.  The future benefit, and surely more impactful, is in the compounding nature of the tax-free returns. With no tax implications during the investment period, reconfiguring the ideal portfolio and staying in line with your stated objectives is simpler and you realize an increase in your rate of return.  For a private investor in peak earning years, deferring any part of the tax bill to retirement or beyond when he or she is potentially in a lower income bracket is prudent tax planning.

Diversify Retirement Accounts

Contributing to and investing in multiple types of retirement accounts allows you to mix and match sources of income to minimize taxes in the future.  Not only do the investments in these accounts grow tax free until you start taking distributions, but depending on the type of account, the distributions themselves could be tax-free.  Roth accounts are funded with post-tax money. That is, there is no deduction on your current year tax return. The positive feature of these types of accounts is that when the money is eventually distributed, those distributions are fully tax free.

Without foresight of where tax rates will be when you hit retirement, having multiple types of retirement accounts allows you to take advantage of the different distribution characteristics of each.

Asset Location, Location, Location

If a typical portfolio is to have some combination of fixed income securities as well as dividend-paying equities, how would a private investor consider the separate tax treatments of the income derived from each?

Given the tax-inefficient nature of fixed income, it is generally preferred to invest in this asset class within your tax-efficient retirement accounts first.  Remember, the income within these accounts are tax-deferred until the time of distributions. An additional benefit with this strategy is having your future retirement assets invested in typically safer, lower risk investments.

Equities on the other hand should be invested in your taxable accounts first.  The preferred tax rate on dividends and capital gains make it the easier pill to swallow.  Considering the additional risk and volatility associated with equity investing, the taxable account is preferred over the retirement accounts.

Think Long-Term

Often easier said than done, holding investments for over a year greatly reduces the tax consequences resulting from the sale of an appreciated investment.  Short term capital gains, which are gains realized from the sale of an investments held for less than a year, are taxed at your ordinary income rate. This could be as high as 37% for those investors in the top tax bracket.  Conversely, those gains on sales of investments held for over a year, or long-term capital gains, are given a preferred tax rate of anywhere from 0-20%. Being aware of the holding period on investments you are considering selling is important and could have a material impact on your tax return.

Tax Loss Harvesting

Tax loss harvesting is the practice of realizing capital losses to offset realized capital gains.  The purpose of this strategy is to lower your tax bill while simultaneously rotating out of positions that may be loss leaders in the portfolio or out of favor.

Setting up the right portfolio for long-term growth while also maintaining a level of risk you are comfortable with takes careful consideration.  Do not overlook the importance of employing tax-aware strategies when managing your portfolio and retirement assets. While not an exhaustive list, the strategies mentioned here should help in building and planning for your wealth to meet you and your family’s short term and long-term goals.

Note: Fritz Schoenhut, MST, CFA is Managing Director and Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit. Visit us at

For over 25 years, Point View Wealth Management, Inc. has been working with families in Summit and beyond, providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals.  Click here to contact David DietzeClaire Toth, Fritz SchoenhutDonna St.Amant, and Elaine Phipps, or call 908-598-1717 to learn more about Point View Wealth Management, Inc. and how we can help you and your family meet your financial objectives. To sign up for our complementary commentaries and newsletters, e-mail us at

CNBC has named Point View one of the Top 100 fee-only wealth managers in America.


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