Wealth management without tax planning can produce unwanted surprises. One of the ways we help clients avoid those surprises and accrue more assets over the long-term is by applying tax-smart strategies to help you keep more of what you’ve earned. By reducing tax liabilities for your portfolio, you could have more money to invest during your working years and more income to enjoy during retirement. Our firm provides the knowledge, expertise, and collaboration of CPAs and financial planners under one roof.
The Impact of Mutual Funds on Capital Gains
Mutual funds are popular with investors due to their inherent diversification, professional management, and potential for lower risk than stocks. But there can be some downsides too — especially when it comes to capital gains tax.
When you own stocks, you can decide the best time to sell based on their value and your current tax situation. With mutual funds, the fund manager chooses which assets to sell and then passes on those capital gains to you. In the worst-case scenario, they may choose to sell assets with significant gains shortly after you bought the fund. In this situation, you would not get the benefit of the gains, but you would still be on the hook for capital gains tax that accompanies their distribution.1
Tax-loss harvesting refers to identifying and selling an asset that has not performed as well and then reinvesting in other assets that might help strengthen your portfolio. The difference between the amount you initially paid for the asset and the selling price is then applied against future capital gains to help lower your tax bill. Up to $3,000 can be applied annually with additional amounts carried over to subsequent years.
Although mutual funds only pay capital gains distributions in the fourth quarter, you should not wait until then to start accruing “tax assets”. Tax-loss harvesting can be applied throughout the year, and one of the best times to act is when the market is more volatile.
One of Many Tax-Saving Strategies
Of course, tax-loss harvesting is just one way we can help reduce your annual tax bill without impacting your portfolio’s performance. Wealth management through a tax-focused lens can be applied across most of the financial decisions you make — including investing, retirement spending, social security planning, and transferring wealth.
Capital gains and tax-loss harvesting can feel like complicated topics, but it’s not important that you understand the nuances; it’s important that your financial advisor does. At Lamb, Po & Xu CPAs, we speak finance in your language and help you keep more of what you’ve earned.