Tax-Efficient Investing

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Tax-efficient investing is rarely a topic of cocktail party conversations.  In fact, many clients come to us with complex money management plans that pay little or no attention to the issue of tax liability. The staggering truth – investors can lose almost 50% of their investment returns to taxes. Ready to focus on tax-efficiency now?

The team at Smith Howard Wealth Management (“SHWM”) is committed to helping our clients make smart investing decisions and reap the benefits of those decisions by ensuring their investments are tax-efficient. Here are some examples of the strategies we use with our clients in order to fulfill that commitment:  

Tax-Efficient Forms of Investing– We believe you should understand your portfolio and our money managers work to educate clients on the rationale behind our investment strategies, including why we opt for certain forms of investments. Recently, a family came to us with a portfolio that included separately managed accounts that held many individual stocks and bonds. We educated the family on the benefits of using exchange traded funds (“ETFs”) and mutual funds which include:

  • A diversified portfolio with thousands of holdings instead of just a handful of individual stocks and/or bonds;
  • Low fund fees and trading costs
  • The ability to deduct the fund management fees for ETFs and mutual funds inside the fund instead of being subject to the limits imposed on personal tax returns;
  • Daily liquidity, meaning their money is available to them when/if they need it; and
  • Improved tax efficiency due to low fund turnover and the ability of ETFs to redeem underlying holdings in-kind.

Asset Location – A new client came to us with a portfolio that, like many, included a mix of taxable accounts and tax-deferred/tax-free retirement accounts. We explained the benefit of careful asset location and were able to protect some of his investment income from higher tax rates by selecting which types of investments go into each account. For example, since bonds pay interest income which is taxed at a higher rate than dividends and capital gains, it is often more efficient to hold bonds in tax-free/tax-deferred retirement accounts and keep stocks in taxable accounts. Viewed separately, each account may appear unbalanced and weighted towards one type of investment, but the overall portfolio is diversified. Our money managers use their experience and education along with our sophisticated software programs to ensure each client’s portfolio is balanced and tax-efficient.

Charitable Giving – Almost all of SHWM’s clients engage in charitable giving. While most would give regardless of the tax benefit, our advisors make the most of charitable giving and use giving as part of a tax-efficient management strategy. In one recent example, a client told us that they wanted to make a charitable gift to their church. Instead of giving cash, we arranged for them to gift a highly appreciated stock that we had already planned to sell as part of rebalancing their portfolio. This allowed them to support their chosen charity, capture the related tax deduction, and avoid paying capital gains tax on the sale of the stock.

Tax Loss Harvesting – Even investments chosen by the world’s best money managers (and we think some are on our team!) experience some losses. Opportunistic tax loss harvesting takes advantage of this situation. When one client sold some real estate that generated a significant capital gain, we reviewed her portfolio and identified specific holdings that were showing a loss. By selling those positions (“harvesting”) and then immediately reinvesting the proceeds into similar holdings, we captured a loss that could be used to offset the real estate capital gain without changing the balance of her investment portfolio. 

We put our entire team’s education and experience, as well as our state-of-the-art software programs, to work to maximize the ultimate value of each client’s portfolio. The fact that our Managing Director, Tim Agnew, is a CPA helps ensure that the tax consequences of investments are always considered. Likewise, our close relationship to Smith & Howard, a nationally-recognized CPA firm, is a huge benefit to our clients when it comes to connecting the dots between investing and smart tax planning.

Our investment strategy includes careful attention to tax-efficiency and recognizes that it is the end results, after taxes are paid, that truly matter. Call your personal SHWM advisor or call 404-874-6244 to talk to a member of our team about tax-efficient investing and the other strategies we can use to make the most of your investment portfolio.