Let's take a look.
While the composition of investments in your portfolio is important in terms of their returns, investing in a tax-efficient manner can generate income in your pocket as well.
TD Ameritrade in their Five Strategies for Tax-Efficient Investing lays out the implications: "After factoring in federal income and capital gains taxes, the alternative minimum tax, and any applicable state and local taxes, your investments' returns in any given year may be reduced by 40% or more."
Investopedia explains in A Beginner's Guide to Tax-Efficient Investing, "Simply put, tax efficiency is a measure of how much of an investment's return is left over after taxes are paid… Generally speaking, accounts can be taxable, tax deferred, or tax exempt."
You also need to realize there are tax-inefficient investments and why they can still be important considerations for your portfolio.
Sound complex? This one is. We wish we could make this topic easy for you, but it simply isn't. Investment strategies sensitive to tax efficiency take study and constancy, especially given that tax regulations change frequently.
To state the obvious, that is where Four Peaks Wealth Management can help. As financial professionals, it is our job to stay up-to-date on ways to manage, reduce, and defer your taxes in regards to your investments.*
As 2016 came to an end, we scrutinized portfolios to be sure they continued to be balanced, diversified, and tax-efficient. In some cases, we sold off investments that had underperformed expectations and in doing so, created a loss for you to offset realized gains. Merrill Edge in Tax-Smart Investment Strategies You Should Consider explains, "Using any investment losses you may have to offset your investment gains each year—a technique called ‘tax loss harvesting'—can help reduce your income tax liability."
If you, your financial advisor, or tax preparer are unsure about this strategy, we would be happy to educate you on this important concept.
For those of you still considering FPWM as your investment advisors, we're ready to sit down for a free consultation. Contact us soon.
* Sterling Financial Services now in your FPWM Toolkit
The implications of tax are an important aspect of an investment portfolio so FPWM felt it was a perfect pairing to not just work with a tax firm but to merge with one. FPWM recently merged with Sterling Financial Services in Sedona, just in time for the tax season ahead. Learn more about Sterling at sterlingfinancialaz.com.
It's not too late to gain while you give for 2016!
As a locally-focused firm, FPWM encourages you to be charitable. Generally, you need to make your donations by the end of the year; however, the school and charitable credits have extended deadlines. As an added plus, Fidelity in How to invest tax efficiently offers, "Giving to charity may not be the path to greater material wealth, but the use of charitable deductions can be a powerful part of a tax strategy for those who were planning to make donations."
Please refer to our 2016 year-end charitable contributions letter HERE to find out more.