By Sheryl Rowling
SAN DIEGO — Is Your advisor managing your portfolio tax efficiently?
The tax rules are getting more complicated than ever and taxes are increasing. It’s hard to keep track of all of the ways our income is being taxed: Ordinary tax, capital gain tax, alternative minimum tax, Medicare surtax… where does it end?
You’ve chosen your investment advisor because you believe he or she will take care of your portfolio, grow your nest egg and help ensure your lifestyle throughout retirement. Many of you have carefully selected a Registered Investment Advisor (RIA), who has a fiduciary duty to put your interests above his or her own. But, have you figured out if your advisor is managing your portfolio in a way to minimize your tax bill?
Is it enough that your advisor buys municipal bonds in your taxable account? In the past, maybe yes. In today’s world, the answer is a resounding no.
An investment advisor who is truly saving you tax dollars will be considering many different strategies. Even if you don’t fully understand all of the strategies, it is important to ask questions. Why? Because tax-efficient management can save you money without taking on risky investments!
Here are some questions (with a little explanation) you should be asking your advisor:
1. Do you buy municipal bonds in my taxable account? If yes, does my tax bracket justify that? (In general, municipal bonds pay less than taxable bonds. If you are in a low tax bracket, it might make sense to hold taxable bonds instead.) Should I be holding taxable bonds in my IRA instead? (Holding taxable bonds in your IRA allows you to have higher-paying bonds in a tax-deferred account.)
2. Do you recognize short-term gains in my account? (If yes, this means you are paying almost twice as much tax than if you held the investment a year. Is your advisor paying attention to this? Is your advisor churning your investments?)
3. Do you harvest losses during the year? (Many advisors will recognize losses only at year-end when, in fact, greater tax savings can be achieved by harvesting losses as opportunities arise.)
4. Do you hold stocks or other equities in my IRA? (If the answer is yes, then your advisor is subjecting appreciation to ordinary tax. Appreciating investments should be held in your taxable account. This way, gains will be taxed a lower capital gains rates – only when the investment is sold. And, if these investments are held at death, your heirs will avoid tax on the gain altogether. Not true if held in your IRA.)
Although there are other questions you could ask, these questions should give you a good indication as to whether or not your advisor is truly managing your portfolio for tax efficiency. If you’re not satisfied with the answers, consider finding another advisor (preferably an RIA) who can review your portfolio.
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com