When we think about investing, most imagine tracking stock prices, picking the next winning asset, or strategizing for significant returns. However, tax planning is another often overlooked side of investing that can make a huge difference. Like a solid investment strategy, smart tax planning can help keep more money in your pocket instead of handing it over to the IRS. Here are seven straightforward tax strategies that can help you maximize your investment gains.
1. Track Taxable Events Year-Round
Don’t wait until tax season to think about your taxes. You can avoid surprises come tax season by watching your taxable events all year—like selling stocks or receiving dividends. Set up a simple system to track these events or work with a tax advisor. This proactive approach can give you a clear picture of your tax obligations and help you make smarter financial decisions.
2. Maximize Your 401(k) Contributions
If you’re looking to reduce taxable income and save for retirement, maximizing your 401(k) contributions is a win-win. Every dollar contribution to your 401(k) is deducted from your taxable income, lowering the income tax you owe. If you’re in a low-tax year, consider rolling part of your 401(k) into a Roth IRA. This way, you’ll pay taxes on it now but benefit from tax-free growth and withdrawals in retirement.
3. Utilize 529 Education Savings Plans
Are you saving for education? A 529 plan lets your contributions grow tax-free if you use the funds for qualified education expenses like tuition or textbooks. Plus, some states offer a tax break for residents who contribute. Recent tax laws allow you to move any leftover 529 education savings into a Roth IRA for the beneficiary, giving you more options for using your savings.
4. Don’t Overlook Required Minimum Distributions (RMDs)
Once you reach age 73, you are required to start taking RMDs from certain retirement accounts, like traditional IRAs or 401(k)s. Skipping these distributions can lead to hefty penalties, so make sure to include this in your tax planning. If you miss the deadline, Uncle Sam takes a large cut—so stay on top of this yearly requirement to avoid costly fees.
5. Take Advantage of Tax-Loss Harvesting
Tax-loss harvesting is a fancy way of describing when investors sell investments at a loss for legal tax reduction. For example, if the market dips, you can sell some underperforming stocks to balance out the gains from your winners. The losses can help you offset up to $3,000 in regular income each year and transfer any extra losses to future tax years. This strategy is beneficial during volatile market periods when losses might be more common.
6. Rebalance Your Portfolio in a Tax-Efficient Way
Portfolio rebalancing is an effective strategy for staying on track with your investment goals by adjusting your combination of assets, like stocks and bonds. To keep taxes low, try rebalancing in a tax-advantaged account like a Roth IRA, where any growth remains tax-free. If you’re rebalancing a taxable account, consider adding funds to underweighted assets instead of selling existing ones. This can help you avoid unnecessary capital gains taxes while keeping your portfolio balanced.
7. Make Strategic Charitable Contributions
You can legally lower your taxable income by donating to charity and itemizing deductions. Consider donating some of your appreciated assets like stocks or real estate for a bigger impact. By doing so, you’ll avoid paying taxes on the appreciation while still receiving a full deduction for the donation. If you’re over 70½, you can also make Qualified Charitable Distributions (QCDs) directly from your IRA, which can satisfy your RMD requirement and save on taxes at the same time.
Bottom Line
These seven tax strategies offer creative yet legal ways to slash your tax burden and grow your investments. But to really cash in on their benefits, you need to consult a tax pro to help with customized tax strategies based on your financial situation. At Tax Goddess, we have helped clients claim over $1.68 BILLION in tax savings through Strategic Tax Coaching. For more context, our STC clients pay an average annual tax rate of just 6.92%!
If you are paying over $100k in taxes yearly and are curious about how much we can help you save, book a FREE Consultation to find out.
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