Taxes On Investing: When to Have the Talk

Key Takeaways

Taxes and investing are a fact of life. Financial consultants Jonathan Belay, Rachel McLain and Don Thomas share what prompts questions and when clients really should think about taxes on their investments.

Investors Are More Tax Aware Thanks to the Media

The media has played a role in awakening investors about taxes. In the past, fewer clients asked, but in recent years, things have changed. Clients are much more mindful about taxes today than ever before.

“That’s a good thing,” says Jonathan. "I want clients to know what they're investing in and how it could affect their whole financial situation, including taxes."

Clients are also asking about tax-efficient investing, particularly exchange-traded funds (ETFs). ETFs are getting more attention because they are a tax strategy for investing, and clients want to know the impact taxes could have on their wealth-building goals. Including taxes in your financial plan can help you and your advisor create smart strategies for maximizing your investments.

Retired Investors May Be Most Concerned About Taxes—Should They Be?

Our consultants find that often retired clients have the most questions about taxes and their investments. Retirees care about taxes because they want their money to last in retirement. They are aware of taxes on Social Security. And typically, they will receive income from a tax-deferred retirement account, which means the tax liability is due now.

Should retirees be more concerned? Not necessarily, our consultants say. Retirees are often in a lower tax bracket than they were when working, so it’s important to address taxes when you are still working. That is especially true if you are in your later career and making a higher salary and are in a higher tax bracket.

While you're still working, tax discussions can help set the stage for tax strategies in retirement. Investors in their 50s and 60s may also want to think about transferring taxable money to portfolios with better tax efficiency.

Capital Gains Put Investors on Tax Alert

Our financial consultants agree that some investors think about taxes when their investments realize a capital gain. That’s when they start seeking out tax strategies.

“Tax remedies aren't retroactive,” says Don. “But investors can use strategies to lower taxable capital gains and manage their tax burden.” Those strategies may help you avoid a surprise tax bill on your next tax day.

Another time investors become more tax-aware is close to tax filing day every April, but you can start managing your tax bill throughout the year by following some tax-time tips. Some tips have a December 31 deadline, so you’ll want to pay attention.

Other strategies are ongoing practices to adopt when investing or withdrawing from your investments. Understanding your tax bracket and checking estimated distributions for your mutual funds are two to consider.

When Should Investors Pay Attention to Taxes?

We've discussed three instances when investors mention taxes, but should you only think about them during these times? Not necessarily. There are other important times to consider taxes. These times include when you invest, transfer money between investments, withdraw money, and work on your financial plan.

“Several decisions you make as an investor can have tax implications,” says Rachel. "Most investors simply want lower taxes, without concerning themselves with the reasons or mechanisms behind it."

An example is to consider after-tax returns when you are choosing or comparing investments. Considering returns both before and after taxes can lead you to more efficient investing decisions. Many clients prioritize performance, but those who have held investments for a while also take into account the impact of taxes on their returns.

Investors often become more aware of taxes when they experience a distribution. Many don’t want to repeat a higher or unexpected tax bill, so it’s important to think about taxes upfront.

Another time to consider taxes is when investing in a tax-advantaged account, such as an IRA or retirement plan. The right type of investment account for you depends on when you want to pay taxes. You can choose to pay before you put in money, like with a Roth IRA. With traditional IRAs, you pay taxes when you take out the money.

When investing in a taxable account, you may want to think about tax-efficient investments versus those that are not. Rebalancing your portfolio is also a time to consider tax implications. Returning your portfolio to its intended risk level causes you to buy and sell investments, which will likely involve taxes.

Planning to Pay Fewer Investment Taxes—It’s a Team Effort

A final important time to consider taxes and your investments is when you’re working with a professional on your financial plan. Many times, the best way to do that is to connect your financial consultant with your tax professional.

“We aren’t tax consultants,” says Don. “But we can discuss investment-related tax issues.” Even better, our consultants can work directly with you and your CPA to help you develop tax strategies for your financial plan.

Our financial consultants can also help determine if tax-efficient investments are suitable for your taxable accounts.

“Asking clients how they feel about taxes is part of our regular conversations,” says Rachel. And I always like to talk about the tax-friendlier options since clients are likely hearing about products like ETFs.”

The four consultants agree that taxes are a crucial component of your financial plan. They recommend reviewing them regularly, especially if you're concerned about their impact.

Jonathan says, "We never want clients surprised by taxes. That’s why the planning part is critical.”