Tax Optimization

  • Are your taxable accounts managed in a tax-optimized way? (e.g., tax-efficient selling) 

  • Are you making contributions to an employer-sponsored retirement plan or IRA? 

  • Have you considered making Roth IRA contributions to reduce future tax liability? 

  • Are you minimizing your tax liabilities through charitable donations, a mortgage or other strategies?

Things to consider

Tax planning is more complicated than simply filing and trying to “save” a few dollars in what you may owe Uncle Sam. It requires developing a strategy, whether it is for you, your family or your business. Developing the plan and tactics is only one step in a tax-optimization strategy; you also need proper administration to support, operate, track, document, and follow through. Tax plans or strategies must be flexible and adjustable for the changing world. Optimizing the tax function is an important objective for any individual or organization. A proactive approach can help prepare you, your family or your business for long-term success.

What you need to know

What is tax optimization?

Tax optimization is the logical analysis of a financial situation or plan from a tax perspective to align financial goals with tax-efficiency planning. It encompasses many different aspects, including the timing of both income and purchases (and other expenditures), selection of investments and types of retirement plans, as well as filing status and common deductions. However, while tax planning is an important element in any financial plan, it is important to not let the tax "tail" wag the financial “dog.”

What it means

There are many different cost-basis methods of accounting, each with unique advantages. The common FIFO (first-in, first-out) method uses the first shares purchased as the first shares sold when positions are sold or liquidated, regardless of whether they are at a gain or a loss. Let’s take a look at how the two methods compare using the hypothetical fund ‘ABCDX’ as an example.

NOTE This chart is for illustrative and educational purposes only and does not include any dividend and/or
capital-gain distributions that may have been received. Reinvested distributions will affect the cost basis and
impact which shares are sold. Actual situations may vary.

The two cost-basis methods produce different results. In this example, the FIFO method would realize a $5-per-share (or $50) gain while the Tax-Optimization method would lock in a $10-per-share (or $100) loss to be used to offset any other realized gains and therefore help lessen the tax impact for that calendar year.

Set up an appointment with your advisor to discuss how he/she can help make sure you are taking full advantage of these money-saving opportunities.

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*This is a partial listing of Financial Engines’ customers as of December 31, 2017. These companies have consented to disclosure of their relationships with Financial Engines. This does not constitute an endorsement or approval of the advisory service provided. Third-party marks appearing on this site are the property of their respective owners.

*Investment News, RIA Data Center, 2018

*Methodology: InvestmentNews qualified 2,172 firms headquartered in the United States based on data reported on Form ADV to the Securities and Exchange Commission as of May 1, 2018. To qualify, firms must have met the following criteria: (1) latest ADV filing date is either on or after January 1, 2017, (2) total AUM is at least $100M, (3) does not have employees who are registered representatives of a broker-dealer, (4) provided investment advisory services to clients during its most recently completed fiscal year, (5) no more than 50% of amount of regulatory assets under management is attributable to pooled investment vehicles (other than investment companies), (6) no more than 25% of amount of regulatory assets under management is attributable to pension and profit-sharing plans (but not the plan participants), (7) no more than 25% of amount of regulatory assets under management is attributable to corporations or other businesses, (8) does not receive commissions, (9) provides financial planning services, (10) is not actively engaged in business as a broker-dealer (registered or unregistered), (11) is not actively engaged in business as a registered representative of a broker-dealer, (12) has neither a related person who is a broker-dealer/municipal securities dealer/government securities broker or dealer (registered or unregistered) not one who is an insurance company or agency.

All information provided through the Education Center is for education purposes only and does not constitute investment, legal, or tax advice, an offer to buy or sell any security or insurance product or an endorsement of any third party or such third party's views. Whenever there are hyperlinks to third-party content, this information is intended to provide additional perspective and should not be construed as an endorsement of any services, products, guidance, individuals, or points of view outside Financial Engines. All examples are hypothetical and for illustrative purposes only. Please contact one of our investment advisors for more complete information based on your personal circumstances and to obtain personalized individual investment advice.

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