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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