10 Unique Investing Tactics to Handle the Coming Tax Uncertainty

by Ron Haynes

Yesterday I outlined how everyone’s tax rates are set to increase unless there is some sort of Congressional intervention … we’re standing on the edge of a fiscal tax cliff so to speak.

And since smart investors (and taxpayers!) seek ways to maximize the return on their investments and minimize their tax exposure, I’ve assembled 10 strategies and tactics to help do just that. Two ways to help maximize your return on your investments are:

  1. Put money into investments with a low fee structure
  2. Put money into investments that are tax advantaged

Assuming you’ve put your retirement accounts and other capital into low fee investments (especially after reading The Advantages of ETFs: Lower Expense Ratios), there are some specific strategies and tactics to help you navigate an uncertain tax landscape.

  • Maximize your retirement plan contributions
  • Think about a Roth IRA conversion
  • Examine your appreciated assets
  • Buy and hold
  • Consider municipal bonds
  • Investigate a variable annuity
  • Go pro and get some advice
  • Reconsider your dividend paying investments
  • Give it away early
  • Know your goals

1. Max Out Your Retirement Plans

Regardless of whether taxes increase or not, it always makes sense to take full advantage of retirement accounts and/or IRAs but especially  when there is a tax benefit to you, even if that benefit is in the distant future. I personally have both a Traditional IRA and a Roth IRA – which one I personally contribute to in a given tax year depends on my tax situation.

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2. Consider a Roth IRA Conversion

Roth contributions are made with after tax dollars and, depending on your situation, the gains will be tax free in the future. Almost anyone can convert their Traditional IRA into a Roth … if you’re willing to pay the taxman. It could be beneficial to you to go ahead and pay those taxes. Brokerage houses like Scottrade can make the conversion very easy by deducting any taxes due from the balance you have in the account.

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3. Review Assets That Have Grown In Value

If the capital gains rate increases from 15% to 20% (as it is currently scheduled), it may be in your best interest tax-wise to go ahead and take those gains. In a rising capital gains tax environment, it’s wise to evaluate all your assets with an eye to their future performance and capture any gains now rather than later.

4. Go Long with Buy-and-Hold

A buy-and-hold strategy can become a better strategy in a rising tax environment. Anytime you can delay paying taxes, you’re paying them with monies that have (hopefully) grown and with monies that are less valuable due to inflation.

5. Supplement Investments With Municipal Bonds

Municipal bonds, which are federally tax free and usually even state-tax free, are one of the most efficient investments for protecting yourself against current and potentially higher future tax rates. Be careful to pay special attention to the credit ratings of those municipalities however. You’ve probably seen all the recent city bankruptcies in the headlines.

6. Investigate Variable Annuities

Annuity income is usually tax deferred and diversification in a variable annuity can provide your portfolio some sweet tax-deferred growth (including lifetime income, increased retirement savings, equity upside potential, and even a death benefit for your heirs). Withdrawals will, however, be taxed as ordinary income.

7. Consider Using a Professional

One of the great things about using a professional who can manage your portfolio is simple: TAX ADVANTAGES. Professionals can help you find tax-effieicnt investments that are managed to limit the number of taxable events within your accounts. Other options a pro can help you evaluate are Separately Managed Accounts (SMAs) that limit your tax exposure though holdings that are especially designed to limit your taxes and use tax-management techniques to limit the impact of taxes and increase your after-tax returns.

8. Reconsider Your Dividend Investments

Dividend income stands to receive the most dramatic impact (unless something changes). Should rates rise from 15% to 43.4% (a 189% increase), you’ll need to closely examine your dividend income and consider whether it’s better to realize gains now or just pay the taxman. Should you be using dividends are income, you’ll need to consider other yield producing investments for better after-tax performance.

9. Give It Away!

After 2013, estate and gift taxes are set to explode. If you plan to leave an estate to your heirs, you may want to consider strategically transferring assets earlier rather than later. With the way taxes are set to skyrocket, it may be better to give even larger gifts, even taxable ones. Currently, individuals can gift up to $13,000 per recipient without incurring federal gift taxes. Spouses can together gift up to $26,000 in addition to the current $5.12 million lifetime exemption.

10. Know What You Want to Accomplish

Don’t let taxes be the impetus for all your investment decisions. Taxes are a critical component to investing, particularly when you’re investing for your retirement, but it’s important to know what your goals are for yourself and your family – both now and in the future. Keep those objectives in mind and communicate them to any financial advisers you use so you can achieve your goals in the best tax efficient manner.


About the author

Ron Haynes has written 988 articles on The Wisdom Journal.

The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.

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