My daughter Savannah is prepping for her solo at Jump Dance Studio in Lakewood Ranch, and I’m slumped down in my chair exhausted just watching her practice. I wouldn’t dream of trying those moves. Forget it. No way. My back is tensing up at the thought.
But even more than being amazed at all that energy she’s burning, what I marvel at is the precision she demands from herself. And that’s good because precision counts in competitive dance. The crisper Savannah’s technique gets, the higher her score. She can have an off day on technique and still do well in the other judging categories but, like any motivated dancer, she wants every point she can get.
I can’t help but think of parallels between competitive dance and building a nice retirement. Just as in a dance competition, we don’t need flawless execution to do well. People can become wealthy if they can successfully combine an above-subsistence income, an appropriate savings rate, and make responsible investing decisions. But without tax planning, that leaves points on the table. To this financial advisor at least, tax planning distinguishes a precisely executed financial plan from the rest.
As any good coach will tell you, practice makes perfect. Here are some ideas to toss around with your tax advisor, or if you prefer, feel free to reach out to me.
Tax loss harvesting: If you have or plan to book capital gains, the time to take a tax loss is as soon as you have one, not just the end of the year. If you’re still in love with the investment that’s showing a loss, you don’t need to forsake it forever. You might be able to swap into something similar but won’t trigger a wash sale and then go back to your original investment after 30 days. And, presto, you’ve offset some capital gains.
Roth IRA conversions: Converting a Traditional IRA to a Roth IRA might feel like a drag because you’ll pay a tax on the conversion, but it can save a ton of money down the road by allowing you to withdraw from your Roth IRA income tax free. It’s definitely not something anyone should do blindly, because there are circumstances where it’s actually not a great idea, but if you have a Traditional IRA, you should at least know whether a conversion is possible and if it makes sense.
Use growth investments for income: Again, this won’t make sense for everyone, but many investors take regular distributions from their growth investments to imitate an income stream from a bond portfolio. Why? Because long term capital gains tax rates are often lower than those on taxable income, and growth investments typically have higher potential returns than income investments.
Give generously, but not to Uncle Sam: The Internal Revenue Code gets really tricky when it comes to gifting. Rather than giving headaches to accompany your gifts, speak with an advisor about what, when, how much, and to whom you give. For example, if you give appreciated stock to a family member, he or she will be on the hook for the full capital gain because the original cost basis follows the gift. That stock might do more good if it went to a tax-exempt charity.
Like dancing competitively, those of us seeking to build and preserve wealth don’t need to make frantic moves to score points. Instead, we seek to precisely and creatively bring a carefully thought-out vision to life, and tax planning should play a key part.
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 6260 Lake Osprey Dr. Lakewood Ranch, FL 34240. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth ManagementSM or its subsidiaries. Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. CDs are FDIC insured and offer a fixed rate of return. They do not necessarily protect against a rising cost of living. The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value. Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested.