Portfolio Taxes

AS A REGULAR EMPLOYEE, you likely have little or no control over how much you have in taxable earnings each year. But there’s plenty you can do to manage the tax bill generated by your investments. The rest of this chapter is devoted to the three strategies you ought to focus on.

First, make the most of the tax-sheltered retirement accounts available to you. That will mean not only stashing as much money as possible in these accounts, but also carefully weighing whether to fund traditional or Roth retirement accounts.

Second, ponder which investments to hold in your retirement accounts and which in your regular taxable account. In all likelihood, you’ll want to use your retirement accounts to hold investments that would otherwise generate big annual tax bills, while keeping more tax-efficient investments in your taxable account.

Third, seize the opportunity offered by years when your income is relatively low. Those low-income years may allow you to generate additional taxable income, while still paying taxes at a relatively low rate. To that end, you might sell stocks with large unrealized capital gains that you no longer want to hold or perhaps convert part of your traditional IRA to a Roth IRA.

Our Humble Opinion: Investors spend hours picking investments, while paying scant attention to taxes and investment costs. But the fact is, when you buy an investment, you never know whether you have yourself a winner. By contrast, managing your tax bill and holding down investment costs are two surefire ways to improve your portfolio’s performance.

Next: Step 1: 401(k) and IRA

Previous: Managing Earnings

Article: Now or Later?

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