Is Your Portfolio Tax Efficient?

Taxes can impact investment portfolios negatively when proper investment management strategies aren’t leveraged. And, for retirees facing a lump sum investment when they officially retire, taxes can be crippling. There is good news! With proper planning, many taxes can be managed or reduced. Taxes can impact investment portfolios negatively when proper investment management strategies aren’t leveraged. With proper planning, many taxes can be managed or reduced.

Is Your Portfolio Tax Efficient?

Let’s consider a typical scenario- a retiree receives their pension funds in a lump sum. What are their available options? There are typically three, including:

  • Receiving the lump sum in its entirety as cash
  • Rolling the distribution into a qualified IRA account; converting your traditional IRA into a Roth IRA
  • Using 10 year tax averaging

Lump Sum Payment- If you choose to receive your funds in the form of a lump sum, you will lose a portion of your portfolio to taxes immediately. And, you will lose the benefit of tax deferral unless you reinvest the funds into a more tax favourable investment. Future earnings under tax deferral arrangements will be taxes as they are earned.

Rollover- If you choose to rollover your funds into a qualified IRA account or other qualified plan, you will not pay taxes on the distribution, your funds will continue to grow on a tax deferred basis, and when you withdrawal your funds, they will be treated as ordinary income. Tax deferred investments offer tremendous advantages to investors when it comes to tax liabilities. For example, the funds invested into a tax deferred account such as an annuity, with grow on a tax deferred basis. This means that the investor will not have to pay capital gains taxes on an annual basis while the funds are accumulating.

You can accomplish this by rolling over the funds directly or by depositing the funds within 60 days of their withdrawal into a qualified account. Another option is to convert your traditional IRA into a Roth IRA if you meet the eligibility

Averaging- The final option is to receive the funds in a lump sum and to average the taxes. Although you would still be required to pay the total amount of taxes due during the first tax year, you could spread the liability over a ten year period which can reduce your tax rate and offer you tremendous financial savings. There are a number of complicated rules and restrictions associated with this option. Be sure to discuss this financial decision with your qualified CPA or tax accountant.

By restructuring your investment portfolio, you may be able to reduce your annual tax liability substantially. And during retirement years, this reduction can provide a positive impact to your standard of living. In order to create more efficient investments, you need to consider an evaluation of your current holdings in order to determine what if any restructuring is necessary.

The professionals of Trippon Wealth Management Group dedicate themselves to focusing on the unique set of tax planning and financial planning services which will allow their clients to live a life reflecting their core values.