Most investors don’t think about taxes until after they’ve made money. A smart investment strategy begins with a tax plan, not a stock pick.
If you’re serious about keeping more of what you earn, you can’t afford to treat tax planning as an afterthought.
Here’s why it should be the foundation of your strategy.
Tax planning drives net returns
Your investment portfolio might be performing well on paper, but the only number that matters is what you keep after taxes.
High turnover? That could mean short-term capital gains taxed at ordinary income rates. Actively managed funds?
They might trigger surprise taxable distributions at year-end. Rebalancing across accounts without regard for tax consequences? You could be paying unnecessary capital gains.
Taxes can significantly impact investment returns for stocks and bonds. Compounded over decades, this can be the difference between financial comfort and freedom.
Asset location matters as much as asset allocation
Most investors understand the importance of diversification. Fewer understand how tax treatment varies across account types.
Put municipal bonds in a tax-deferred account, and you’re wasting their tax-exempt benefit. Put a high-yield bond fund in a taxable account, and you’re likely overpaying Uncle Sam.
A well-constructed tax plan guides where you hold each investment. Low-growth assets may belong in taxable accounts with limited tax impact. High-growth or high-income assets may be better suited for IRAs, Roth IRAs, or other tax-advantaged vehicles.
The result? You preserve more of your gains and pay less in avoidable taxes.
Capital gains should be realized with intention
Selling a winning investment can trigger capital gains. That’s fine if it’s part of a bigger plan. It’s a problem if it’s done without regard for the tax bill.
A tax-first approach asks:
- Can this gain be offset with a loss elsewhere?
- Would waiting a few more months qualify it for long-term rates?
- Does it make sense to harvest gains strategically across tax years?
These aren’t academic questions. They can save you thousands. The difference between short- and long-term capital gains rates can be significant in higher brackets. Add the 3.8% Net Investment Income Tax and state taxes, and the penalty for poor timing worsens.
Withdrawal strategy is part of the plan
If you’re retired or approaching retirement, the order you withdraw from accounts matters.
A thoughtful tax plan coordinates withdrawals from taxable, tax-deferred, and tax-free accounts to manage your marginal tax bracket, avoid Medicare premium surcharges, and reduce required minimum distributions in future years.
Without that plan, you might withdraw from the wrong accounts first, bump into a higher bracket, or pay more in future taxes than necessary.
Tax planning allows for proactive charitable giving
Investors who give to charity often do so by writing checks. That’s easy, but not optimal.
A tax plan can identify better ways to give:
- Donating appreciated stock directly to a charity avoids capital gains and allows a full deduction
- Using a donor-advised fund (DAF) can let you bunch several years’ worth of giving into one high-income year
- Making qualified charitable distributions (QCDs) from an IRA can satisfy required minimum distributions tax-free if you’re over 70½
These strategies don’t just help others. They allow you to give more while spending less.
Tax-loss harvesting can add value year-round
The idea behind tax-loss harvesting is simple. You sell an investment at a loss to offset gains elsewhere.
If done correctly, it lowers your tax bill. However, if done automatically by an algorithm, it may not match your broader financial picture.
An effective tax plan applies harvesting selectively:
- Without disrupting your long-term asset allocation
- While avoiding the IRS wash sale rule
- With awareness of short-term vs. long-term loss utility
It’s not just about reacting to market dips. It’s about embedding loss harvesting into a year-round strategy that aligns with your goals.
A Roth conversion isn’t a tactic. It’s a tax strategy
Converting traditional IRA assets to a Roth IRA is a powerful move. You pay taxes now in exchange for tax-free growth later.
Without a tax plan, you risk pushing yourself into a much higher tax bracket in the year of the conversion.
The best Roth conversion strategies include:
- Timing conversions in low-income years
- Managing around Medicare premium thresholds
- Coordinating with charitable deductions or large itemized deductions
It’s not a one-and-done decision. It’s a long-term tax strategy that evolves as your income, spending, and estate plan change.
Your advisor should lead with tax insight
You’re missing out if your advisor isn’t asking for your tax return or collaborating with your CPA.
Investments don’t exist in a vacuum. Every financial decision, whether about where to invest, what to sell, how to withdraw, or when to give, has tax consequences.
The right advisor doesn’t just manage your portfolio. They help you manage your tax exposure. That means making recommendations based on performance, risk tolerance, and after-tax efficiency.
It’s how real value is added.
Tax planning is the alpha you can control
You can’t control the market. You can’t control interest rates, inflation, or geopolitical risk. You can control your tax exposure.
A sound investment strategy starts with a tax plan. It integrates your goals, income, account structure, and timeline and considers the full picture, not just your portfolio.
You’ve worked hard to build your wealth. Don’t let poor tax planning chip away at it.
Start with a plan. Then invest accordingly.
Disclaimer: Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. (28-LPL) There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.