By definition, tax-efficiency measures how much of the income and returns generated by your investments reach your pocket after paying taxes. Dodds Wealth uses a four-pronged approach to tax-efficient investing and wealth management:
Different types of investments vary in terms of tax efficiency. For example, junk bonds or actively traded mutual funds generate more taxable income. At Dodds Wealth, we review the tax efficiency of each investment for our clients in an effort to optimize after-tax returns.
When it comes to taxes, the long-term capital gains rate is lower than the short-term capital gains rate. That means that in a taxable investment account, you'll pay a lower tax rate on your profit if you hold the investment longer than a year. At Dodds Wealth, the tax consequences are one reason we recommend long-term investing to our clients.
With tax-deferred accounts like 401Ks, 403Bs, IRAs you don't need to pay taxes until you begin withdrawing funds. With tax-exempt accounts like Roth IRA or Roth 401Ks, you won't owe taxes on qualified distributions or gains. For comparison, taxable investments require you to pay taxes on any taxable income earned and capital gains taxes on realized profits in the account. We recommend making non-tax-efficient investments in a tax-deferred or tax-exempt account and making tax-efficient investments in your taxable account.
In taxable investment accounts, we practice tax loss harvesting by taking advantage of losses in your portfolio to offset gains. We replace the sold security with a similar one while maintaining the optimal asset allocation. This strategy makes lemonade out of lemons by producing a tax benefit from your investment losses.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
No strategy assures success or protects against loss.
If you are looking to invest, call our experienced team to schedule your first meeting. If you live in Denver, call (303) 539-3900 or if you are located in Colorado Springs, call (719) 260-9200.
