At FinTrust, we understand that many little things add up to a lot.
Tax-smart investors understand that investing is not just about what you earn, it is also about what you keep. Taxes reduce income and wealth and impact many types of investments and accounts. Tax rules and laws also change over time, so properly understanding, monitoring, and reviewing the tax ramifications of your financial and investment strategies is critical.
Our team of experts and extensive referral network of tax professionals can help you with tax efficient investing.
Many account types, including Roth IRA accounts, Health Savings Accounts, and 529 accounts are considered tax-advantaged because they are either exempt from taxes under certain conditions and offer other benefits like tax-deferred growth on investments.
Tax-Deferred accounts, including Traditional IRAs, 401(k)s, Rollover IRAs, Keoghs allow an investor to accumulate funds on a pre-tax basis while deferring taxes on investment gains until the money is withdrawn from the account. These accounts differ from Tax-Advantaged Accounts because there are rules related to when required minimum distributions are required.
The tax treatment of securities is as varied as the tax code. Municipal Bonds, for example, are commonly called “tax free” securities as interest from municipal bonds may be exempt from taxes. Master Limited Partnerships, MLPs and REITs, are taxed as partnerships rather than as corporations and as a result are considered pass through entities. As a result, the tax treatment of distributions from pass through entities may differ in that distribution may in fact be considered a return of capital rather than income. Pass through entities may also create K-1 rather than 1099 income and be subject to UBIT rules.
Tax diversification can be important if you’re uncertain about your future tax bracket and because tax laws regularly change. Tax diversification can also help with charitable giving and estate planning goals and strategies. Holding your investments in different accounts based on tax treatment (such as taxable and tax-advantaged investments and accounts) adds value during the accumulation phase of your financial life by allowing you to defer taxes (or, in the case of a Roth IRA, entirely eliminate the taxes on investment returns if you satisfy the holding period requirement). It also adds an additional layer of diversification to your portfolio during the distribution phase, as you may be able to manage your tax liability by enjoying the flexibility of being able to choose which type of account from which to take your required withdrawals.