Incorporating Tax Implications into Your Investment Strategy

Part 5 of our Stone Creek Advisors Blog Series

Have you ever switched advisors only to have the firm you transferred to sell out of every holding in your portfolio, hitting you with a huge capital gains bill that you did not expect? At Stone Creek Advisors (SCA), we certainly take the tax implications of our decisions into account. While risk management is our number one focus and taxes do not drive our investment decisions, they are a factor in our process.

At many investment firms, their focus is solely on generating potential returns when making investment decisions without regard to the tax impact those decisions may have on the client.  We believe it's crucial to also consider the tax implications of our investment decisions. At the end of the day, in non-qualified accounts, what is left in an investor’s pocket is their return net of fees and net of taxes. By understanding the tax implications of their investments, investors can make strategic decisions to reduce their tax liability and increase their overall returns.

Types of Investment Accounts—Investors can take advantage of tax-efficient investment vehicles such as individual retirement accounts (IRAs including both traditional and Roth) or 401(k) plans. These accounts allow investors to defer taxes until they withdraw funds (or in the case of Roth the gains are tax-exempt), allowing them to grow their investments tax-free for many years. Look for our coming blog post on different IRA options and the pros and cons of each.

Timing of selling—When it comes to taxes and investing, timing is crucial. Capital gains taxes are triggered when an investor sells an investment for a profit. By holding onto the investment for at least a year, investors can qualify for long-term capital gains tax rates, which are typically lower than short-term capital gains rates. Investors can also use tax-loss harvesting to offset their capital gains taxes. This strategy involves selling losing investments to offset gains in other investments.

Types of Investments—Different investments have different tax implications and some are more efficient from a tax standpoint than others. Stocks held for over a year are subject to long-term capital gains tax, while stocks held for less than a year are subject to short-term capital gains tax (again typically higher than longer term gains). Bonds, on the other hand, are taxed at ordinary income tax rates. Municipal and Treasury Bonds have some tax exemptions surrounding them. ETFs are notoriously more efficient vehicles from a tax standpoint than mutual funds. By understanding the tax implications of each vehicle, investors can make informed decisions about which investments to hold in their portfolio and when to sell them.

Taxes are inevitable, but by being aware of tax implications, investors can maximize their after-tax returns and reduce their tax liability. By working with the client and their accountant, Stone Creek seeks to limit the number of tax time surprises for clients and come up with a strategy customized to each client’s unique circumstances. 

MGO One Seven LLC (“MGO One Seven”) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. Services are provided under the name Stone Creek Advisors, LLC, a DBA of MGO One Seven. Investment products are not FDIC insured, offer no bank guarantee, and may lose value.