{"id":1017,"date":"2013-10-01T20:11:31","date_gmt":"2013-10-01T20:11:31","guid":{"rendered":"http:\/\/vhfinancialmanagement.com\/?p=1017"},"modified":"2013-10-01T20:11:31","modified_gmt":"2013-10-01T20:11:31","slug":"the-power-of-taxable-investing","status":"publish","type":"post","link":"https:\/\/vhfinancialmanagement.com\/2013\/10\/01\/the-power-of-taxable-investing","title":{"rendered":"The Power of Taxable Investing"},"content":{"rendered":"
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As a fee-only financial advisor who is always looking at the tax impact of investing, I often write about the importance of pre-tax investing.\u00a0 Whether it is in a 401k\/403b, SEP, SoloK, or a traditional IRA, creating a tax deduction by investing for your future is certainly a home run.\u00a0 In September of 2011, I penned the article titled 401k: Still the Best Game in Town!<\/a>\u00a0 The post was an example of my belief in the power of pre-tax investing.<\/p>\n

Unfortunately, we often are limited to the amount we can invest on a pre-tax basis. \u00a0The tax code limits how much and who can make contributions to certain retirement accounts.\u00a0 Often, these limitations can impact an investors ability to reach their retirement goals.<\/p>\n

The good news is there is an answer when pre-tax investing is not an option.\u00a0 If you can\u2019t invest on a pre-tax basis, a taxable investment strategy can be a great option.\u00a0 It allows for lots of flexibility and can work quite well for most folks.\u00a0 Here are some of the benefits of taxable investing:<\/p>\n

Flexibility of contributions and distributions<\/span><\/b><\/p>\n

When investing in a taxable account there are no limitations to the investing or distribution schedules.\u00a0 While I typically don\u2019t count taxable investments as emergency funds, funds can be withdrawn at anytime\u2026..therefore can be used for emergency purposes. \u00a0\u00a0With no distribution limitations (other than tax planning strategies)these investments can be used for any purpose: college, retirement, automobile purchases, home remodels\u2026etc.<\/p>\n

The timing of when the contributions are made is just as flexible.\u00a0 With all retirement plans there are limitations as to when the contributions are to be made.\u00a0 In a taxable account, the contributions have no timing limitation\u2026..contribute when you want.<\/p>\n

Capital Gain Treatment<\/span><\/b><\/p>\n

Another benefit to taxable investing is the treatment of long term capital gains. Even with the increase in capital gain rates this year (for those with higher incomes), distributions are still taxed at a lower rate than that of earned income.\u00a0 The tax code allows for another wonderful retirement strategy.\u00a0 If capital gains are used to fill up the 15% tax bracket as income on your personal tax return, the capital gain tax is zero.\u00a0 Essentially, some people can take up to $72,500 in capital gains and pay no tax! This requires a good deal of planning, but it\u2019s obviously worth it.\u00a0 What a deal, right!\u00a0 This illuminates the importance of taking a look at the tax consequences of distributions \u00a0prior to pulling the trigger.<\/p>\n

Capital Loss Harvesting<\/span><\/b><\/p>\n

Another great tool for taxable investments is the ability to harvest capital losses.\u00a0 Most folks understand that a capital loss may be used to reduce taxable income, but they often feel that taking a loss is an emotional defeat\u2026.and therefore choose not to.<\/p>\n

There is another way to approach this. The key is to harvest the loss and immediately reinvest into another investment that avoids the wash sale rules. In effect, the investment is not \u201cout of the market\u201d, but we\u2019re able to harvest the loss while the investment has the opportunity to rebound\u2026..essentially, \u00a0we get to reduce our taxable income.<\/p>\n

Dollar Cost Averaging<\/span><\/b><\/p>\n

One of my favorite strategies for taxable investing is the use of dollar cost averaging. Automatic investing helps smooth out the bumps along the investment highway and can be a great way to buy into the market during volatile times.<\/p>\n

Don\u2019t forget current taxation<\/span><\/b><\/p>\n

One important note should be addressed when discussing this method of investing.\u00a0 It\u2019s important to understand that all income produced by the underlying investment( except muni- bond interest) \u00a0will be currently taxed, so it\u2019s very important to invest is a tax-efficient investment\u2026.one that doesn\u2019t produce a lot of dividends, capital gains, or other income.\u00a0 This means that bonds and bond funds are certainly not a good choice for this type of investing.\u00a0 Passive investing with index funds is usually the best fit.<\/p>\n

There are many benefits to investing in a taxable account.\u00a0 While it is often overlooked, it is a great strategy to invest for the future with flexibility. The next time you find yourself out of options for pre-tax investing don\u2019t throw in the towel\u2026.simply look to set up a taxable investment strategy.<\/p>\n

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