Achieving a comfortable retirement often comes down to investment performance and tax burden. However, it’s a tricky task to balance investment gains with a tax-minimization plan. If you expect your investments to perform well, you may have to accept more taxes paid when you cash out your investment, and you may even find yourself in a higher tax bracket when you do so.
Capital gains taxes are taxes levied on the sale of an investment that had appreciated in value. Essentially, you may owe up to 20% in taxes on gains earned from a successful investment depending on your taxable income for that year! Although it’s important to make smart investment decisions, it’s also important to consider each opportunity’s tax situation so that you don’t end up owing more than you thought on a great investment.
One strategy that can help you defer your taxes on investments is the tax-loss harvesting strategy. This strategy essentially allows you to write off investment losses in the form of a tax credit of up to $3,000 per year.
The tax-loss rule states that your investment losses offset investment gains by their dollar values. For instance, if you had an investment whose value was set to give you a $10,000 gain and a different investment that was taking a loss of $3,000, you could sell the losing asset, pay no capital gains taxes, and receive the investment loss tax credit. Then you could reinvest both the tax credit and the sold investment into a new investment or the same one to continue growing or rebound from its low prices. In a way, it’s a small incentive to sell a losing investment for current-year tax purposes, then reinvest it to benefit from a rebound in the future. In addition, you can even apply investment losses to your income taxes. These losses can also be applied to any year you wish.
The other tax-optimization strategy you can take advantage of is the like-kind exchange rule for real estate. This rule allows you to defer taxes on real estate sold if the proceeds from the sale are reinvested in a qualified similar asset, such as another real estate property of similar value if done so within 180 days.
Taxes pose a complicated issue for retirees who expect to use their investments to cover their costs of living in retirement. When it comes to investments and retirement planning, factoring in taxes in each category of your plan is important, but isn’t easy to do so without financial expertise. Contact us at (603) 261-3736 to get started with a financial advisor.
Source: https://www.barrons.com
Bob has a passion for making your money work hard for you. He takes profound joy in ironing out a plan for a long and comfortable retirement, no matter what your current income or level of wealth. With a work ethic second to none, he has a zeal for transforming uncertainty into stable ways for you to protect your future and your family. He knows that the quality of your life you enjoy today can remain as rewarding—or even better—after retirement.
With a strong background in information technology, Carol is instrumental in building operational policies and strategies that keep the organization functioning smoothly. Carol’s organizational skills and her flexibility to jump from priority to priority along with her commitment to customer service makes her an essential part of the Grimard Financial team. When Carol is not working with the Grimard Financial Family, she is a very creative and accomplished photographer.