Our weekly roundup of tax-related investment strategies and news that your clients may be thinking about.
How mutual funds could get a lot less taxing: Investors may want to consider alternatives to mutual funds because they can generate tax liabilities even if they don’t provides earnings, and lawmakers have been unable to fix this. Clients who reinvest distributions from mutual funds will still pay tax because the IRS doesn't distinguish a cash payout from reinvestment. Clients can look at more tax-efficient exchange-traded funds or investing in retirement accounts that have tax deferral, such as IRAs and 401[k]s. -- Daily Finance
Investors, don't make these tax blunders: Although taxes should not be the main factor in an individual’s investment decisions, investors still need to account for the tax implications of their moves to optimize their returns, according to this article on Morningstar. Many investors sold stocks at a wrong time, resulting in paying hefty taxes. Other investors converted their traditional IRA assets into Roth accounts and ended up paying a bigger tax bill. Many clients also shared how unforeseen events, such as regulatory changes or deaths in the family, led to higher taxes. -- Morningstar
A plan to slash a couple’s taxes: A financial advisor helped a couple who earn substantial income from their business as an independent contractor to reduce their huge tax bill to have more money to save for retirement, according to The Wall Street Journal. The advisor told them to transfer their savings from actively managed funds, which generate big taxes, to low-turnover, low-expense-ratio index funds. The expert also advised the couple to reduce the taxes they pay for their business by setting up a solo 401(k) for themselves. The advice would allow the couple to move to a lower tax bracket, scrap the alternative minimum tax, and take additional deductions. -- The Wall Street Journal
To lower your client's taxes in retirement, stay flexible: Retirees need to keep their withdrawal strategy flexible to enable them to reduce their tax liability, according to Morningstar. For instance, retirees who move to a lower tax bracket because of high medical deductions may withdraw funds from a traditional IRA, since it's tax-smart to take distributions from that account when the rate is at its lowest. Also, taxpayers who will pay hefty taxes for robust stock results may pull funds from their Roth accounts to avoid being moved to a higher tax bracket. Morningstar
Don't be dogmatic about retirement-portfolio withdrawals: Clients are advised to be flexible about retirement withdrawal sequencing instead of sticking to the standard sequence for tax-efficient portfolio withdrawals, according to Morningstar. This is because the clients' tax situation may change yearly according to their expenses, available deductions, investments' performance, and required minimum distributions. Clients are better off keeping holdings in taxable, tax-deferred and Roth accounts throughout their golden years so their total tax burden will be manageable, the article suggests. -- Morningstar
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