Tax-efficient planning is good medicine

While T. S. Eliot observed that April is the cruelest month, he likely wasn’t thinking about the tax season grind. But with the April 15 behind us, it’s a good time to point out that using the period advantageously after the tax filing period has passed — hopefully with our wits still intact — can pay major long-term dividends.At first take, talking about tax-efficiency strategies can prompt a polite “call me later about this” response, but it’s hard not to overstate just how vital this issue is today.While we don’t give tax advice, our role over the years has evolved to the point where we often serve as a family’s virtual chief financial officer. In that paradigm of risk management, we consult on one’s liquid assets and help manage risk.If clients don’t do their part in areas such as tax and estate planning, all our investment successes can be for naught. It can be a troubling, and too common, occurrence for those who don’t seek tax-efficiency counsel.If you can think beyond the immediate needs each April 15 brings, your outlook to the future can provide multiple options to manage your portfolio. In my experience, those who have the greatest success in retirement are the ones who don’t drive their spouses crazy and have the greatest flexibility in an ever-evolving tax code to pick and choose from which asset pool to draw down their resources in their remaining years — in the most efficient manner.To be sure, there are obstacles aplenty, such as public policy. One might do a terrific job managing one’s assets over the years and Congress can undo it all seemingly overnight by changing the tax code. Our motto is to be ahead of the curve, not behind it.Frankly, all too often there is confusion about the benefits and mathematics of tax deferral. Sometimes taking a swallow of long-term “good” medicine, when a short-term gain is right before us, isn’t easy, yet it can help pay off with efficiencies over time.

The gratification gameConsider this fundamental fact — a tax-deferred investment only defers one from paying potentially more down the road. Let me repeat this distinction. Not paying taxes in a tax-deferred account means you won’t pay taxes until later. But that may not always be to your advantage, especially if equity returns are moderate and with taxes of many varieties likely to rise.Even with uncertainty, tax efficiency comes into play in how and where you hold your assets. Comparing investment options, such as tax-deferred IRAs and stocks, can provide hard-number examples of immediate tax-deferred gratification versus long-time gain.Many consider exploring the conversion of a traditional IRA to a Roth IRA, and should only do so after careful tax planning. Yes, you lose the deduction now but potentially gain in the long run because it is tax-free income when legally withdrawn — and from a long-term investment perspective, not subject to possible income tax rate increases.Utilizing investment losses — which for some may be abundant — also can provide an important efficiency. One might make the loss of today have greater meaning in the long run by carrying that loss forward and taking credit with the IRS for future capital gains – again, with proper tax advice this can make a huge difference.In most cases, one does not have to blow up an entire life’s savings to enjoy these important efficiencies. Once explained, most understand that subtle changes can have long-lasting effects. But one fact is crystal clear — without tax-efficiency planning, people could surrender a substantial amount of their retirement income to future liabilities when the tax deferment bill comes due.Preventive medicine is good medicine.
Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 800-422-1030