Update Your Financial Plan Annually For Taxes – Part 2
Thursday, November 17, 2011, 2:00 AM | Leave Comment
Revisit your tax strategy to prevent you from paying taxes more than what you are required by law. It will boost your after-tax returns. So far as taxes are concerned, there are two kinds of investments: tax-sensitive and tax non-sensitive. Morningstar did research for the period between 1935 and 2009 and found that over the 74-year period, investors who managed their investments in a tax-sensitive manner achieved average returns that were 1% to 2% higher than those who didn’t.
The tax season is just about upon us and this is as good a time as any to revisit your tax strategy. You and your adviser can go over your investments and see if there is anything missing that you can fix.
Such strategy might include knowing
- when to sell or hold (one of the hardest things to do in investment),
- having an asset location strategy, and
- monitoring deductions and distributions.
When you apply your tax strategy to practice, it definitely should include tax-advantaged investments, such as a 401(k) plan or a deferred annuity, tax-exempt bonds, or tax-managed mutual funds for your portfolio.
Health Spending Accounts
IRS has a page on Flexible Spending Arrangements (FSAs) in terms of Contributions to and Distribution from FSA, HRA, and HSA. So please visit the page, study it and take advantage of these tax savings if you are not already doing them, especially the ones that might apply to your situation. Check with your employer’s Human Resources department.
In a Nutshell
No one likes to pay more tax than is absolutely necessary under the law. There are completely legal ways to manage your taxes to certain extent. However, don’t cheat on your taxes just to save some bucks. When you revisit your tax strategy, examine your current financial situation, your long-term goals, and then adjust your portfolio for the best possible tax returns. Next we will discuss Update Your Financial Plan Annually For Estate – Part 3.
