Mistakes to Avoid when trying to Invest Tax Efficiently

When it comes to investing, as important as thinking about what you are investing in is, it can be just as important to consider your taxes as well.

Here are some mistakes that I have seen that you can avoid in your own finances:

1. Not maximizing tax-advantaged retirement accounts:

Obviously, cash flow and income limits can factor into whether this is possible to accomplish. However, if able, maximizing tax-advantages retirement accounts can work greatly in your favor. Even if not maxing out contributions to the maximum limits, missing out on employer matching contributions in retirement plans is another mistake to avoid. Make sure you are contributing enough to at least take full advantage of any company matching.

2. Improper asset location:

Holding tax-inefficient investments (e.g., taxable bonds) in taxable accounts. Asset location can be just as important at asset allocation. Not taking advantage of the tax-deferred or tax-exempt growth in retirement accounts. It is important to know which accounts grow tax free and which ones grow tax deferred (e.g., Roth IRA vs. Traditional IRA).

3. Neglecting tax-loss harvesting:

No one likes losses in their accounts. However, another mistake is overlooking opportunities to realize losses to offset capital gains and income. Mistakes can be made when doing this, such as, violating the wash sale rule by repurchasing a substantially identical investment within 30 days.

4. Ignoring income phase-outs for tax-advantaged accounts:

Contributing to a Roth IRA when ineligible due to high income is easy to do. Monitoring income phase out limits and how they may change each year can be important in avoiding that mistake and having to make corrections on your taxes. Missing out on the ability to deduct traditional IRA contributions is another mistake to avoid.

5. Lack of tax-efficient fund selection:

Holding actively managed funds with high turnover in taxable accounts can lead to paying more taxes. Not understanding how to utilize tax-efficient index funds, ETFs, and municipal bonds ties into this theme as well.

6. Insufficient coordination with overall financial plan:

Implementing tax strategies in isolation without considering other goals and priorities. Consider your current tax liability but also what your tax liability could look like in the future when making these important decisions. Life will change and not regularly reviewing and adjusting tax-efficient strategies as circumstances change should be avoided as well. Life will continue to change.

7. Overreliance on a single tax-saving strategy:

Focusing too heavily on one technique (e.g., only using tax-loss harvesting) and neglecting to diversify tax-efficient strategies across your portfolio.

8. Lack of professional guidance:

Attempting to navigate complex tax rules and regulations without the help of a qualified team of advisors, tax professionals, etc. could lead to missing out on advanced tax-efficient strategies due to limited knowledge.

By being mindful of these common pitfalls, high-income young earners can more effectively implement tax-efficient investing strategies and optimize their long-term wealth-building potential.

Securities offered through Geneos Wealth Management, Inc. Member FINRA/SIPC. Advisory Services offered through N.E.W. Advisory Services, LLC.

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. Investing and investment strategies involve risk including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results.

N.E.W. Advisory Services, LLC and Geneos Wealth Management, Inc. do not provide legal or tax services. Before acting on any information, please consult your tax or financial professional for individual financial advice based on your personal circumstances.