In Part 2 of our three-part series on bringing order to your investment universe, we looked at Transitions and Taxes, or how to balance sensible tax management with effective investment planning.

Today, we’ll wrap our series with additional ways to ease your transition from chaotic to more orderly investing. Some steps are purely practical. Others help you remain calm and confident along the way. We can mix and match them as needed to contribute to your investment success.

Taxes, Taxes, Taxes

Just as location, location, location often dictates where you’ll buy your next home, tax-efficiency is usually integral to your move toward more organized investing. Especially if your plans call for a multiyear shift toward your ideal investment portfolio, there are a number of tax-planning strategies we can pursue within your taxable accounts to minimize the damage done.

Mind Your Annual Income: Be mindful of your total annual income as you proceed. For example, you might experience a low-income year if you’re between jobs or shifting into retirement. Other years, you might receive a big pay raise, sell your business, or otherwise take on extra taxable income. You may be able to speed up your transition by deliberately incurring extra taxable gains in lower-income years, and move more cautiously in higher-income ones.

Watch for Those Tax Thresholds: Try to avoid the “gotchas” that can be triggered when realized taxable gains add to your overall annual income. For example, if the extra income pushes you into a higher tax bracket, your overall marginal tax rate may increase.[1] Access to other government benefits can also be affected by your reportable income, such as whether or not you are subject to additional IRMAA fees when you qualify for Medicare.

Skip the Short-Term Gains: If you sell a taxable position you’ve held for a year or less, gains are taxed at typically higher short-term rates. It may be worth waiting to sell significant positions until you’ve owned them for more than a year, so the sale qualifies for long-term gain rates.

Harvest Some Losses: Even if your investment plans don’t call for selling particular investments in your taxable accounts, you may still be able to tap them for tax-loss harvesting. By selling any positions in your taxable portfolio at a loss—and promptly reinvesting the proceeds in a similar (but not identical) asset—you can generate realized losses to offset realized taxable gains, without altering your overall portfolio mix. This may free you to realize more taxable gains among the positions you do want to permanently sell.

Be Picky About Lots: Instead of selling an entire fund, ETF, or stock holding, you can sell targeted lots, or share batches, within each. For example, your earliest lot comes from your initial purchase. You also may acquire additional lots through dividend reinvestments, or by buying more shares over time. When it comes time to trade, you might sell particular lots with lower embedded gains, keep those that would incur short-term gains, and/or use specific lots to harvest capital losses, as described.

Seizing the Days

As you transition toward your ideal portfolio, life may send you additional opportunities to seize and obstacles to avoid. Following are a few examples.

Take Advantage of Market Declines: When markets decline, stocks go on sale. If your plan calls for selling some positions and buying others, you may be able to take advantage of market downturns to enjoy lower taxable gains as you sell, and better (lower) prices as you buy.

Add New Money to the Mix: Whenever your plan calls for holding more of a particular type of investment, it’s always best accomplished when you can add new money to your portfolio, and investing it accordingly—no taxable strings attached. Have you recently experienced a pay raise, equity compensation event, or inheritance?  Any such “found” money can be ideal for this role.

Withdraw Money Mindfully: Likewise, as you withdraw money from your investment accounts, you can be deliberate about selling positions in which you are overweight, to reduce your exposure to them as planned.

Shift Money from Taxable to Tax-Sheltered: Each year, you are given fresh opportunities to add new money to your tax-sheltered accounts. You might use these annual opportunities to move assets from your taxable to your tax-sheltered accounts, where trades do not incur taxable gains. This may offer more flexibility for achieving and maintaining your ideal portfolio mix.

Give Your Money Away: If you are charitably inclined or planning to gift assets to loved ones, you may be able to move your portfolio closer to your ideal targets through charitable giving and/or gifting. In short, if you’re planning to give some money away anyway, you might as well be deliberate about which investments you tap for it.

Acting on Your Orderly Resolve

Are you ready to bring more order to your investment universe? Consider hiring a planner to step you through the tactics just described. Your planner can also provide you with a robust cost/benefit analysis to help you:

  • Decide how fast or slow you’d like to go.
  • Know where you stand as you proceed.
  • Resolve second thoughts you may encounter along the way.

We have a caveat, though: Seek a planner who clarifies rather than confuses your planning.

Your ideal ally will not only provide you with solid numbers to consider, they should be able to explain them in a way that makes sense to you. The goal is to gain an empowering sense of control over your investments. Proceed with caution if someone is instead trying to dazzle you with daunting data that leaves your head spinning.

Also, be sure to give yourself some grace as you proceed. Change—even change for the better—can be scary. While your head may be telling you it’s time, your heart may be hesitating.

To build and maintain a comfortable pace for you and your financial wellbeing, we suggest hiring a planner to help with the practical and emotional challenges involved. And remember, even the most orderly universe contains some chaos, to fuel the work in progress. Money management is no different. The more accurately you aim for perfection, while embracing the essential uncertainties involved, the more effectively you can pursue your ideal financial goals.

Please let us know if we can assist with your pursuit.


[1] Entering into a higher tax bracket does NOT mean you must suddenly pay a higher rate on ALL of your reportable income; you only pay a higher rate on the amount that exceeds the previous bracket. In techy terms, the total rate you pay across all your brackets is called your marginal tax rate.