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Understanding the Value of Tax Management at Integrity Financial Planning Thumbnail

Understanding the Value of Tax Management at Integrity Financial Planning

Tax management is a crucial part of the investment process. It's often overlooked because it's not glamorous but deserves serious attention, like asset allocation and portfolio construction. The reality is that taxes can significantly impact your overall portfolio value. That's why understanding tax management, how it works, and how to implement it into your investment strategy is so important. This post will examine how we use tax management to impact your portfolio. 

The Value of Tax Management

Taxes matter. Taxes represent a drag on portfolio returns but can be optimized using tax-loss harvesting and other strategies. Taxes matter because they eat into your investment returns, which most investors want to minimize. If you're saving for retirement or building up your emergency fund, every dollar counts--and paying too much in taxes won't help you get there faster (or at all). While taxes are an unavoidable part of investing, there are several ways to reduce the amount you pay. One way is tax-loss harvesting, a strategy where you sell a losing investment and use the loss to offset gains from other investments. Other strategies include gain deferral and using appreciated securities for charitable gifts. 

After-Tax Returns

The after-tax return is the return you get after paying taxes. Tax-alpha is the benefit of active tax management. It's calculated by comparing your after-tax return with the return you would have had with no tax management. The result indicates how much more money you have at your disposal than without active tax management. In our previous post, "Is Year-End the Best Time to Look for Tax-Loss Harvesting Opportunities? No", we document the benefits of "always on" tax loss harvesting using two studies to show that active tax management can improve after-tax returns by 1% or more annually. How much your portfolio earns is important; how much you keep is more important. By incorporating tax management strategies into your investment plan, we can help you achieve better results with less effort. 

The IFP Taxes Saved Report

The Taxes Saved Report is a great way to understand the value of tax management. It shows you:

  • The after-tax return on your investments compared to what it would have been without our service, so you can see how much more money you're keeping in your pocket.
  • Your taxes are saved because of our service, so you know how much money was saved by using our services (and why).
  • We maintain an audit trail on all trades in your account, explaining the rationale for each, which could include lowering your taxes or risk level (tracking error). 

Tax management is about more than just saving money. It's also about getting the most out of your investments and planning for the future. Tax-managed portfolios can help you achieve your financial goals faster by being more efficient with your money and reducing the portfolio drag caused by taxes.

You can see an example of a Taxes Saved report here. To get a personalized portfolio recommendation, you can take our short assessment here. To schedule a meeting with us to discuss your specific situation, visit our calendar here.

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.