How Taxes & Financial Planning Go Hand in Hand

Apr 13, 2021

For many, taxes and financial planning seem like separate spheres of money management. But in reality, your financial plan and your taxes are very linked. Almost every financial decision you make will have a tax impact, especially those tied to your long term financial goals. Making sure to think about your decisions from a tax perspective can help to avoid mistakes up front and big bills down the road.

Here are three quick ways to make sure you’re considering the tax impact of your financial portfolio:

Review your entire portfolio from a tax point of view

Your financial plan will almost certainly include assets that carry tax implications. Making sure that you and your financial advisors are reviewing the overall portfolio with a tax lens is step one in incorporating tax planning into your financial plan. Retirement plans, market investments, educational savings, and charitable giving can all impact your taxes and your advisor may have suggestions on where to invest or store your money accordingly.

Strategically plan for pre- or post-tax contributions

Once you have an accounting of the different assets, programs, and funds within your financial plan, your advisor can help you to strategically think through pre- and post tax contributions. Each decision will have its own impact on your overall tax burden (both now and in the future) and it’s important to consider how best to handle these contributions. It may be tempting to defer all tax payments, but your advisor can help you understand if that strategy works best for you and if not, what your alternatives might be.

Consult your financial planner about asset location and gain/loss harvesting

As mentioned above, each of the assets in your portfolio will impact your taxes, but your financial planner can help to determine the best location and management strategy overall. Are you eligible for different retirement vehicles? Should you consider a health savings account? Have you invested enough in your family’s legacy to qualify for tax savings? Each of these questions is worth considering as you make financial decisions and build your overall portfolio. 

Similarly, your advisor can help to strategically time the sale or acquisition of new assets depending on how they will increase or decrease your tax burden and in combination with other financial considerations. For instance, securities held at a loss might be strategically sold to offset other gains in a high year or not sold if they might be more beneficial after tax season.

Keeping an eye on your financial plan and your portfolio when it comes to tax implications can help you to avoid paying more in taxes than you have to. Because taxes and financial planning should go hand in hand, incorporating your tax planning into your financial plan can help improve the chances of your family meeting their financial goals. Your financial advisor can help to strategically consider your tax burden and make changes to your overall plan that will benefit you in the long run. 

Peninsula Wealth is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Peninsula Wealth and its representatives are properly licensed or exempt from licensure. This material is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Peninsula Wealth unless a client service agreement is in place.