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Reduce Your Tax Bill: Investment Strategies

The Founder and President of Dobrusin Financial Shares Five Ways to Maximize Your Money for Tax Season

It’s not what you own, but where you own it.

Investors often own the same investments in both retirement and non-retirement accounts. As an alternative, consider placing tax efficient holdings in your non-retirement accounts like tax-exempt bonds with low capital gain distributions. Investments that generate taxable interest, short-term capital gains and non-qualified dividends should be held inside your pre-tax accounts like 401Ks. 

Time to sell?

Tax loss harvesting is a technical term for selling positions in a portfolio that incurred a loss prior to year-end. This is only appropriate in your non-retirement accounts such as your individual, joint or trust accounts. Doing this allows investors to offset gains realized earlier in the year against losses, prior to year-end. Remember, if a holding is sold at a loss, it cannot be repurchased within a 30-day period. 

Should I convert my traditional IRA to a Roth IRA?

A Roth conversion is where funds are transferred from a pretax individual retirement account (IRA) to an after-tax Roth IRA, increasing taxable income. This begs the question: why would anyone do this? Well, a Roth conversion could make sense if the market experiences a significant decline and there's a strong conviction in its eventual recovery. 

What about charitable contributions?

For investors that have attained the age where a required minimum distribution from an IRA account is required, you can make the distribution tax free. If the funds are sent directly from the account to a qualifying organization, the distribution is not included as taxable income. Dubbed the Qualified Charitable Distribution (QCD), this lets taxpayers donate to charity and benefit by not including the distribution as income. Arizonans can also contribute to certain in-state organizations and receive a dollar-for-dollar tax credit. 

Where should I invest to save on taxes?

Contributions to tax deferred accounts allow taxpayers to reduce their current year liability and defer income to a later date. For taxpayers in higher income brackets, explore a back door Roth IRA contribution enabling investors to contribute to Roth IRAs even if their annual income is above the contribution limits.

  • David Dobrusin, President of Dobrusin Financial

Arizonans can contribute to 529 education savings plans and receive a state tax deduction of up to $4,000 per beneficiary (married filing joint). If eligible, Health Savings Account contributions let taxpayers reduce their income up to $7,750 for family coverage and can invest the funds.