How Much Time Do You Spend Optimizing Taxes When Investing?

By: ispeculatornew
Date posted: 04.05.2012 (5:00 am) | Write a Comment  (3 Comments)

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It seems a bit crazy. Investors that spend hours trying to find the best possible stock to buy, that try to optimize asset allocation, find lower commission rates, trying to save a few dollars here, improve returns a bit there, looking for mutual funds or ETF’s that cost a bit less, etc. Then they pay almost no attention to optimizing payable taxes. We all do our best to ensure that our retirement and other accounts increase as fast as possible.

Taxes Are A Huge Factor

I think it’s easy to forget the huge impact of taxes on our retirement. Just think about it for a minute.. If you are able to optimize taxes that you pay in the early years, it can mean incredibly big differences decades later as you can reinvest that money over time and then pay lower taxes once you do need the money.

Why Do We Overlook Taxes?

It beats me honestly. I wish I could say that I’m doing everything that I should but I’m not. I have gotten much better over the last few years but there is still a lot to be done. I think there are a few reasons why most of us spend too little time worrying about the tax aspect of investing. It’s usually not very exciting, takes a decent amount of time and isn’t simple by any means…

Unfortunately, It’s Complex

Why is it so complicated? I think the main reason is that there are no fixed rules for diminishing taxes. It depends on each individual investor, what accounts they hold, what their financial situation and objectives are, etc. There are two main types of accounts:

-Tax Deferred Registered accounts
-Taxable cash/margin accounts

There are 2 main taxes on investments:

-Capital gains taxes
-Income tax

Some Basic Rules

-In general, you would like to have as many taxable investments being made in a tax deferred account, such as a RRSP or a 401K. Ideally, any dividends, capital gains or other events would occur in those accounts.

Depending on your situation, asset allocation can sometimes be modified for tax reasons. For example, holding more income (bonds, dividends, etc) securities in tax deferred assets can make a lot of sense. For an investor that is holding retirement assets in both types of accounts, holding all assets that will generate payable taxes in a tax deferred account could make sense for example.

While you would not sell or hold a security strictly for capital gains taxes purposes, it should certainly be part of the equation as it can have a significant impact. Plan on taking a year off to travel around the world? That would be a great time to sell those stocks that you made a killing on.

Special securities: Some specific investments such as life insurance investments, municipal bonds or others can have very unique tax impacts and could certainly be appropriate for some investors.

So now tell me, what are YOU doing to optimize your taxes?

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  1. Comment by John — April 5, 2012 @ 8:04 am

    IS – you may want to clarify that you are under CAN tax rules. I agree tax impact is important and needs to be kept in the front of our minds.


  2. Pingback by Dividend Link Time — April 6, 2012 @ 4:01 am

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  3. Comment by IS — April 6, 2012 @ 6:48 am

    @John – I am actually under both CAN and US rules (long story) but I think it would apply to almost any jurisdiction. Thanks for the comment:)

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