April was an action-packed (or nerve-racking) month, with numerous headlines warning that tariffs could destroy the global economy. The good news is that the market has rebounded since early April, including a nine-day winning streak—the longest in 20 years. As I often say to my clients, “You need to be in it to win it!” For investors who stayed the course, your portfolios have bounced back nicely. Those who automate their investment contributions likely benefited even more from this market rebound.
There is still a lot that needs to be finalized regarding tariffs, but that’s out of our control. Instead, it’s important to focus on items that are investors do have control over. Since we just wrapped up tax season, let’s go over a few ways investors can improve their financial lives as it relates to taxes:
Multiple 1099s/K-1s
During tax season, it becomes abundantly clear how organized or disorderly your finances are. Did you receive multiple 1099s and K-1s from various investment firms? If so, you should question the need for having assets spread across many different areas. In addition to being cumbersome during tax season, when you need to assemble all the relevant tax documents for your CPA, it is virtually impossible to manage and track your progress.
For many investors, keeping investments consolidated in just a few accounts at one institution is sensible. It will be logistically simpler during tax season and more easily allow monitoring to ensure you are on track to achieve your financial goals.
A metric I consider when determining if I should complicate my portfolio by adding additional investments is called Return On Hassle or ROH. Is the additional investment or account at another firm worth the extra headache? Generally, the answer is “no,” and that’s why I try to keep my own investments and my clients’ assets as streamlined and consolidated as possible.
If you do have assets at other firms, especially those that push exotic investments or their own investment products (which is a huge conflict of interest), consider consolidating where appropriate.
Review K-1s And 1099s
It’s worth spending the time to review your tax documents to determine how tax (in)efficient your investments are. You can do this with your CPA, financial advisor, or on your own if you have the time and knowledge. You will never be able to avoid paying taxes indefinitely. However, there are some strategies that may be unnecessarily tax inefficient. For example, actively managed mutual funds and Separately Managed Accounts with high turnover can trigger an unnecessarily large tax bill. Furthermore, most alternative investments can consistently lead to unnecessarily high taxes.
It’s important to consider whether an ongoing higher tax liability makes sense. If it does make sense, consider “asset location” strategies, which is the process of allocating tax inefficient investments into tax advantaged accounts, like an IRA, and tax efficient investments into a taxable account.
Don’t Let Taxes Drive Your Investment Decisions
While tax planning is important, it should not be the main driver of your investment decisions. Over the years, I’ve seen many clients shoot themselves in the foot by letting taxes drive their investment decisions. One way this can manifest is not selling a stock with large gains even though it represented a large portfolio risk due to its size or future growth potential. Sometimes the client is paralyzed by concerns about paying taxes on the gains that they don’t make any adjustments to their own peril. Letting a tax bill take precedence over growing your money or minimizing your portfolio risk is generally a bad decision.
Furthermore, some folks have preferred to stay in triple tax-free municipal bonds with minuscule yields, instead of shifting part of their portfolio into higher returning areas of the market. This also leads to a smaller nest egg and the risk of inflation eating away at your portfolio.
Letting taxes be the main driver of your investment decision usually leads to subpar investment performance and a lower probability of reaching your financial goals. Keep this perspective in mind as you determine an investment strategy that makes sense for you.
Focus On Lifetime Tax Liability, Not Your Annual Tax Bill
It’s always important to keep the big picture in mind. Having a big tax bill in any one year is not the end of the world. In fact, it may be part of a sensible strategy. Sucking up a one-time large tax liability to have a smaller ongoing tax bill, a larger net worth, or to mitigate your risk, may be a good financial decision.
Understandably, investors may get agitated over a large tax bill in any one year. However, keeping in mind the bigger picture and the overall strategy should help guide you towards the right financial decisions.
Investors should consider the above strategies over the next few months. Doing so may result in a smoother tax season next year and, more importantly, a more organized financial life with a higher likelihood of achieving their financial goals.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. ParkBridge Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: https://www.kestrafinancial.com/disclosures.
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