Having Options is the key to a tax efficient portfolio:

We all know that ordinary income, dividends, and long-term capital gains can all be taxed at very different rates, yet so few of us design an investment strategy that will provide the desired income/cash-flow in the most tax efficient manner possible. The basic problem is that we don’t give ourselves enough options from where to take the cash-flow. For instance, I recently met with a new client who is in her 60’s and has been supplementing her income by taking IRA distributions. After I informed her that she will have to pay several thousand dollars in unnecessary taxes as a result of this, she was shocked and frustrated. The basic rule is that if you are under age 70 1/2, the age at which the IRS mandates that you begin taking withdrawals from your IRA and similar retirement accounts, DON’T take monies out of your retirement accounts unless absolutely necessary. These withdrawals are generally taxed as ordinary income and unless you’ve been tracking your contributions and they were made with after-tax dollars, your cost basis is zero so the entire withdrawal is taxed as ordinary income, the highest tax to which you can be subjected. Instead, look for other investments to satisfy your cash-flow needs.

Odds are you have a savings account, taxable investment account, IRA or 401(k), and maybe even gold coins and some real-estate. These are all options that should be reviewed for potential sources of “income.” Also, don’t ignore social security, in particular the spousal benefit. For instance, let’s assume you need $90,000 per year to live the lifestyle you desire. The source of this cash-flow can have dramatic tax impacts. If a married couple were to take the full $90,000 from IRA distributions, the tax rate might be as high as 25%, meaning they would need to withdraw $112,500 to net $90,000 and pay $22,500 in Federal Income Taxes. Conversely, if that same couple started taking their spousal social security benefit of $15,000, $50,000 from a taxable account with long-term capital gains of $40,000, and the remaining money from the IRA account, their tax liability would be cut by roughly 50%. If some of the income were to come from high-quality dividend paying stocks, the tax bite would likely be even lower. This large variation is due to our complicated tax system. Until the tax system is reformed, astute investors have the ability to lower their tax burden significantly by careful planning and thoughtful consideration of the cash-flow source.

Of course, everyone’s circumstances are different and some strategies may not be feasible for everyone. Your best opportunity to lower your tax bite is to work closely with an investment professional who coordinates with your accountant and takes tax consequences into consideration. As the tax filing deadline fast approaches, ask yourself; “Am I paying more taxes than I should?” If you’re not sure the answer is NO, you may have an opportunity to lower your tax bill for next year.


Feel free to call or email me for an initial consultation.


Christopher Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern and can be reached at (845) 368-2907 or





You must be logged in to post a comment Login