March 22, 2024
Tax-wise investing
Protecting your wealth all year long

Growing and protecting your wealth is our primary mission at LCM.  And while wise investing is a skill in which we take great pride, with Tax Day just around the corner, we thought it would be the perfect time to share some of the lesser-known strategies we use to help grow and protect your assets by limiting the impact of one of the greatest threats to anyone with significant wealth and a complex investment portfolio: taxes…

Here are just a few of the ways we work ‘behind the scenes’ to keep your tax bill as low as possible—even as your wealth continues to increase:

Tax-Loss Harvesting

Though down markets are never a treat, unrealized losses on investments offer a valuable opportunity to make gains on the tax side of the equation.  Put simply, tax-loss harvesting is the act of selling securities (stocks, bonds, or funds) that are down to realize a loss that can be used to offset taxable gains elsewhere in the portfolio—and for up to $3,000 of regular income (as of 2023).

Tax-loss harvesting can also be used to help reduce tax liabilities in the future.  This is especially important if you either recognize more losses than gains in a given year, or if you have already offset the $3,000 income cap.  In both cases, the current rules allow your losses to be carried forward indefinitely.  To learn more about tax-loss harvesting and how we use it to help minimize what you pay in capital gains taxes by offsetting investment gains with investment losses, see our blog post Tax-loss harvesting: the upside to a down market.

Asset Allocation

Experienced investors are very familiar with the practice of allocating assets across different types of investment vehicles—stocks, bonds, alternatives—to balance risk.  A similar approach to strategic asset allocation is also useful as a tax-management tool when applied across accounts based on their tax registration.  Here are two examples of how we use asset allocation to help optimize the tax efficiency of your investments:

  • By placing investments that are expected to generate taxable income—such as interest from bonds or dividends from stocks—into tax-advantaged accounts like IRAs or 401(k)s, we are able to defer taxes on these earnings until you withdraw the assets in retirement when your tax rate is likely to be lower.
  • By placing assets that generate tax-exempt income—such as municipal bonds—into taxable accounts (since their interest income is not subject to federal taxes), we are able to position your assets for growth with minimal tax impact.

In these and other cases, our goal is to tailor the timing of income recognition by strategically realizing gains or losses to offset other tax liabilities.

Managing Capital Gains & Taxable Distributions

Managing capital gains and taxable distributions is critical, particularly for investors in higher income brackets.  Since long-term gains are taxed at a lower rate, we tend to favor long-term over short-term capital gains.  And by deferring the realization of capital gains or large taxable distributions into the next tax year, we can manage your income level more effectively to keep you in a lower tax bracket and reduce your overall tax burden for the year.

On the side of taxable distributions, we carefully manage around investments that issue large distributions.  For example, since mutual funds are required to distribute all realized capital gains annually (even if the end investor didn’t transact in the fund), there is a potential additional tax burden.  One strategy we use to address this issue is something we call ‘capital gain avoidance’.  For funds that have communicated the likelihood of significant gains, we determine whether the portfolio would benefit from either holding the fund and receiving the capital gains distribution or, instead, selling the mutual fund prior to the distribution and taking a potentially smaller capital gain (or loss).

Appropriately managing investments that make substantial year-end distributions can prevent an unnecessary increase in your tax liability.  By combining this strategy with tax-loss harvesting, we can boost tax efficiency even further.

Other Tax-Smart Strategies

Of course, we keep tax efficiency in top of mind with every type of transaction we make on your behalf.  When you need to withdraw money, we try to reduce the tax impact of those withdrawals by considering tax-efficiency alongside risk and asset allocation when selecting and selling holdings.  As markets move and investments shift, we analyze the potential tax impact of each trade when rebalancing accounts back to the appropriate asset allocation.  And when we transition new client assets to LCM, we do so in the most tax-efficient manner, carefully analyzing existing holdings and looking for innovative ways to fold them into our portfolios—rather than simply selling their existing investments and starting from scratch.

Our holistic trading approach also plays an important role in supporting tax efficiencies for each client.  While our research might suggest the benefit of buying or selling an investment, sometimes a particular trade will result in only minor optimizations.  In this case, we may decide that it is more beneficial to forgo a trade entirely if your resulting tax burden would outweigh the benefit for your portfolio—a level of personalized analysis that we are proud to provide (and which is much less achievable at larger firms where outsourced trading and volume-based approaches to investment management dictate trade activity).  Our goal, always, is to reduce the potential tax consequences for you. 

While accountants typically do the bulk of their strategic work at the end of each fiscal year and the beginning of the next, as your wealth managers, we focus on reducing tax liabilities in your portfolio with every investment decision we make.  That means we not only keep an eye toward taxes throughout the entire year, but we also plan with a vigilant eye on the future to consistently help maximize your after-tax returns.  It’s just one more way we strive to deliver a level of value to ensure you are invested wisely at every step.


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