Investment Tax Planning

Barking at Taxes

We see little sense in optimizing investment returns and then erasing your returns through poor tax planning. That seems like—dare we say it?—the tail wagging the dog.

Investment Tax Planning

We thoroughly integrate tax planning into management of your investments. Here are some of the areas we consider.

We hear horror stories of advisors switching clients to new investment plans without considering the tax consequences. Clients can be left with large, unexpected tax bills.

At Rain Dog, we fully consider the tax implications and tax-reduction possibilities around such changes.

First, we evaluate whether the benefits of the portfolio change will outweigh the tax consequences. Poor tax planning can wipe out investment gains, and we never want that to happen.

Second, we evaluate the most tax-efficient way to make the desired changes. We evaluate whether changes will be most efficient if performed over multiple years, and we review the extent to which changes can be made in your tax-preferred accounts without creating tax consequences in your taxable accounts.

Third, if we find that increasing your tax bill in the short term will be useful to optimize your financial situation over the long term, we will communicate that to you and make sure you agree before we proceed. You will never be surprised by an unexpectedly large tax bill.

For sake of tax efficiency, your investment assets should be placed in the locations that are most tax efficient for your portfolio overall.

Some advisors will apply rules of thumb such as, “Your highest growth assets should be in your Roth account”; “income-producing assets should be in your tax-deferred account”; and so on.

This is well-intended but not very effective. The truly tax-efficient location of your assets depends on your unique circumstances: the amount of your total assets; percentage of assets you have in tax-free, tax-deferred, and taxable accounts; how close to retirement you are; your near-term cash needs; your plans for Roth conversions; your strategy for handling required minimum distributions (RMDs); the cost basis of your taxable assets; and many other factors that are unique to you.

We design your asset-location plan based on your specific circumstances.

One reason Rain Dog emphasizes index funds is that they tend to be tax efficient. Index funds tend to have low portfolio turnover compared to actively managed funds.* With low portfolio turnover, only a small percentage of your gains are taxed each year, and your taxable investments can grow almost as if they were tax-deferred rather than taxable.

*Sources: “Turnover ratios and fund quality,” Investopedia, retrieved 1/24/2024; “US Mutual Fund Turnover and Returns, 1991-2020,” Gene Hochachka, SSRN, December 10, 2021.

A backdoor Roth conversion can be one your most powerful tax planning tools. We simulate a variety of future tax environments—based on your specific income, assets, and planning horizon—and design a tax-efficient Roth conversion strategy.

We do not have a crystal ball that forecasts future tax laws, but we can design a strategy that is flexible and works well with current tax laws as well as adapting to future tax changes.

Many individuals and couples will experience a few years of relatively low income as they wind-down full-time employment but are not yet taking social security. Those years can offer a valuable tax-management corridor in which to arrange your assets to be tax-efficient during retirement and to do so in a tax-efficient way. This can affect your Roth conversion strategy, among other considerations.

Different size estates call for different kinds of tax planning. In addition to the total size of your estate, the specific form in which you leave your assets will affect how much your heirs receive after they pay their taxes. We evaluate that as part of your investment planning. We also consider alternative means of transferring wealth to your heirs, which is especially important for residents of Washington state.

The investment planning tools used by many advisors do not fully consider the effects of taxes on investment growth, or, in some cases, consider taxes at all. Rain Dog’s proprietary Investment Forecasting Model (IFM) thoroughly integrates tax consequences into its investment forecasts.

We believe in paying our fair share of taxes. We just don’t believe in paying more taxes than necessary, and we don’t think you should either.* Get in touch, and let’s see whether we can take a bite out of your taxes.

*If you feel differently, you can always donate the tax money you save to your local, state, or federal government. However, we know a few charities that would benefit more.