How to Add Tax Diversification to Your Portfolio

Tax diversification involves investing your money in places where it is treated differently. In other words, it leads to you paying less tax and gaining more money. Both are desirables outcomes. We are going to give you three ways in which you can easily add tax diversification to your portfolio.EggsinOneBasket

After-Tax Holdings

The money invested has already been taxed, but any income you get from dividends will be taxed as income in the financial year you receive that money. These are basic investments and tax holdings, so this does not require more than a simple chat with your financial advisor.

Get them to choose the investments with specific rules related to lower tax rates, or preferably no tax rates at all.

Tax-Free Holdings

You pay no tax at all on these holdings. Again, this isn’t as complex as it sounds. The two most common tax-free holdings are Roth accounts and municipal bonds. They don’t offer massive rates of return, but they provide a way to save a significant amount of money for your retirement.

Tax-Deferred Holdings

You typically receive a tax deduction for contributions to accounts in this category. You only pay tax later on when you eventually withdraw.

So which accounts fall into this category?

These usually refer to contributions made to a retirement account, such as the 401(k), 403(b), and Thrift Savings Plan. Be aware that liquidity is minimal when you invest your money in this category of account.

On a final note, watch your liquidity. If you don’t have any liquidity, your choice of investment can actually hurt you.

Image credit: 401(K) 2012

Be Sociable, Share!

johnAbout john
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Huddleston Tax CPAs of Seattle & Bellevue
Certified Public Accountants Focused on Small Business

(800) 376-1785
40 Lake Bellevue Suite 100, Bellevue, WA 98005

Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.