Sometimes It Pays to Pay Tax

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By Joe Morgan, CFP®, CFA, Principal: JWM Wealth Management, LLC, Resident since 2004

Most people will delay paying tax as long as possible. We see this quite often in taxable investment portfolios where you can choose to sell investments with gains or losses when readjusting your portfolio.

The typical approach is to avoid selling gains as long as possible and only sell the losers in order to benefit from a write-off.

But following this method over time will distort your portfolio, moving it away from whatever optimal strategy you decided to put in place.

This is especially true if we don’t replace the investments sold with something substantially similar. And if we do, we run the risk of violating the IRS’s wash sale rules which will negate the tax effect anyway.

A better method is to raise cash as needed in a proportional manner throughout our portfolio, keeping the strategy intact. This may cause us to pay a bit more tax today but ensures our desired risk/reward structure remains in place.

One wrinkle is that when we pass, our assets shift to our heirs while resetting the cost basis. This argues in favor of selling only losers as we get nearer our demise.

Like so many other areas of financial planning, if we know when we are going to die the best strategy becomes clear.

JWM Wealth Management, LLC is a Registered Investment Advisor with the State of California and Joe Morgan is a fiduciary to his clients at all times. If you’d like to ensure your finances are on the right track, schedule a call with Joe at www.calendly.com/jwmwealth. You can also learn more at jwmwealth.com.