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5waystomakeyourportfoliomoretaxefficient
FEBRUARY24,2017

IfyouthinkabouttaxesonlyinApril,reconsider:Maintainingataxefficientportfolio
throughouttheyearcanhelpyousavemoneyontaxesnowandinthefuture.Readthe COMMENT
fivetipsbelow,andfacethenexttaxfilingdeadlinewithmoreconfidencethanyou'veever EMAIL
hadbefore. SHARE
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1.Saveasmuchasyoucanintaxadvantagedaccounts PRINT
Maximizewhatyousaveforretirement,highereducation,andhealthcareintaxadvantagedaccounts.Anumberof
theseaccounts,includingtraditionalIRAsandemployersponsoredretirementplans,offeradoubletaxadvantage
taxdeductiblecontributionsandtaxdeferredgrowth.1Othertaxadvantagedaccounts,suchasRothIRAsand529
collegesavingsplans,providetaxdeferredgrowthandtaxfreewithdrawalsforqualifieddistributions.2Ahealth
savingsaccountoffersatripletaxadvantagetaxdeductiblecontributions,taxdeferredgrowth,andtaxfree
withdrawalsforqualifiedhealthcareexpenses.

"Ifyourinvestmentsaregrowingwithoutbeingsubjecttotaxation,you'llhavemoremoneyinyour
accountthatcancompound,orgenerateearnings,"saidJacklinYoussef,aseniorwealthmanagerin
VanguardPersonalAdvisorServices."Overthelongterm,themoreyouhaveinvested,themore
growthyouearn."

Ontheflipside,taxableaccountsgenerallydon'tofferspecialtaxbreaksandyouhavetopay
incometaxesoninterest,dividends,andcapitalgainsasyourinvestmentgrows.

"Thatdoesn'tmeanyoushouldavoidtaxableaccounts,"addedYoussef."Taxableaccountscanstillhaveaplacein
yourportfolioyoujusthavetolocatedifferentinvestmenttypesintherightaccounts."

2.Consideraconversion
Diversificationappliestomorethaninvestmentsitalsoappliestoaccounts.Consideraddingtaxdiversificationto
yourportfoliobyinvestinginaRothIRA.

Ifyoudon'tqualifytomakeaRothIRAcontributionbecauseofyourincomelevel,youcancompleteaRoth
conversion(convertingassetsfromatraditionalIRAtoaRothIRA).Theconversionwillbetaxedatyourordinary
incomerateintheyearyouconvert,butthelongtermtaxdiversificationbenefitmayoutweightheimmediatetax
burden.

"Whenyou'redecidingifyoushouldconvert,youhavetoconsideryourtaxratenow(versuslater)andthe
immediatetaxesyou'llhavetopaytoconvert.Butit'salsoimportanttothinkabouttheflexibilityandcontrolthe
conversioncanaddtoyourfutureretirementandlegacyplans,"saidYoussef.

3.Tapintoyouraccountsintherightorder
Yes,there'sa"rightway"todrawdownfromyourportfolioduring Allabouttaxsavings
retirement.Thoughtfullymanaginghowyoucreateanincomestreamin
BoostyourtaxIQ
retirementcanminimizeyourtaxliabilityandextendthelifeofyour
savings. Visitouronlinetaxcenter

Formanypeople,theorderbelowmakesthemostsense: Gettaxhelp

1.TakeanyRMDs.(Ifyoudon'tneedtospendthemoneyrightaway, Partnerwithanadvisor
moveitintoataxableaccount.)

2.Withdrawfromyourtaxableaccounts.

3.Withdrawfromyourtaxdeferredaccounts,liketraditional401(k)sandIRAs.

4.WithdrawfromyourtaxfreeaccountslikeRoth401(k)sandRothIRAs.

"Theamountandsourceofincomeyoureceivewhenyou'reretiredalsoimpactsthetaxabilityofyourSocial
SecuritybenefitsandtheMedicarepremiumsyoupayforPartsBandD,"saidYoussef.

4.Harvestyourlosses
"Taxlossharvesting"issellingasecuritythathasexperiencedalosstooffsetrecognizedcapitalgainsand
possiblyupto$3,000ofordinaryincomewhichcanprovidetaxsavingsfortheyear.Althoughthispracticesounds
intuitive,itcanbecomplicated.

"Don'tletpossiblecomplicationsdeteryou,"Youssefsaid."Thepotentialsavingscouldmakeitworthyourwhileto
consultataxprofessionalorfinancialadvisor."

5.Begenerous
 Charitablegivingisitsownreward,butitcanalsoofferpotentialtaxadvantages.Ifyoudonateappreciated
securitiesyou'veheldformorethanayear,you'llqualifyforacharitabletaxdeductionandyourinvestmentearnings
(appreciation)won'tbesubjecttocapitalgainstax.

IRAaccountownerswhoaresubjecttorequiredminimumdistributions(RMDs)alsohavetheoptiontomakea
qualifiedcharitabledistribution(QCD),wherebytheycandonatetheirRMD(upto$100,000)directlytoaqualified
charity,incometaxfree.

"Giftingtofamilymembers,ormakingdirecttransfersontheirbehalfforhealthandeducationpurposes,canbe
anotherwaytoboostthetaxefficiencyofyourportfolioandhelpyoumeetyourwealthtransferobjectives,"Youssef
said.

Bepreparedfortaxtime
Whennothingiscertainexceptchange,takecomfortinwhatyoucanalwayscounton:taxes.(Sarcasmintended.)

"Ifyoukeeptaxefficiencyinyourmindthroughouttheyearasyoumakeinvestmentdecisions,youcanefficiently
manageandmaybeevenreduceyourtaxesnowandinthefuture,"saidYoussef.

1YoumaybeabletodeductsomeorallofyourtraditionalIRAcontributions.Thedeductibleamountcouldbe
reducedoreliminatedifyouoryourspouseisalreadycoveredbyaretirementplanatwork.

2Theavailabilityoftaxorotherbenefitsmaybecontingentonmeetingotherrequirements.WithdrawalsfromaRoth
IRAaretaxfreeifyouareoverage59andhaveheldtheaccountforatleastfiveyearswithdrawalstakenpriorto
age59orfiveyearsmaybesubjecttoordinaryincometaxora10%federalpenaltytax,orboth.Earningson
nonqualifiedwithdrawalsina529collegesavingsplanmaybesubjecttofederalincometaxanda10%federal
penaltytax,aswellasstateandlocalincometaxes.

Notes:

Allinvestingissubjecttorisk,includingthepossiblelossofthemoneyyouinvest.Beawarethatfluctuationsin
thefinancialmarketsandotherfactorsmaycausedeclinesinthevalueofyouraccount.
Pleaserememberthatallinvestmentsinvolvesomerisk.Beawarethatfluctuationsinthefinancialmarketsand
otherfactorsmaycausedeclinesinthevalueofyouraccount.Thereisnoguaranteethatanyparticularasset
allocationormixoffundswillmeetyourinvestmentobjectivesorprovideyouwithagivenlevelofincome.
WhentakingwithdrawalsfromanIRAbeforeage59,youmayhavetopayordinaryincometaxplusa10%
federalpenaltytax.
Youmaywishtoconsultataxadvisoraboutyoursituation.Thisarticleisnotmeantasasubstituteforconsulting
aqualifiedtaxadvisor,ortoprovidetaxorlegaladvice.

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