By Casey Snyder and Tom Sedoric

March 2020 was a gift.

We know what you’re thinking… “What?” 

And that’s a completely fair reaction. 

In general, March 2020 is bookmarked in our minds as a negative moment in time within the working calendar of our lives. A pandemic swept the globe and wiped out our “normal” lifestyles in an instant, rendering us in a state of constant isolation with businesses and recreational activity placed on indefinite hold. Fear and uncertainty ruled the day-to-day.

However, from the perspective of tax-efficient investing, March 2020 was an absolute gift for tuned-in investors and financial fiduciaries across the board. 

What is Tax-Efficient Investing? 

Let’s be mindful that taxes are the single greatest expense that we’ll experience in our lifetime. 

The primary goal for any investor—whether a seasoned financial saver or someone just getting started—is to drive a return and maximize that return for your impending retirement. The bulk of your financial future rests on the investment strategy you’ve engaged in during your earning years. Many in today’s workforce are tied to, or have the opportunity to invest in a company-sponsored 401(k) plan, which is common. And while you should feel good about contributing to a healthy savings habit through a program like a 401(k), this shouldn’t be the only investment pipeline you’re funneling your monies into. 

But let’s not digress too much here… We’re happy to talk at length about proper personal investment strategies to help guide a more prosperous financially sound retirement. In fact, you can learn a whole lot more by downloading our latest white paper, Creating Tax Efficiency for the Future, right here. What we will say is, it’s not smart to put all your savings into one basket. Diversification is key.

In short, tax-efficient saving is an exercise in an investment strategy that enables you to hold on to the bulk of your accrued investment savings. Because it’s the after-tax number that matters as it relates to your savings, not the pre-tax amount you’re looking at when you glance at your monthly and annual financial statements. That’s a key point to keep in mind. What does the bottom line actually look like when you start pulling from your retirement accounts? 

Tax-efficient savings strategy works to leverage the monies invested into accounts that ensure that, upon retirement, you’re doling out minimal tax payments related to the savings you’ve built up over your lifetime of investing. 

Why Was March 2020 a Gift?  

Right. Let’s get back to the task at hand.

Exposing yourself to losses that are experienced during the shock of an economic downturn can set you up for years of tax savings benefits related to your investment portfolio. Speaking from experience, the 2008 economic crash enabled us at The Sedoric Group to prime our tax-efficient investors with tax forward savings that lasted the next decade or more. 

In a nutshell, by experiencing loss, you can optimize future gain. Sometimes it’s hard for us to answer investors asking us why some causations are the way they are. How does loss equal gain? It’s a tough pill to swallow when you’re presented with a financial statement that shows you’ve ended a month (or a year) with less than you started. We get it. But markets—like other things in life—ebb and flow. Having a trusted accountant or financial advisor that can help you navigate these uncomfortable financial situations will position you for a more prosperous future.

Thus, planning to position some of your post-tax savings toward post-tax investments enables you to take advantage of the working ebb and flow of the stock market. As an example, when the market goes into a dizzying downturn, as it did in March 2020, it can make sense to sell off stocks at a loss and buy in to similar stocks at a very low price to accomplish two things:

  1. Reap potential reward on gains as the market rebounds and experiences forward growth.

  2. Benefit from using capital loss during a period of economic strife to offset future capital gain while lowering your overall taxable annual income.

?That last point, as we alluded to earlier, is a financial fixture that can stretch out over the course of years, as we’ve experienced and put into action for our clients before.

The gift of growth, with a tidily tied ribbon in the form of tax savings to help maximize your access to that growth when it’s time to tap into those accrued funds. 

Need help figuring out your best financial path forward? Give us a call

Any opinions are those of the author and not necessarily those of Raymond James. Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.