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5 Common Mistakes Investors Make

common mistakes taxes Mar 14, 2022
Yields for You
5 Common Mistakes Investors Make

Growing up, I would often hear my dad and his friends lament about their failed investments and missed opportunities. As a child, I swore to myself that I wouldn’t turn into a worn-out, broken man, constantly losing in the game of life.

But what does it take to win in life?

It is easy to jump to conclusions and say, “If only I had invested in Apple, or Tesla. If only I had held on longer. If only…”

The right decisions are always obvious in hindsight. The real trick is to have foresight. To have the ability to predict, with a general level of accuracy, which decisions will lead to advantageous outcomes.

Personally, I believe that investing is less about making the right decisions, and more about NOT making the WRONG decisions. I know it sounds counterintuitive. I have talked about this in previous posts, podcasts, and videos.

Today, we are going to talk about 5 of the most common mistakes that people make with their retirement savings.

#1 - Not Leveraging Long Term Capital Gaines

The first common mistake I see is in the area of Capital Gains.

I think many investors, and even some advisors, fail to properly consider the tax implications of their investment strategies. Oftentimes, we just assume that paying taxes is a given. However, there are techniques you can use to minimize the taxes you pay on your investments. This can range from investing in the right type of accounts, to choosing tax-favored investments, and holding periods. There are even advanced techniques such as tax arbitrage that I talk about in my free report How to Pay Zero in Taxes in Retirement.

For example, did you know that you can reduce your tax bill by simply owning an investment for more than one year?

Holding a security for more than a year qualifies it for favorable tax treatment and lower capital gains taxes; shifting your tax rate from the short-term capital gains rate of ordinary income to the long-term capital gains tax-rate which may be considerably lower.

#2 - Not Using Retirement Accounts for Investing

Another way to reduce taxes? Invest in your retirement accounts, such as your 401(k) and IRA, which are not subject to capital gains taxes, so you don’t have to worry about those gains. However, you will have to pay income taxes on withdrawals, and there may be early withdrawal penalties. There are techniques for mitigating these downsides, which I talk about in my free report, How to Pay Zero in Taxes in Retirement.

#3 - Getting Hit with Phantom Income Tax

Another tax-risk is “Phantom income” tax, this scary term is used to describe capital gains tax you owe on Mutual Funds that generate income, but overall have a loss. Since Mutual Funds are a type of pass-through entity, you can owe this tax even when the fund has lost money. ETFs have different tax treatment, so if there is an ETF version of your Mutual Fund, you may want to consider swapping the positions in your portfolio.

#4 - Not Harvesting Tax Losses

There is another reason why you may want to consider swapping positions in your portfolio, and that is tax-loss harvesting. Essentially the key to this strategy is to find the positions in your portfolio that have sustained losses and swap them for investments that will have a similar, but not identical.

For example, if you own an ETF of the S&P 500 Value Cap, you could swap it for an S&P 500 Market Cap ETF. This allows you to capture the “current” losses on the position. It allows you to participate in the market’s recovery, so you aren’t locking in those losses – but you are getting a tax benefit. (See for a great explanation.)

As of right now, those losses can be used to offset future capital gains. In addition, the IRS allows up to $1,500/single- and $3,000/married- per year of capital losses to be used to reduce your taxable income. For more information see IRS Topic 409, and IRS Pub 550.

#5 - Not Utilizing Roth Conversions

A final strategy to consider is performing strategic Roth Conversions.

A Roth Conversion is when you move money from a pre-tax account like a Traditional IRA or regular 401(k) to a Roth IRA or Roth 401(k). You pay taxes today on the amount of the conversion based on your marginal tax rate. The upshot is the money can grow tax-free forever once it is converted to the Roth account. The time to do a Roth Conversion is when you happen to be in a low-tax year (perhaps due to a job loss) – or when your securities are at a low point due to market volatility. I consider this to be the ultimate form of Tax-Loss harvesting.

The best advice I can give you regarding tax mistakes is to ensure you work with a financial advisor and CPA who is well-versed in tax matters. An example would be an advisor who is an Enrolled Agent (EA) or a CPA/PFS.

Be sure to ask the advisor if they do “tax forward” planning for you and “tax harvesting” for your accounts. Many financial professionals may be qualified to provide tax advice but may be barred from providing it by their compliance or risk departments. So, make sure to ask upfront and understand what your advisor can or cannot provide.

As with any advice, seek multiple opinions and be sure to make your own educated decisions. This is your retirement; you only get to do it once.

If you would like to discover what tax-saving opportunities exist in your accounts, click the link below to have our team do a free tax SWOT analysis for you.

In the review, we’ll highlight what you are doing good, what can be done better, and where you have opportunities to save on taxes today and in the future, we’ll also stress test your plan for common retirement mistakes investors make.

Get your free SWOT analysis today. Click the button below to get started. We only have a few spots available each quarter, so book yours today.

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