4 min read

5 Reasons Tax Planning is Integral to Investment Planning

Taxes and investing are inextricably tied, so tax planning and investment planning should also go hand-in-hand. There are tax implications to every decision that you make about investing. Your tax planning decisions also affect how much money you’re able to put into investments and how much risk you’re able to take. 

So while growing your wealth may remain your top concern when investing, tax strategy always has to be part of the conversations you have with your advisors. Here are just a few of the reasons why tax planning is integral to your investment planning.

1. Tax planning helps you identify tax-efficient investment strategies. 

Who doesn’t want to maximize investment dollars while paying minimal taxes? Building a tax-efficient portfolio is one of the key benefits of integrating tax planning and investment planning. Every investor should speak to their tax planners and/or other financial advisors for specific guidance about how to do this, because there are a ton of ways to approach tax-efficient investing depending on your goals. Carefully balancing assets between both taxable investments (like stocks and bonds) and nontaxable investments (like Roth IRAs) is often part of a tax-efficient strategy. 

2. Capital gains tax planning needs to happen in advance. 

Strategizing around capital gains specifically can be an important part of investment planning. If you’re going to invest in stocks, bonds, real estate and/or other capital assets, it’s going to be important to talk to your advisors about taxes and timing. Any profits you make from selling capital assets that you’ve owned for less than a year are taxed as ordinary income. Holding onto capital assets for more than one year incurs long-term capital gains taxes (assuming you eventually sell them for a profit). So investors should think about a long-term tax plan when buying investment property or other capital assets, and talk to tax planning advisors before making any other moves with existing capital investments. 

There are several ways that tax planning can be used to minimize or even avoid capital gains taxes. For example, let’s say you have a variety of stocks in your portfolio, including some that are underperforming. You want to sell some other investments that are going to result in capital gains. You may be able to use tax-loss harvesting to sell some slumping stocks at a loss, and can then deduct up to $3,000 from your taxable income to offset some of your capital gains taxes. And you can reinvest the proceeds of those underperforming stocks into a new investment that’s better aligned with your goals. 

3. It’s useful to project how your future tax situation will change investment outcomes. 

Evaluating investment opportunities requires you to try and predict the future. From a tax planning perspective, you have to ask yourself how a given investment might affect your tax situation in a year or 10 or 20 years down the line. A classic example is 401(k) planning. If someone expects to drop into a lower tax bracket after they retire, they might max out their 401(k) contributions while they’re still working. The expectation is that they’ll save money in the long run because their withdrawals in retirement will be taxed at a lower rate than their current tax rate. Or, young investors might anticipate moving into higher brackets as they earn more wealth, so they’ll pay more on taxable withdrawals then. The bottom line is, talking about how your investment earnings will someday be taxed is an important part of investment planning. 

Touching base with your tax planners about your investment decisions is also important because changing tax codes and evolving tax policies may affect your outcomes. New legislation may require you to adjust some of your previous plans. 

4. You can’t overlook the role of estate planning and estate taxes in your investment decisions. 

Good tax planning should help you minimize your own tax bills during your lifetime, and minimize estate taxes after you die so you leave your loved ones with as much money as possible. There are a number of questions that investors should address as part of estate tax planning

For example, what would happen to your investments if you died today? What would the tax implications be for the family members who inherit those investments? Would your heirs owe any inheritance taxes on those assets? (In most states, including Massachusetts, they would not.) What investments would be considered part of your estate at the time of your death, therefore counting toward the value of your estate and possibly adding to your estate tax bill? Do you want to bequeath any investments to charity as part of your tax planning strategy?

5. Speaking to your advisors allows you to get really clear about the tax implications of every investment. 

There are so many types of investments you could put your money into, each with its own complicated rules. Most investors aren’t tax experts, and don’t want to be. 

Talking through an investment with your tax planning advisors is an opportunity to make sure you understand exactly what you’re getting into and that you’re not working from any misconceptions. This could be especially important for young adults or anyone new to investing. Tax planning and investment planning can seem daunting and complicated when you’re starting out, but that’s what your advisors are for. They should always be willing to explain your investment options in simple terms so you feel like you have all the information you need. There’s no such thing as a stupid question when you’re making decisions about your own financial future.

Sachetta, LLC believes in a holistic approach to financial planning, so we always look at the complete financial picture when advising clients. Tax planning, investment planning, retirement planning and estate planning are all part of the same conversations, so you can feel confident that nothing is slipping through the cracks with the investments in your financial plan. Contact us today! 


Michael J Callahan, CPA, CFP®, MST has been involved in personal financial planning, as well as both business and individual taxation for more than 15 years. Our ideas about money are formed by our life experiences. Over the years, Mike has seen those close to him make common money mistakes from not having enough life insurance, to not doing the proper estate planning. When he received an inheritance in college and started looking into how he could use it to achieve his goals, he realized that he could use those experiences to help others. He changed his major to Finance, and the rest is history.