One year into the pandemic has taught us that uncertainty is certain. It is time for us to batten down the hatches and become familiar with what’s unfamiliar. This here; pops a common question. “I am receiving high ROI. Why then, should I re-strategize?” Well, that’s because it is not what you make, but what you get to keep. Let’s dive right into the risk-reduced and tax-smart investment ways that you should consider as a wealth holder and/or small business owner.
1. CONTRIBUTE TO TAX-EFFICIENT ACCOUNTS
Maximize the utility of tax-efficient retirement accounts for which you’re eligible to help reduce current and/or future taxes. The two most commonly used retirement accounts that enhance tax efficiency are tax-deferred and tax-exempt accounts. You can also diversify your account types by using a combination of investment accounts that let you mix and match income sources in retirement and help minimize your taxes.
2. ON THE CONTRARY, HOLD INVESTMENTS LONGER
Unlike most times, it is advised to hold investments longer in order to avoid unnecessary taxation.. While it feels great to sell a stock after a great profit and share your win stories with neighbours and friends, few people realize that the constant buying and selling of investments can generate excessive costs and taxes payable. Buying longer term positions with less transactions, can reduce costs, defer taxation and maximize compounding to build more wealth over the long term.
3. APPRECIATE ASSETS WITH CHILDREN AND/OR CHARITY
Gifting appreciated securities or property to individuals in lower tax brackets (such as your children) can be very beneficial. For charitable donations, gifting appreciated securities may be more beneficial than gifting cash. Doing so allows a donor to claim a deduction for the fair market value of the securities without having to pay capital gains taxes that would otherwise be incurred upon their sale.
4. RISKS AND DE-TAXIFICATION
You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments Risk tolerance, risk avoidance and risk reduction are three major parameters revolving around investment risks and tax savings. To be able to understand and calculate the amount of risk you can withstand as well as reduce to the chances of risks is parallel to how tax efficient are your investments.
5. TAX-SMART-WEALTH-MANAGEMENT FRAMEWORK
Tax smart wealth management is the proprietary framework to manage wealth in the most tax efficient manner. It encourages wealth to be protected from tax erosion and aims to maximize post-tax investment returns. The critical elements of this framework are:
- Tax Deductible Strategies
- Tax-Advantaged Strategies
- Asset sale tax planning strategies
- Cash flow distribution strategies
- Coordination with tax professionals
6. THREE STRATEGIES FOR PORTFOLIO RISK MANAGEMENT
● STRATEGY 1: ASSET ALLOCATION
Appropriate asset allocation refers to the way you weight the investments in your portfolio to try to meet a specific objective — and it may be the single most important factor in the success of your portfolio.
Asset allocation and portfolio diversification go hand in hand. Portfolio diversification is the process of selecting a variety of investments within each asset class to help reduce investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.
● STRATEGY 3: DOLLAR-COST AVERAGING
Dollar-cost averaging is a disciplined investment strategy that can help smooth out the effects of market fluctuations in your portfolio.
7. TAX FREE SAVINGS ACCOUNT
In the 2008 budget, the government of Canada introduced a brand new personal savings vehicle: the Tax-Free Savings Account (TFSA), to help you save for different purposes throughout your lifetime. Interest, dividends, and capital gains earned in a TFSA are tax-free for life. Here are a few benefits of a TFSA:
- Ability to invest in many types of assets (Stocks, Bonds, GIC’s, Funds)
- Tax Free Profits
- Easy Withdrawal and Re-Deposit
- No Income Requirements
- Useful as Emergency Funds, Savings for Retirement and Large Expenditures
Read our previous blogs on various financial investments for wealth owners and small business owners in 2021.