Broker Check

2nd Quarter Market Commentary

Tax Efficiency

Investing success should be measured by your NET RETURN. That is, what do you have left to spend after fees and taxes?

Many investors look to their CPA or tax preparer to suggest tax saving strategies. Often this results in recommendations to make qualified contributions to lower Adjusted Gross Income. However, tax planning involves far more than the immediate reduction of last year's taxes.

At HARRIS & ASSOCIATES we are committed to helping you have more dollars to spend. That means collecting dividends, achieving capital gains, Tax Loss Harvesting, and pursuing strategies for long term tax reduction such as Roth Conversions and Private Pensions. Let’s talk about those last three strategies that may reduce your taxes or eliminate them completely!

Tax Loss Harvesting

When market valuations decline most portfolios have positions that are negative. In other words, the current price is lower than the purchase price. As long as the position is maintained, there is no gain or loss recorded for tax purposes. However, if the advisor sells those positions that are down, the owner of the account can capture losses. Those losses can be used to offset current gains, or they can be saved to use against future gains! This lowers the capital gains an investor must pay. Of course, Tax Loss Harvesting takes time and attention. Does your advisor harvest losses on your behalf?

Roth Conversions

Most clients have sizeable assets in their IRAs. These provide a tax deduction for contributions and are a favorite suggestion for tax preparers for that reason. However, every dollar earned in an IRA (SEP, Traditional, or Rollover) must be shared with your partners, the Federal and State governments. The total sharing may be 25 to 30 cents on every dollar you earn, depending on your marginal tax bracket at the time of withdrawal.

Roth IRAs, on the other hand, let you keep and spend 100 cents on every dollar you earn. Assets grow tax-free and even earnings can be withdrawn tax-free after the initial 5-year hold. The problem is converting IRA assets to Roth generates ordinary income tax on the conversion amount. Who wants to pay more tax?

But why not pay tax once and for all, and never have to pay tax on the growth of that account ever again! Clearly, this is a case of short-term pain and long-term pleasure.

Strangely we have found that tax preparers have a hard time encouraging clients to convert IRA assets to Roth because it increases taxes. This goes against everything they do to lower taxes! In addition, clients must have the money in a [already taxed] non-qualified account to pay the tax. Also, sometimes advisors don’t encourage clients to convert to Roth because they lose assets when the tax must be paid. This is a pay cut for the advisor.

However, at HARRIS & ASSOCIATES we believe the long-term benefit to the client is our first priority. So, we tell clients to convert some amount every year. If they have a very large IRA converting the entire amount will push taxes into the highest tax bracket. But we suggest clients convert as much as they are able, and still remain in a reasonable tax bracket. Over time all IRA assets will end up in Roth. Money in a Roth can be a boost to earnings that even expert investment management will find hard to beat. Imagine, a 20% to 30% boost to portfolio gains! And it is 100% money the client can spend.

Private Pension

This last strategy involves the use of life insurance as a way to grow assets tax free and withdraw money without every paying any tax. Simply put, maximum premiums are packed into a policy with the lowest death benefit that still meets the definition of insurance. Any more premium will make the policy a Modified Endowment Contract [MEC] and it no longer gets the favored tax treatment of insurance.

Ideally, this strategy is possible when a client has substantial non-qualified assets (Trust, individual or joint accounts with assets taxed annually on dividends and gains). And the client is at an age where they don’t expect to spend the money out of the policy for 15 or more years. Usually, premiums are paid for 7 years, allowed to grow tax free and withdrawals are started in year 16 or later. All the premiums paid are withdrawn as basis [no tax]. Then, earnings are taken out as loans at very attractive rates ¼ % or even zero net interest!

The leverage will depend on the investment experience and the timing. Generally, a client can expect to withdraw 3-5 times the money invested in premium—All tax-free. The key is to not drain all the assets so that the policy can mature and pay a residual death benefit—Also completely tax-free!

This is one of the best strategies available. The tax savings far exceed the cost of insurance over the life of the plan. Moreover, there is total flexibility. The client can take as much or as little money as they choose, careful to not take out so much that they lapse the policy. (If that happens, all the earning become taxable.) Properly structured, invested and managed to retain a residual benefit at maturity, this strategy could give clients more money to spend, especially when they may need it most.

Contact Us
At HARRIS & ASSOCIATES we are prepared to assist you with growing your investments and potentially reducing your taxes substantially. See what we may suggest for you.

Sincerely yours,



David L. Harris, PhD, ChFC, CFP®
Wealth Advisor 

A Registered Investment Advisor

(310) 318-3700



Harris & Associates is a Registered Investment Adviser. This commentary is solely for informational purposes and not a solicitation to invest. The results reflect the deduction of fees and the reinvestment of dividends and other earnings. Advisory services are only offered to clients or prospective clients where Harris & Associates and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. The performance is based on the strategy described above involving selling equity assets, gathering cash and hedging portfolios with inverse ETFs in an effort to combat sliding markets. Investing involves risk and possible loss of principal capital. No advice may be rendered by Harris & Associates unless a client service agreement is in place. More information about Harris & Associates including our investment advisory fees are described in Form ADV Part 2 available on the Investment Adviser Public Disclosure website. Please contact a financial advisory professional before making any investment decisions.

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