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Tax-Efficient Investment Options for 2019 and 2020

During 2020, you may want to consider one – or several – of the following approaches:

As we approach the extended tax filing deadline of July 15, you still have time to reduce your 2019 taxable income by contributing to your Individual Retirement Account (IRA). IRAs allow individuals to contribute up to $6,000 ($7,000 if you are 50 or older) for retirement and to deduct that amount from their taxable income. As a result, you can lower your tax bill, potentially increase your refund, and benefit from tax-deferred growth.

Kevin Dombrowski, a partner at Grey Fox Wealth Advisors

Tax season is also a great reminder that each of us can often invest in the future in a more tax-efficient way. During 2020, you may want to consider one – or several – of the following approaches:

Invest through tax efficient accounts. These accounts include your company’s 401(k), your organization’s 403(b), and your traditional and Roth IRAs. Depending on the specific vehicle, you can (a) reduce taxable income by the amount of investment [401(k), 403(b), traditional IRA] or (b) enjoy tax-free distributions in the future [Roth IRA]. Additionally, if you’re a business owner, there are a number of ways that you can build an investment strategy to lower your firm’s tax liability, to support your employee’s retirement plans, and to improve your own long-term trajectory.

Make a charitable contribution. If you plan to make a charitable contribution to a local or national organization, you may want to open a Donor Advised Fund (DAF). While it may sound fancy, a donor advised fund is simply an investment account that can grow over time and from which you can send payments to your favorite charities or your church. A DAF can be opened with as little as $5,000, its investments can grow tax-free while in the account, and your initial contribution reduces your tax bill.

Leverage an Opportunity Zone Fund. Created as part of the Tax Cut and Jobs Act of 2017, opportunity zone funds allow investors with capital gains to defer, reduce, and eliminate taxes on those gains. Through an opportunity zone fund, you can purchase real estate, invest in operating businesses, or – with the help of the Delaware Community Foundation and Discover Bank – optimize a charitable donation in certain neighborhoods throughout Delaware.

Coordinate your investment allocations. It may be more efficient to place certain types of investments in certain types of accounts. For example, investments that produce consistent income – such as high-income bonds, REITs, high-turnover stocks – may be better in tax-deferred accounts, because you will not have to pay tax on the payments/dividends. On the other hand, tax-advantaged investments – such as municipal bonds – may be best in taxable accounts, because their payments are already tax-free.

In order to make these types of allocation decisions, be sure to invest your entire portfolio with one comprehensive strategy. It’s not about how well one individual account does; it’s about how well your entire portfolio performs over a long-term investment period.

You work hard to properly balance work, family, friends, and – now – social distancing; you deserve to keep as much of your paycheck as possible.

Submitted by Kevin Dombrowski, a partner at Grey Fox Wealth Advisors. Located in Wilmington, Grey Fox Wealth Advisors is an independent fiduciary that provides portfolio management and financial planning services to individuals, families, and small businesses throughout Delaware.

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