80% of Investors Expect Higher Taxes: Here's How To Tax-Smart Your Portfolio Now
Tax Day has long passed, but that doesn't mean taxes shouldn't be an afterthought for the rest of the year -- especially when it comes to your investment strategy. How and where you invest today can shape how much of your money you ultimately keep in retirement.
That's why a growing disconnect is raising concern among financial professionals. A recent Nationwide Retirement Institute study found that 80% of investors expect taxes to rise in the future, yet less than one-third (31%) say they're proactively adjusting their financial plans to prepare.
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Here's why that gap matters, and what tax-smart investors can start doing now.
Expecting Higher Taxes -- but Failing To Plan -- Can Backfire
Many investors still focus on taxes primarily around filing deadlines, rather than as an ongoing part of their financial strategy. But future tax changes can directly affect retirement income.
"Our survey found many investors have a portfolio that leans towards a single, taxable asset class, and 13% don't know how to describe their portfolio's tax composition at all," said Kush Kotecha, president of Nationwide Annuity. "A resilient plan generally includes assets across tax-deferred, tax-free and taxable accounts."
Without that balance, investors may have less flexibility to adapt if tax rules change down the road.
Tax Diversification: The Foundation of a More Resilient Portfolio
Most investors understand the value of diversifying across stocks, bonds or other assets, but diversification also applies to how investments are taxed.
"A tax-efficient retirement strategy starts with diversifying not just investments, but tax exposure," Kotecha said.
He recommends incorporating tax-deferred solutions like annuities, solutions with tax-free withdrawals like Roth IRAs, and taxable solutions like brokerage or bank accounts.
"Diversifying your portfolio will give you flexibility to manage taxable income year-over-year, especially if tax rates rise, deductions shrink or thresholds change," Kotecha said.
Working with a financial professional can help investors understand how their current accounts fit into that broader mix.
"An advisor can help you proactively rebalance your strategy to diversify your tax-risk profile," he said. "In fact, 85% of advisors told us they are working with their clients to help diversify their tax portfolio."
Reducing Tax Drag With Tax-Efficient Income Strategies
Beyond account type, the way assets are structured inside a portfolio can also affect long-term returns. It could be worth considering incorporating tax-efficient income solutions, like annuities.
"By allowing assets to grow tax-deferred, annuities can help reduce the drag of taxes on long-term returns and create a more efficient income strategy in retirement," Kotecha said.
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Why Withdrawal Timing Matters in Retirement
The order and timing of withdrawals can significantly affect how much income remains after taxes. A tax-efficient retirement strategy considers where assets are held and the order in which they're accessed.
"For example, some investors may choose to blend withdrawals from multiple account types rather than draining one entirely to balance taxes they may owe," Kotecha said. "You can also delay tapping tax-free assets for times when you may need more control over your taxable income."
Having multiple options can make it easier to respond to changing tax environments.
The Importance of Planning for Uncertainty
Another important tenet of tax-smart investing is acknowledging uncertainty.
"Rather than trying to predict future tax rates, legislative changes, or individual longevity or spending patterns, work with an advisor to build a plan that provides flexibility and includes options," Kotecha said. "Being able to tap into different strategies when the environment shifts, and understanding how those strategies will be taxed, is essential to a secure retirement."
Make Tax Planning a Year-Round Priority
Tax planning is most effective when it's built into year-round financial discussions -- not just during filing season.
"The best way to incorporate taxes into your overall financial strategy is to make them a regular part of discussions with your advisor -- a partner who can help you prioritize tax-efficient retirement planning," Kotecha said. "In fact, 29% of investors told us they count on their advisor to help them plan for taxes in retirement. If you are not receiving regular tax guidance from your advisor, you should ask for it or consider looking for a new partner who can help you plan for tax efficiency in retirement."
With many investors already expecting taxes to rise, taking action now may provide greater flexibility and peace of mind.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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