Why Your Investments Need Both a CPA and a Financial Advisor Working Together
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Every Investment Move Has a Tax Implication | Where Things Fall Through the Cracks | Taking a Holistic Approach to Investment Planning | Why This Matters
Imagine your portfolio is up nearly 12% for the year. Your CPA puts your tax return together, and you go from ecstatic to upset. You’re told that a significant portion of that growth will be going to the IRS. Why? Short-term gains, a big year-end fund distribution and a rebalance that nobody thought twice about*.
Nothing you did was reckless. Your financial advisor had made reasonable calls. Your tax preparer filed an accurate return. The trouble was that the two of them had never once spoken to each other.
I see some version of this every tax season. And it’s one of the reasons I became both a CPA and a Personal Financial Specialist (PFS). After years of preparing returns, I kept having to explain in April what could have been fixed in October. I wanted to be in the conversation where the decisions were made, not just when tax season arrived.
So let me share what I’ve learned from sitting on both sides of the table: every investment decision is a tax decision, and if the people handling your money and your taxes aren’t talking, you’re almost certainly leaving money behind.
Every Investment Move Has a Tax Implication
Most people think that taxes only get triggered when a stock is sold. I wish it were that simple. In my experience, the tax meter starts running the day you invest and doesn’t stop until the money is out of your hands.
When You Sell
Sell something for more than you paid and you owe tax on the gain. The part people underestimate is timing. Hold an investment a year or less and the gain is taxed like your paycheck. Hold it longer than a year and you usually get the lower long-term rate. I’ve watched clients sell a position two weeks shy of that one-year mark, and it cost them far more than the extra two weeks of risk ever would have.
When You Rebalance
Rebalancing is key, it keeps your risk where it should be. However, in a taxable account, selling your winners to buy underperforming stocks means realizing gains. A routine rebalance can hand you a tax bill you never saw coming if it’s done without a plan.
Stock investing includes risks, including fluctuating prices and loss of principal.
When Your Investments Pay You
Dividends and interest are generally taxable the year you receive them, even if they’re automatically reinvested and you never touch the cash. Qualified dividends get a break. Bond and CD interest usually doesn’t.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
When Your Fund Pays You Whether You Like It or Not
Many mutual funds distribute capital gains near year-end, and you owe tax on them even if you didn’t sell a single share. Buy into a fund in early December and you can end up paying tax on gains you never enjoyed.
Where You Hold It
The same fund can be taxed three different ways depending on whether it sits in a brokerage account, a traditional IRA or a Roth. Deciding what goes where (asset location) is one of the most overlooked ways I help clients keep more without taking on any extra risk.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
When You Take It Out
Withdrawals from a traditional IRA or 401(k) are generally taxable income, and required minimum distributions eventually make that withdrawal mandatory. Those dollars can nudge you into a higher bracket, make more of your Social Security taxable and even raise your Medicare premiums.
This isn’t really bad news, it just needs proper planning. And a good plan needs someone looking at your portfolio and your tax return at the same time.
Where Things Fall Through The Cracks
Here’s how it usually works. Your financial advisor thinks about growth, risk and your goals. Your CPA thinks about getting your return right and keeping you out of trouble with the IRS. Both are good at their jobs. But the advisor makes decisions all year without seeing your tax picture, and the CPA finds out what happened months later when nothing can be undone.
These are the mistakes I see most often, and every one of them is avoidable.
The Wash Sale Nobody Caught
An advisor sells a losing fund to harvest the loss. Two weeks later, your IRA or your spouse’s account buys that same fund. (The window runs 30 days before and after the sale.) The IRS wash sale rule can wipe out the loss, and unless someone is managing every account in the household, no one notices.
Roth Conversion in the Wrong Year
Well-timed Roth conversions matter. I’ve seen people convert in the same year they sold a rental property or got a big bonus, stacking the conversion right on top of their highest income. The CPA knew about the income, but the financial advisor didn’t.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
Taking Gains at the Wrong Time
A December rebalance looks harmless unless you’re about to exercise stock options or sell a business. Waiting a few weeks for a lower-income year could have saved real money.
Losses Left Behind
There’s a silver lining when the market drops. Harvested losses can offset gains (plus up to $3,000 a year of ordinary income) with the rest carried forward. But only if someone actually harvests them.
The Estimated Tax Penalty
A big gain or fund distribution can leave you underpaid for the year. If your CPA hears about it in time, we adjust your estimates. If not, you could owe an underpayment penalty on top of the tax.
Giving to Charity, The Expensive Way
Writing a check is generous. Donating appreciated stock instead lets you skip the capital gains tax and still take a deduction if you itemize. If you’re old enough, giving straight from your IRA through a qualified charitable distribution can be even better. These ideas rarely come up unless both sides of your finances are in the same conversation.
In each of these cases, the CPA and the financial advisor did exactly what they were supposed to do. The client lost money because nobody was looking at the whole picture.
Taking a Holistic Approach to Investment Planning
In my own firms, tax planning and investment planning are managed together through Grigg Financial Group and our sister company Grigg Wealth Management, so conversations about tax planning and investings happens naturally.
Here are some reccomendations for you moving foward.
Schedule Mid-Year Check-Ins
Late summer or early fall is a good time to check in. There’s still room to harvest losses, size a Roth conversion, fix your estimated payments or plan a charitable gift before December 31st.
Get a Tax Projection Before Year-End
I’d much rather tell a client in October what bracket they’re headed for than explain it in April. That projection tells the investment side how much in gains it can realize, and when to wait.
Notify Your CPA & PFS About Big Life Changes
Selling a house, an inheritance, retiring, exercising stock options, selling a business, even a new baby. Tell both your CPA and PFS early. These are the moments where planning pays off most.
Think in Decades, Not Years
Some of the best results I’ve gotten for clients came from smoothing income across several years. The stretch between retirement and required distributions is often a golden window for Roth conversions.
Do a Post-Season Review
Once your tax return is filed, a short conversation about what worked and what surprised you sets up a better next year.
Why This Matters
After all these years of doing both jobs, here’s what I’m sure of: your investments and your taxes aren’t two separate conversations. They’re the same conversation. Every trade, every rebalance, every withdrawal changes what you actually get to keep.
You don’t have to become a tax expert to benefit from that. You just need the people advising you to talk to each other, and to do it before December 31, not after.
Ready to see how coordinated investment planning could work for you?
*Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.