Taxes are a big drag on investment performance, greater than either commissions or management fees.
There is a growing realization among taxable investors that it’s not what you earn that counts, but what you keep after taxes — you want to maximize after tax returns.
Here are some components to tax-aware investing:
- Increase investment in tax-favored assets – High income taxpayers pay 40.8% on interest and 23.8% on long-term capital gains (LTCG).
- Deferring gain recognition – All things being equal, the lower the turnover ratio of a portfolio, the higher the effective growth rate will be and greater terminal wealth from the investment.
- Tax-aware asset allocation – Make asset allocations based on the returns after application of the effective tax rate on each asset class.
- Tax sensitive asset location – list your assets by tax cost. Put high tax cost assets (corporate bonds) in IRAs or other tax deferred vehicles; and keep low tax cost assets (i.e. municipal bonds and long-term capital gain (LTCG) assets) personally.
- Manage capital asset holding periods – strive for LTCG. The tax rate of long-term capital gains is almost half of short term capital gains (STCG).
Our knowledgeable professionals can help you decide on investing with tax advantages in mind. Contact us today to learn more.
