PC-ES Reduce Your Tax Bill - PC1334-Print

TAX MANAGEMENT

REDUCE YOUR TAX BILL

Minimize Taxes by Maximizing Tax-Efficient Investment Strategies

When it comes to income, it is often said that it’s not what you make but what you keep after taxes that really counts. The same adage holds true for investing too. Taxes are an often overlooked expense that can erode portfolio return. While taxes should not be the sole focus of your investment decisions, they should be a factor to help you maximize your after-tax returns. This approach is particularly important for investors in higher tax brackets who are investing in taxable accounts. BUILD WEALTH THROUGH TAX-EFFICIENT INVESTING Tax-efficient investing is a key component to building wealth, yet it can be challenging for individual investors to do given the amount of research and planning required. Save time and taxes by implementing some of the strategies below.   Design a Tax-efficient Asset Allocation Plan. Your first step toward a tax-efficient strategy is deciding what types of accounts to hold your investments in. Since different investments and accounts have different tax treatments, one of the keys to tax efficiency is holding investments in the appropriate account. In general, investments that tend to lose less of their return to income taxes are better for taxable accounts. Likewise, investments that lose more of their return to taxes may be best in tax-advantaged accounts, such as IRAs.   Re-balance Even If It Triggers Taxes. At some point, savvy investors must re-balance their portfolios by using some of the earnings from the better-performing investments to diversify their allocations and manage risk in the portfolio. To minimize the tax impact, start the re-balancing process in tax-deferred accounts such as IRAs or 401(k)s. Then move to the taxable accounts and make as few trades as possible. Remember that the cost of taxes is generally outweighed by the benefits of re-balancing. You can always add new money to underweighted asset classes to help keep your portfolio allocation in balance and not trigger a taxable event.

Tax treatment of expected returns

Taxable Tax deferred Tax exempt

Tax-free muncipal securities and municipal mutual funds

Exempt

M

L

L

Equity securities held long term for growth

M

A

A

Taxed at long-term capital gain rates

M

A

A

Equity index funds/ETFs (other than REITs)

M

L

L

Tax-managed mutual funds and managed accounts

L

M

M

Real estate investment trust (REITs)

Taxed at ordinary income rates

L

M

M

all returns as short-term capital gains

L

M

M

Fully taxable bonds and bond funds (i.e., corporates)

M

A

L

More appropriate Appropriate Less appropriate

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