Tax Efficient Investing

What is Tax Efficient Investing?

Tax efficient investing involves:

  • Choosing the right type of investment,
  • Using the best investment tax structure and,
  • Placing investments in the right type of account.

By focusing on these three specific investment strategies, you will pay less in taxes and keep more of your return.  But remember, don’t let the tax tail wag the investment dog!

Are ETFs better than Mutual Funds?

ETFs aren’t better than mutual funds.  But, they do have a different tax structure.  In general, ETFs can be more tax efficient than mutual funds because they are structured to have fewer taxable distributions.  Fewer distributions may mean less taxes.  ETFs are made up of “creation units,” which mimic the ETF’s investment portfolio as a whole.  This structure means that it will be very rare that ETFs will declare a capital gain distribution.  Mutual funds are required to “pass through” capital gains to shareholders (even if you don’t have a gain in your mutual fund).  Keeping this in mind, we tend to place ETFs over mutual funds in taxable accounts.

Should I put my Bonds in my Taxable Account?
Probably, not.  Typically, it is more tax efficient to hold equity securities (stocks) in taxable accounts.  Since 2003, tax law favors dividends and capital gains over interest.  This means that dividends and long term capital gains will be taxed at rates lower than interest income.  Generally, interest is taxed at an individual’s higher ordinary income tax rate.

What is Tax Loss Harvesting?

Tax loss harvesting involves selling investments out of taxable accounts that are at a loss and purchasing a similar investment at the same time.  You can use the loss to offset any realized gain while staying fully invested. Tax loss harvesting can be a great way to offset your gains for the year.

How does Tax Loss Harvesting help?

Tax loss harvesting can help you offset realized capital gains, reducing the amount of tax you owe. The losses will be used to offset gains.  Plus, if you have more losses than gains, up to $3,000 of these additional losses can be used to offset ordinary income on your tax return.  Any losses above $3,000 can be carried forward to future years.

There are other ways to reduce your taxes and increase your after-tax return.  If you are interested in learning more about what Shoreline Financial Advisors can do for you, give us a call at 203-458-6800 or email us at the link below.

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The information contained on this Website is not intended as, and shall not be understood or construed as, financial, tax, or professional advice. The information contained on this Website is not a substitute for any advice from a professional who is aware of the facts and circumstances of your individual situation. We have done our best to ensure that the information provided on this Website and the resources available for download are accurate. Regardless of anything to the contrary, nothing available on or through this Website should be understood as a recommendation.  Neither the Company nor any of its employees or owners shall be held liable or responsible for any errors or omissions on this website.

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