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Tax expenses can significantly detract from an investor’s portfolio return. We take a three-pronged approach to tax optimization by focusing on asset location, tax loss harvesting (TLH), and tax efficiency. Comprehensive tax optimization can increase after-tax return by up to 1% per year.1

In order to minimize the tax consequences within an investment portfolio, the tax attributes of each account type and security must be considered.

Types of Accounts by
Tax Characteristics

Taxable Accounts: Individual, Joint, and Trust
Tax Deferred Accounts: Traditional IRA, Rollover IRA, SEP IRA, 401k
Tax Exempt Account: ROTH IRA, ROTH 401k, Charitable remainder unitrust, and Charitable annuity unitrust

Three Ways We
Optimize for Taxes


Tax-Sensitive Asset Location

Investors with both taxable and tax-advantaged retirement accounts can improve after-tax return by strategically placing investments in their most tax-efficient account types.

To maximize the benefit, we rank investments based on tax-equivalent yield (TEY), which is automated through our platform. TEY differs from gross yield in that it factors in different tax rates for each investment type. We estimate the tax savings from asset location can be up to 0.30% per year, depending largely on marginal tax rate.


Tax Loss Harvesting

Tax loss harvesting refers to the intentional selling of securities at a loss to turn an unrealized loss into a realized loss. This may sound counterintuitive, but there are two main ways tax loss harvesting can save money and improve after-tax return.

Up to $3,000 per year can be deducted in realized losses from ordinary income. Capital losses can be used to offset capital gains, creating a tax-deferred benefit that can compound over time. We estimate common results lead to savings in the 0.2% to 0.4% range.2

In the example below, the investor could use losses realized from Stock B to offset gains realized from Stock A. Because the amount of the realized capital loss exceeds the realized capital gain, the additional loss can be used to offset ordinary income and then future gains or income. 
tax optimization chart
tax optimization chart

The following example assumes the investor have stock A with $25,000 released capital gains plus potential tax owed $8,750. And stock B with $30,000 realized capital loss. $25,000 of losses can be used to offset realized capital gains. Potential tax saved $8,750. $3,000 of losses can be used to offset ordinary income. $2,000 of losses can be used to offset future gains or income. The investor in the end can end up with $9,8000 total potential tax savings. * Above example assumes a 35% combined federal/state marginal income tax bracket. The example is hypothetical and provided for illustrative purpose only: it's not intened to represent a specific investment product and does not reflect the effect of fees. If a taxpayer's capital losses are more than their capital gains, they can deduct the differences as a loss and their tax return. This loss is limited to $3,000 per year, or $1,500 if married and filing a separate return.


Tax Efficiency

We aim to maximize tax efficiency by building our portfolios with individual stocks and using tax-efficient ETFs over mutual funds.

Individual stocks are generally the most tax-efficient because the investor has the most control over the investment, but when investing in other asset classes through a fund there are other considerations. Generally speaking, the taxable nature of the underlying security flows through to the investor the same whether it is owned as an individual security or through a fund, but the management of the overall fund presents opportunities for enhanced tax efficiency.

Benefits of Your
Personal Strategy®

Disclosures (as of 3/16/20)

1 - The average tax cost ratio of equity mutual funds is 1.0% to 1.2%, according to Morningstar. By avoiding tax-inefficient funds and adding the benefit from tax location and tax loss harvesting, our research shows proper tax management can improve portfolio returns by up to 1.0% annually. Sources: Rushkewicz, Katie, “How Tax-Efficient is your Mutual Fund?” 15 February 2010. Morningstar. 17 January 2011; Vanguard Study. Average tax cost is calculated based upon Morningstar data for all domestic equity stock funds with 15 years of performance history as of September 30, 2014. Calculations assume account is not liquidated at the end of the period. When after-tax returns are calculated, it is assumed that an investor was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains. State and local income taxes are not reflected in the calculations. After-tax distributions are reinvested, and all after-tax returns are also adjusted for loads and recurring fees using the maximum front-end load and the appropriate deferred loads or redemption fees for the time period measured.

2 - Model Assumptions: Available Loss is equal to 10% of portfolio assets, with average loss of those assets being 15%. Tax rate assumptions use a low to high range for capital gains of 15%-36.2% and income 15%-51.9% respectively. This assumes federal gains rates = 15%-23.9%, state gains rate = 0%-12.3%, federal income rate = 15% - 39.6%, and state income rate = 0% to 12.3%. Small Portfolio is defined as an investment portfolio with taxable value less than or equal to $200,000. Loss harvesting benefits assume some desire to rebalance. There would be reduced benefit compared to a buy and hold forever strategy. Represents tax savings in current year. Some savings represent a tax deferral and may lead to increased future tax if portfolio is liquidated. Loss harvesting opportunities tend to reduce over time as winners accumulate.

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