Tax Planning
Mar 30, 2022

​Four Tips to Tax-Efficient Investing | Baird Retirement Management

Is your portfolio tax-efficient? Here are four ways tax-smart investing can potentially help you keep more of what you earn.
  1. Tax-Managed Mutual Funds. Although mutual funds are generally not known for their tax-efficiency, “tax-managed” mutual funds seek to limit turnover and distributions and use other strategies to minimize tax implications.
  2. Separate Accounts. Through separate accounts – managed investments that buy individual securities with pooled money – a manager can avoid pre-existing gains/losses and short-term capital gains, strategically harvest losses to offset gains and identify lots for sale.
  3. Tax-Deferred Accounts. The table below summarizes considerations of taxable and tax-deferred accounts in seeking to improve your portfolio’s tax-efficiency:
Taxable Accounts Tax-Deferred Accounts
Individual stocks you plan to hold for more than one year Individual stocks you plan to hold for less than one year
Tax-managed stock funds, index funds, tax-managed funds, low-turnover funds Actively managed stock funds generating short-term capital gains
Stocks or mutual funds paying qualified dividends Taxable bond funds, corporate and government bonds producing high income, zero-coupon bonds, inflation-protected bonds or high-yield bond funds
Municipal bonds REITs
4. Knowing When and How to Sell. 
  • Holding investments for more than one year can help you take advantage of the lower long-term capital gains tax rate when you sell, though there may be investment risks to consider.
  • Buying the same security at different times and prices (“lots”) gives you control over any gains/losses you realize.
  • Capital losses can be used to offset gains dollar-for-dollar plus up to $3,000 of ordinary income each year, though realized losses in tax-deferred accounts cannot offset gains in taxable accounts.
  • Losses from wash sales (i.e., when you sell a security at a loss but repurchase the same or similar security within 30 days before or after the sale) cannot offset gains or income in the current tax year – the loss may be deferred until the replacement property is sold or permanently disallowed.
Because of market fluctuations, your portfolio’s performance may vary. However, tax-smart strategies may help you gain greater control over the taxes you pay and keep more of what you earn. Investors should consider the investment objectives, risk, charges and expenses of mutual funds carefully before investing. This and other information is found in the prospectus or summary prospectus, which can be obtained from your Baird Financial Advisor. Please read it carefully before investing. There are many differences between separately managed accounts and mutual funds, all of which should be considered very carefully before investing. There are fees and charges associated with separately managed accounts, and not all the accounts are suitable for all investors. Further, the investments cited in this article are merely examples of investments that may have taxable events that make them more or less advantageous for a taxable or tax-deferred account. Their inclusion should not be regarded as a recommendation. Talk to your Baird Retirement Management advisor for a custom investment strategy.

Robert W. Baird & Co. does not provide tax advice. Please consult with your tax professional before implementing any strategies. Article provided by Baird for the Pfeil Leatherwood Group at the Houston – Memorial City office of Robert W. Baird & Co., member SIPC. Rick Pfeil and Matt Leatherwood have 24 combined years of financial services industry experience, and can be reached at [email protected] 

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