- 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.
- 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.
- 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|
- 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.
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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]