Tailoring Your Investments To Maximize After-Tax Returns
By Brian Famigletti, Managing Director & Head of Marketing
The Right Mix
It can be tricky to balance the returns on your investments and the taxes they accrue. On one hand, you want to prioritize investments with impressive yields. On the other, these same investments often come with costly tax implications.
A key step to optimizing your returns is ensuring you have the right mix of tax-free, tax-deferred, and taxable accounts. For example, your account mix might include Roth IRAs, traditional IRAs, and brokerage accounts, each of which carries both unique advantages and additional tax considerations. When assessing your account mix, it’s important to remember that some tax-free and tax-deferred accounts come with contribution limits and income-based phaseouts that can cap your contributions. For this reason, high-net-worth investors are likely to find the bulk of their net worth held in taxable accounts. In a taxable account, returns might be encouraging, but the profit might not look as good after taxes are accounted for.
With all that in mind, here are some strategies for tailoring your investments to maximize after-tax returns, not just before.
Smart Asset Allocation
Minimizing the tax hit on your taxable investments is one way to maximize after-tax returns. This means looking at your investment choices through the proverbial microscope.
For example, the interest generated by municipal bonds is already tax-free at the federal level. For this reason, they are not considered appropriate for tax-free or tax-deferred retirement accounts. On the other hand, U.S. Treasury bonds are taxable at the federal level and would benefit from the tax-deferred nature of a traditional IRA.
Another detail to consider is your mix of mutual funds and ETFs. Typically, ETFs are considered the more tax-efficient option because they tend to distribute fewer capital gains to shareholders. However, mutual funds that track an index tend to distribute fewer capital gains than those that are actively managed.
For these reasons, an actively managed fund may be better suited for a tax-deferred account, while an ETF or passive fund could be a good option for a taxable account.
Seeing the Bigger Picture
Maximizing after-tax returns means creating a comprehensive plan involving multiple account types and asset classes. It’s important to see each account — and each investment within the account — as singular parts of a bigger picture. Focusing on one account without considering the others could result in an inefficient plan with unnecessary tax burdens.
It can take considerable effort to maximize after-tax returns. Tax law is ever-evolving — and always complicated. Consulting with a CPA or a financial advisor may make a world of difference, helping you to take full advantage of every account type, while steering clear of unnecessary taxes that could erode your returns.
Want to optimize your portfolio for tax advantages, but unsure where to start? Book a call with Griffin Asset Management today.
Source:
BlackRock: After-tax allocation strategies for high net worth clients
