Keeping investment taxes low
Keeping investment taxes low
Points to know
- Your account type, investment type, and trading behavior will all impact the amount you owe Uncle Sam.
Every investment decision is an opportunity to save
There are a lot of choices you'll need to make in investing, whether you're just getting started or you've been investing for decades. Many of these decisions will have a tax impact.
Taxes directly reduce your returns, so it's smart to familiarize yourself with the potential tax hits—or tax savings—you could be in for.
When choosing an account type
Use tax-advantaged accounts when saving for retirement or education
Roth and traditional IRAs, 401(k) plans, and 529 savings plans all give you tax benefits on the money within these accounts.
When choosing investments
Choose investments that are tax-efficient
Some investments, like index mutual funds and ETFs (exchange-traded funds), are naturally tax-efficient. Others, including tax-managed funds and tax-exempt bonds, were created specifically for investors concerned about lowering their taxes.
A note on after-tax returns
When reporting performance, mutual funds and ETFs include "after tax" figures that are meant to represent what an investor might have left over once taxes are paid.
These figures are unlikely to perfectly represent your exact situation, but they'll give you an idea of how tax-efficient the fund is.
Even if you're in a high tax bracket, it's important not to just focus on taxes when you're selecting funds. A fund with a return of 10% and a 3% tax bite is still going to leave you with more than a fund with a 5% return and a 1% tax burden.
After-tax return figures help you keep this total picture in mind.
When managing your portfolio
Manage different accounts in ways that minimize your taxes
If you own some accounts with tax advantages and some without, you have greater flexibility to lower your tax burden across all your accounts.
Manage accounts to lower taxes
Consider selling at a loss
While you should never sell an investment for the sole reason of lowering your taxes, you should keep tax implications in mind when making trades.
Offset taxable gains through tax-loss harvesting
Limit your trading
Every time you sell investments in a taxable account—especially if you're selling in order to lock in gains—you could be increasing your tax bill. Instead, stick to your investment plan and limit your trading activity.
Tax savings without the hassle
When it comes to investing, the effects of taxes are just one consideration to keep in mind. If spending time and energy on investment decisions isn't your cup of tea, we can take on the responsibility for you.
Vanguard Personal Advisor uses strategies like the ones described above to help you meet your goals while minimizing the impact of taxes.
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All investing is subject to risk, including the possible loss of the money you invest.
The information contained herein does not constitute tax advice, and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about his/her individual situation before investing in any fund or ETF.
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