How do tax-smart strategies actually work?
Using a tax-smart strategy can help investors keep more of what they earn. Now may be an opportune time to consider adding one to your portfolio.
There are two big reasons why: taxes may be poised to move higher and expectations for future market performance are lower than what we’ve experienced in recent years.
An active tax management approach continually seeks opportunities to enhance your after-tax returns. But just how does it work? To illustrate, let’s look at the investment journeys of two hypothetical families to help show the difference that tax loss harvesting can have on a portfolio. Remember, this scenario is intended to simply illustrate how a tax loss harvesting strategy seeks to enhance a portfolio’s after-tax returns and is not a guarantee of results.1
Tax-Smart Portfolio vs. an Index
The Washingtons are the matriarch and patriarch of a large New York family. They own a successful family business that has been operating for generations. As part of their goals-based plan, they aim to grow and preserve a portion of their wealth to pass on to future generations.
The Cabellos live in San Jose, California. They’re entrepreneurs who have recently experienced a liquidity event from a company they invested in. Given their high federal and state tax rates, they want to preserve more income to help meet their long-term goals.
1 All investments involve risk, including loss of principal. There can be no assurance that any return objectives will be met. Any examples used are generic, hypothetical, and for illustration purposes only. The results shown in these materials are based on illustrative/hypothetical examples and do not represent actual investment decisions or results. No representation is made that any investor will, or is likely to, achieve results comparable to the illustrative/hypothetical examples shown. Past performance does not guarantee future results.
2 IMPORTANT: The impact of a tax loss harvesting strategy depends upon a variety of conditions, including the actual gains and losses incurred on holdings and future tax rates.
For illustrative purposes only. Informational analysis assuming 1% tax alpha for the portfolio vs. the S&P 500’s after-tax returns, and are not meant to be representative of actual results achieved by the manager while investing in the respective strategies over the time periods shown. Calculations use the max applicable federal rate: taxes on income from dividends are using the max federal rate of 20% plus the 3.8% NII Tax, for a combined rate of 23.8%. For ST gains the highest federal marginal income tax rate of 37% plus the 3.8% NII Tax is used, for a combined rate of 40.8%. For long-term gains, the highest U.S. federal marginal income tax rate of 20% plus the 3.8% NII Tax is applied, for a combined rate of 23.8%. No state or local taxes are assumed. No representation is being made that any portfolio will or is likely to achieve profits or losses similar to those shown. Past performance is not indicative of future results. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Examples used are generic, hypothetical, and for illustration purposes only. Case studies are based on illustrative examples and do not represent actual investment decisions or results. The impact of a tax loss harvesting strategy depends upon a variety of conditions, including the actual gains and losses incurred on holdings and future tax rates.