Review: 5 things you can learn from your tax return

Taxes are no fun, but they can help you (ok, force you to) get a better picture of where your finances stand. This article has some good suggestions, but I want to focus in on one area in particular: the tax efficiency of your investments.

Tax efficient investing is important. It’s not as important as getting your asset allocation right, but tax efficiency is one of the few things you have any control over with your investments, so you can make sure it’s done right. The article directly calls out two important areas of tax efficiency and sort of talks about a third.

The two that it gets right are asset location, and tax loss harvesting. To put it simply, these are both pretty complicated areas – there are a lot of moving pieces, but the core concepts are pretty straightforward.

Asset location is about making sure your investments are in the right accounts. Since different accounts are taxed differently, you want to make the most out of these differences. Tax loss harvesting is about directly reducing your tax bill by selling securities that have lost you money to offset the gains in securities that have gone up. You can read more about both concepts in the links above.

The piece the article hardly touches on is fund selection. The author mentions that you might want to avoid mutual funds in your taxable portfolio since ETFs are more tax efficient. This is true as far as it goes (sort of – it’s complicated), but there are a lot of other competing factors when you are looking at fund selection. It goes far beyond mutual fund vs. ETF.

The important point here is that your tax efficiency has a real impact on your portfolio’s total returns – especially if a large portion of the portfolio is in taxable accounts. If that’s you, you want to pay special attention to your tax efficiency and make sure you get it right.

For more on how we manage our clients’ portfolios, take a look at our ebook, “A Day in the Life of a Portfolio.”


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