Feb. 24-28: Tips, strategies, and picks for tax-conscious investors.
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It's often said that "the tax tail should not wag the investment dog." In other words, if you need the long-term growth potential of stocks in a retirement portfolio, you should own stocks. If you have shorter-term goals and need the milder profile of bonds, buy bonds. Tax efficiency shouldn't be a litmus test.
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But as any sharp financial advisor (and undoubtedly most canines) would be quick to point out, neither should you crop off the tax tail with no second thought.
Once you have a plan that works for your goals, streamlining with an eye toward tax efficiency has a very real benefit--namely, enhanced aftertax returns.
How enhanced? Morningstar Investment Management's head of research, David Blanchett, quantified the benefits that smart financial planning--including tax planning--can have on a portfolio in a metric called "gamma." In a 2013 research paper, he found that asset location (purposefully putting certain kinds of investments in certain types of accounts for tax efficiency) and sequencing withdrawals in retirement from some accounts before others can generate more than 3% additional income for an investor in retirement. Given how low yields still remain, that's nothing to sneeze at. (See the whole research report
for more on tax efficiency and the other components of gamma.)
What's more, you don't have to be an investing whiz, a market guru, or the next Warren Buffett to benefit from better tax practices. The return you'll get from efficient planning is achievable by anyone who puts their mind to it.
During Morningstar's Tax Relief Week 2014, we helped investors grab more gamma with a sensible plan for investment-tax management both before and during retirement. We detailed the latest tax changes, offered up some of our favorite tax-efficient picks (for taxable accounts), as well as topnotch ideas for your IRA.
Highlights: Investment Picks
Highlights: Strategy Tips
Monday: Keep Tabs on Key Tax Trends
Tuesday: Maximize Your Tax Shelters
Wednesday: Optimize Taxable Accounts
Thursday: Make Munis Work for You
Friday: Save on Taxes in Retirement