Taxes
I was asked after I posted my game plan piece a week or so ago why I often worry so much about the tax consequences of my trades. I saw this piece in in Reuters linked below discussing mutual funds tax consequences. Note the following from the article:
"Some actively managed stock funds at Vanguard Group, the largest U.S. mutual fund company, are paying gains approaching 10 percent of net asset value, Vanguard spokesman John Woerth said. He called that 10 percent range sort of the unofficial threshold for what might be considered a large distribution.
At BlackRock Inc, the $4.3 billion Capital Appreciation Fund plans to distribute gains to shareholders of up to 15 percent of the fund's average net asset value, according to the company's projections. And the distribution payout at the small BlackRock Large Cap Growth Retirement portfolio could top 60 percent, according to company estimates."
Gus Sauter in the Wall Street Journal notes. that "since taxes are inevitable and likely to become even more inevitable, investors should focus on after-tax returns. You can't live off of before-tax returns".
I don't want to wade into the the complex waters of capital gains here but you can see a basic picture of what he's saying if you do the math. A taxable account that started with $100,000 and ended the year with a value of of $130,000 shows a gain of $30,000 or 30%. If that account shows net realized capital gains of $10,000 then the account is potentially subject to taxes between 10-40% depending on how these gains are classified and the income bracket of the account owner. That has the potential to drag the return down to anywhere from 18-27%. ETFs by themselves are more tax efficient than mutual funds. That will not be of much use if there is a lot of turnover in a portfolio that generates in particular short term capital gains. That's why it's so important to be aware of a client's tax situation before you start making large changes to a portfolio. Without getting into specifics, I would like to think that my clients would be happy with their portfolio returns last year. Of course returns were helped by an excellent environment for US stocks back then. I think they'll be happier with those returns when they realize in most cases there won't be much of a tax impact to their bottom lines.
2014 has the potential to be trickier in that regard and I want to make sure I do what I can to minimize any potential tax hits. To echo Mr Sauter, at the end of the day, its not what you make that's the most important number. It's what you keep.
I was asked after I posted my game plan piece a week or so ago why I often worry so much about the tax consequences of my trades. I saw this piece in in Reuters linked below discussing mutual funds tax consequences. Note the following from the article:
"Some actively managed stock funds at Vanguard Group, the largest U.S. mutual fund company, are paying gains approaching 10 percent of net asset value, Vanguard spokesman John Woerth said. He called that 10 percent range sort of the unofficial threshold for what might be considered a large distribution.
At BlackRock Inc, the $4.3 billion Capital Appreciation Fund plans to distribute gains to shareholders of up to 15 percent of the fund's average net asset value, according to the company's projections. And the distribution payout at the small BlackRock Large Cap Growth Retirement portfolio could top 60 percent, according to company estimates."
Gus Sauter in the Wall Street Journal notes. that "since taxes are inevitable and likely to become even more inevitable, investors should focus on after-tax returns. You can't live off of before-tax returns".
I don't want to wade into the the complex waters of capital gains here but you can see a basic picture of what he's saying if you do the math. A taxable account that started with $100,000 and ended the year with a value of of $130,000 shows a gain of $30,000 or 30%. If that account shows net realized capital gains of $10,000 then the account is potentially subject to taxes between 10-40% depending on how these gains are classified and the income bracket of the account owner. That has the potential to drag the return down to anywhere from 18-27%. ETFs by themselves are more tax efficient than mutual funds. That will not be of much use if there is a lot of turnover in a portfolio that generates in particular short term capital gains. That's why it's so important to be aware of a client's tax situation before you start making large changes to a portfolio. Without getting into specifics, I would like to think that my clients would be happy with their portfolio returns last year. Of course returns were helped by an excellent environment for US stocks back then. I think they'll be happier with those returns when they realize in most cases there won't be much of a tax impact to their bottom lines.
2014 has the potential to be trickier in that regard and I want to make sure I do what I can to minimize any potential tax hits. To echo Mr Sauter, at the end of the day, its not what you make that's the most important number. It's what you keep.
posted by CR English at 8:15 AM
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