Tax-Efficient Fund

  

Categories: Tax, Wealth, Managed Funds

Simply put: funds with low turnover (if they're long equities).

Like...you're in a normal, vanilla mutual fund of growth equities. Which do you want if you're tax sensitive? One who trades/turns over 100% of its investments each year, i.e. realizes all of its gains and losses...or one which buys 100 stocks and then just goes and plays golf?

And statistically, both funds have almost the identical same performance. Well, for tax purposes, that first fund, in realizing all the gains every year, makes you pay ordinary income tax rates every year. So if it's up 12% in a year, and you live in a Blue State, you'll pay about 5.5% of that gain in tax, i.e. 6.5% is all that you'll be up, net of taxes. In the second fund, if it's up 12% and the fund has realized no gains, then you're up 12%. Yes, you carry forward the low cost basis of that fund...but if the fund never realizes it, then who cares?

Ok, and here's a 3rd thought on tax efficiency: Only invest in funds that go down in value. That way you'll never pay taxable gains. Or not. And/or you always have a muni bond fund out there in case you're in a more conservative mode.

Lots of choices. Lots of taxes.

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