Tax Management for Investors: 4 Key Strategies

It’s nearly tax season — the IRS will begin accepting and processing 2020 tax-year returns next Friday, February 12 — but keep in mind that for investors, tax management is a year-round endeavor.

Improper tax management can cost you more than a quarter of your long-term return, severely limiting spending power in retirement. The good news is that taxes can be managed. Get full insights with our free downloadable guide 5 Tax Hacks Every Investor Should Know.

For now, here are four key areas where you can place your tax focus.

Tax Efficiency

Thousands of potential investment vehicles exist today, each with radically different tax implications. Choosing and using tax-efficient investments is a vital first step toward keeping more of your money. Here are some general guidelines when it comes to common investment vehicles.

• Mutual Funds are notoriously bad in terms of tax management.
• Exchange Traded Funds (ETFs) are generally more tax efficient than mutual funds.
• Individual Stocks can be the most tax-efficient way to gain exposure to equities.
• Bond ETFs and passive bond mutual funds are generally more tax efficient than actively managed bond mutual funds, but the tax treatment of income generated from bonds differs from that of equities.
• Real Estate Investment Trusts (REITs) dividends are generally taxed as ordinary income to shareholders.

You can track and analyze all of your investment accounts (and, in fact, all other financial accounts) using Personal Capital’s free online tools. Millions of people use this technology to identify their ideal target allocation, designed to minimize risk and maximize returns. With the tools, you can also uncover hidden fees in your mutual fund, investing, and retirement accounts. Financial institutions charge annual fees on mutual funds and other assets. Over time, these fees add up and can dramatically reduce your lifetime savings.