Tax Strategies for Mutual-Fund Investors «
What’s your most important tax advice for mutual-fund investors?
MIKE PIPER: By definition, tax planning is a case-by-case sort of thing, so it’s almost impossible to give a single piece of advice that would be helpful for everyone.
For mutual-fund investors who are investing via taxable brokerage accounts, the general goal is to lose as little of your return to taxes as possible. Strategies to consider would include:
Making sure to tax-shelter your tax-inefficient funds (e.g., taxable bond funds with high yields, stock funds with high turnover, REIT funds) by holding them in 401(k) or IRA accounts before tax-sheltering your more tax-efficient funds.
If you have to hold bonds in a taxable account, checking to see whether muni funds offer a yield that’s as high or higher than the after-tax yield on taxable bond funds with a comparable level of risk.
Paying attention to tax-loss harvesting opportunities (or tax-gain harvesting, if you’re in the 10% or 15% tax brackets). These days with the multitudes of index funds and ETFs available, it’s generally very easy to find a suitable replacement for your portfolio after selling a fund to harvest a loss.
Most people, however, are not maxing out their retirement accounts. So, for them, tips for taxable account investing aren’t as relevant as tips for getting the maximum value possible from their retirement accounts. Things that will generally help in that regard would include:
Not doing any saving for retirement via taxable brokerage accounts until IRA and 401(k) accounts are maxed out.
Carefully considering whether Roth savings, tax-deferred savings, or a combination of the two is most likely to be advantageous.
Resisting the temptation to cash out a 401(k) and spend it after switching jobs.
Checking whether they’re eligible for the retirement savings contribution credit (or whether a modest pretax IRA or 401(k) contribution would make them eligible).
Mike Piper (@michaelrpiper) is a Missouri-licensed CPA and the author of the blog ObliviousInvestor.com. He is also the author of several personal finance books, including his latest, “Social Security Made Simple.”