Tax planning is an important but often overlooked aspect of a long-term investing strategy. After all, your primary concern should be what you keep after taxes, not necessarily a fund's reported return. But from a tax standpoint, investing in funds is tricky because they are required to pay out to shareholders essentially all of the gains they realize each year, as well as dividends and interest payments that they have gathered.
None of this matters if you're investing in an IRA or other tax-deferred vehicle. But if you invest in a regular account, you can get stuck with a tax bill -- talk about adding insult to injury -- even if the fund gets creamed.
Tax-efficiency, a relatively controllable part of investing, will become even more important once the markets turn up, which they inevitably will do. Assessing the tax consequences of bond funds, nearly all of which are divided between tax-free municipal bonds and taxable bonds, is pretty clear-cut. Muni bonds most likely belong in your taxable account, and taxable bonds go in the tax-deferred camp. But the optimum account for stock funds is much less clear.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Generally, you're better off placing high-turnover stock funds that generate large capital gains (especially short-term gains, which are subject to high rates of taxation) in a tax-deferred account. For instance, Ken Heebner typically turns over the portfolio of CGM Focus about four times a year, constantly generating taxable gains: Over the past five years through February 28, CGM investors lost an average of 2.5 points a year (nearly all of their return) to the tax man.
Funds with a consistent buy-and-hold philosophy and low turnover are generally better for your taxable accounts. Four in this camp are Selected American Shares (symbol SLASX), Long-leaf Partners (LLPFX), Vanguard Primecap Core (VPCCX) and T. Rowe Price Small Cap Value (PRSVX).
-
Stocks Slip to Start Fed Week: Stock Market TodayWhile a rate cut is widely expected this week, uncertainty is building around the Fed's future plans for monetary policy.
-
December Fed Meeting: Live Updates and CommentaryThe December Fed meeting is one of the last key economic events of 2025, with Wall Street closely watching what Chair Powell & Co. will do about interest rates.
-
This Is Why Investors Shouldn't Romanticize BitcoinInvestors should treat bitcoin as the high-risk asset it is. A look at the data indicates a small portfolio allocation for most investors would be the safest.
-
Best Banks for High-Net-Worth Clientswealth management These banks welcome customers who keep high balances in deposit and investment accounts, showering them with fee breaks and access to financial-planning services.
-
Stock Market Holidays in 2025: NYSE, NASDAQ and Wall Street HolidaysMarkets When are the stock market holidays? Here, we look at which days the NYSE, Nasdaq and bond markets are off in 2025.
-
Stock Market Trading Hours: What Time Is the Stock Market Open Today?Markets When does the market open? While the stock market has regular hours, trading doesn't necessarily stop when the major exchanges close.
-
Bogleheads Stay the CourseBears and market volatility don’t scare these die-hard Vanguard investors.
-
The Current I-Bond Rate Is Mildly Attractive. Here's Why.Investing for Income The current I-bond rate is active until April 2026 and presents an attractive value, if not as attractive as in the recent past.
-
What Are I-Bonds? Inflation Made Them Popular. What Now?savings bonds Inflation has made Series I savings bonds, known as I-bonds, enormously popular with risk-averse investors. How do they work?
-
This New Sustainable ETF’s Pitch? Give Back Profits.investing Newday’s ETF partners with UNICEF and other groups.
-
As the Market Falls, New Retirees Need a Planretirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
