Tax planning is an important but often overlooked aspect of a long-term investing strategy.
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.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-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).
Cheap Ways to Cool Your Home in the Summer
Take these smart steps to lower your house's energy bill and cool your home.
By Daniel Bortz • Published
Letter from the Senior Digital Editor: Memorial Day Hits
Kiplinger senior digital editor Alexandra Svokos writes for Memorial Day.
By Alexandra Svokos • Published
Stock Market Holidays in 2023: NYSE, NASDAQ and Wall Street Holidays
Markets When are the stock market holidays? Take a look at which days the NYSE, Nasdaq and bond markets are off in 2023.
By Kyle Woodley • Last updated
Stock Market Trading Hours: What Time Is the Stock Market Open Today?
Markets When does the market open? While it's true the stock market does have regular hours, trading doesn't stop when the major exchanges close.
By Michael DeSenne • Last updated
Bogleheads Stay the Course
Bears and market volatility don’t scare these die-hard Vanguard investors.
By Kim Clark • Published
I-Bond Rate Is 4.30% for Next Six Months
Investing for Income Bonds issued May 1 to October 31 will have a rate of 4.30%.
By David Muhlbaum • Last updated
What Are I-Bonds?
savings bonds Inflation has made Series I savings bonds enormously popular with risk-averse investors. So how do they work?
By Lisa Gerstner • Last updated
This New Sustainable ETF’s Pitch? Give Back Profits.
investing Newday’s ETF partners with UNICEF and other groups.
By Ellen Kennedy • Published
As the Market Falls, New Retirees Need a Plan
retirement 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.
By David Rodeck • Published
Where the Midterm Election Races Stand Today
Economic Forecasts In a tight race, these state elections may make the difference when midterm results are announced in November.
By Sean Lengell • Published