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Creating a Tax-Efficient Portfolio: What You Need to Know

by AOG Wealth Management

You need to work on tax efficiency if you want to maximize your returns. Tax efficiency is a measure of how much of an investment’s return remains after you pay your taxes. The more your investment depends on investment income, the less tax-efficient it becomes. AOG Wealth Management, the trusted wealth management expert, explains what you need to know to create a more tax-efficient portfolio:


How Your Accounts Are Structured

There are three ways that accounts are structured under the law. Accounts can be taxable, tax-exempt, or tax-deferred. For taxable accounts, you need to pay taxes on your investment income on the year you received it. Examples of taxable accounts include bank accounts and money market mutual funds. Tax-deferred accounts shelter investments from taxes as long as they stay in the account. Examples include 401(k), IRA or Roth IRA accounts. For tax exempt accounts, you do not need to pay taxes even when you withdraw from them.

Tax Brackets

First you need to determine your marginal income tax bracket and whether it is subject to the alternative minimum tax. Tax efficient investment planning becomes more important the higher your marginal bracket rate. Next, you need to be aware of the differences between taxes on capital gains and taxes on your current income. This information will guide you in choosing tax efficient investments. As financial planning experts, we suggest that investors put tax-inefficient investments in tax-deferred accounts and tax-efficient investments in taxable accounts.

Examples of Tax-Efficient Investments

Here are some examples of tax-efficient investments. Convertible bonds are relatively tax-efficient because you can hold them in tax-deferred accounts and because they incur fewer taxes than junk bonds or preferred stocks. You can also put investment-grade corporate bonds in tax-deferred accounts. Common stocks are among the most-tax-efficient investments because they are taxed at the long-term capital gains rate if you hold them for more than one year. You can also hold them in tax-deferred accounts.

Most investors can make their portfolios more tax-efficient. The right strategy can allow you to keep more of your investment earnings and stay out of a higher tax bracket. If you need a financial advisor that can help you meet your investment goals, then AOG Wealth Management can help.

We focus on creating customized investment solutions that are based on our client’s specific circumstances and objectives. We are the trusted name in our industry in Washington, DC, Reston, McLean and all of Northern Virginia. Call us at (866) 993-0203 to learn more about tax-efficient strategies and ask for a complimentary consultation.

The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual.  We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation.

Category: Blog