Tax Efficiency
I’ve been looking into how to maximize tax efficiency for my accounts. Based on my research there are three types of accounts: ones that are taxed, ones that are tax deferred, and those that are tax-free. For each account, there are specific investments that help maximize the overall tax efficiency. From what I can gather, these are the best investments for each type of account:
Taxable Accounts:
- Index funds – very low turnover stock funds
- Tax-managed mutual funds – usually avoids dividend paying stocks, holds securities for a long time, and sells losing stocks to reduce taxable gain
- Municipal bonds – tax free bonds
- ETF – as long as not dividend paying ones
- Variable annuities
- Individual stocks – as long as not dividend paying ones
Tax Deferred/Tax Free Accounts:
- Taxable bonds – zero coupon or deep discount bonds
- Dividend producing stocks
- High turnover mutual funds
- Any investment that generates frequent cashflow or distributions through interest, dividends, and capital gains
Based on the information, I believe my situation can be considered tax efficient. I hold cash for emergencies, which is taxed very little since I don’t hold that much cash. I hold gold through the ETF GLD in a taxable account that I don’t receive dividends and will not churn often. My short-term and long-term bonds and stocks are held in tax deferred and tax free accounts. My foreign currencies are held in non-taxable safety deposit boxes and offshore bank accounts. And my real estate can be taxed, but only if the gain is beyond the 250k tax exemption. Furthermore, the income from real estate is offset by depreciation, mortgage interest, etc… expenses. So overall, based on current circumstances and tax laws, I don’t need to worry about my investments paying a lot of taxes. Of course this can change as new tax laws are enacted.
Related posts: