3 Ways To Help Maximize Your Portfolio’s Tax Readiness

The following was authored by Hollie Fagan, Head of BlackRock’s Registered Investment Advisor business.

When it comes to taxes and investing, it’s all about the end game—the less you pay now, the more you’ll keep working toward your long-term goals.

As the final months of 2017 gallop to a close (wasn’t it just Memorial Day?), many of us are thinking about taxes and looking for ways to reduce the bill from Uncle Sam.

Your investment portfolio is an important part of that review. A recent BlackRock survey found that 44% of investors say taxes are the costs that matters most to them (Source: GfK, BlackRock, 8/31/2017). There’s a good reason for that: Taxes can take a big bite out of returns.

To that end, here are three tax-smart tips to think about as you prepare for year-end:

1. Seek to limit capital gains distributions

When a fund manager sells a security at a profit, the gain can come back to you as a taxable distribution, even if you don’t sell your fund shares or the fund itself posts a loss. The impact to your bottom line can be significant, as the example shows below. This year may offer some particularly unwelcome surprises, given the stock market’s strong performance.


Investments to consider: Try to reduce or even eliminate capital gain distributions in your taxable accounts. One way to try to do that is with exchange traded funds (ETFs). Because ETFs seek to track the market, they typically turn over securities less frequently than strategies seeking to beat the market; this lower turnover may result in lower capital gains; these vehicles can also be structurally tax efficient. In fact, there are ETFs that have never distributed a cap gain.

2. Be thoughtful about investment income

The other taxable distribution to look out for is the dividend. Certain fund dividends (think taxable bonds and REITs) may be subject to ordinary income tax rates. But there are several ways to possibly lighten the burden. One is location: Consider allocating your least tax-efficient investments to the most tax-friendly accounts. Another consideration is timing: If you’re planning to buy shares, pay attention to when your fund pays out dividends (known as the ex-dividend date). Because the share price may drop temporarily after payment, you could find yourself not only with a capital loss but owing taxes on the dividend.

Investment to consider: The interest from municipal bonds is generally free from federal taxes and often state taxes as well, depending on your state or where you file—savings that may potentially translate into higher returns. And dividends from stock funds (including preferred stocks) are typically considered “qualified income;” although you’ll owe taxes, they may be at the lower capital gains rate.

3. Ask for help

Taxes are complex and most of us would prefer to pay as little of them as possible. Your financial advisor or tax professional can bring crucial insight and perspective into the process. While the BlackRock survey found that 44% of investors say their advisors actively mitigate taxes in their portfolios, 37% don’t know whether they do so (Source: GfK, BlackRock, 8/31/2017). The best thing to do is…ask and learn.

Taxes are only one facet of an investment plan. Your portfolio should ultimately reflect much more: your timeframe and objectives, the risk you’re willing to bear for the performance you want and the best value for your money—including how much you pay in taxes.

Learn more about ways to build tax efficiency into a portfolio.


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