Maximize After-Tax Returns by Columbia Threadneedle Investments
When what you keep — not what you earn — is what really counts You have worked hard to build an investment portfolio that will generate income to help offset your family’s needs and provide for you in retirement. Now, with recent tax hikes firmly entrenched, you may face the prospect of watching nearly half of your earnings siphoned off to pay income taxes.
Fight back against the corrosive effects of taxes on your investments. Devise a strategy that helps you maximize your after-tax return.
Higher taxes are here to stay
Many investors don’t realize the huge negative effect taxes can have on long-term portfolio performance. As the federal government, states and cities continue to raise income tax rates, municipal bonds have never made more sense. Whereas interest earned on taxable fixed-income investments, such as corporate bonds and Treasuries, is taxed at the investor’s ordinary income tax rate, interest earned on municipal bonds is generally exempt from federal taxes.
Many think of tax-exempt bonds as an investment choice designed for high-net-worth investors, but let’s face it: Taxes add up for everyone. Particularly in a low interest-rate environment, the benefits of municipal bonds are real, regardless of your income level.
It’s not just about asset allocation…it’s also about asset location
Choosing tax-efficient investments is only the first step. The potential benefits of municipal bonds increase when asset location is part of your overall strategy. Asset location is all about how you divide investments between your taxable and tax-deferred accounts. Generally, tax-efficient investments like municipal bond funds are best placed in taxable accounts, while less tax-efficient holdings like taxable bond funds are typically held in tax-deferred accounts such as an IRA or 401(k). Your financial advisor can help you create an asset location strategy that’s right for you.
Control what you can in a volatile market
Investors cannot control interest rates, which remain at all-time lows but are widely expected to rise in the not-too-distant future, nor can they change our high level of taxation, which appears to be established for the foreseeable future. However, you can prepare for the potential volatility ahead by choosing investments that are likely to move you one step closer to achieving your desired outcome. Consider municipal bond mutual funds, which may significantly improve the diversification, stability and after-tax income potential of your portfolio.
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