Over the past several years, the amount of capital gains has steadily increased, and the increase will likely continue as long as the stock market continues to rally. This leads investors to wonder what they can do to decrease their tax burden.
Before we talk about possible strategies, let’s take a look at the situation.
After several years of gains, funds began making payouts, just small payouts at first and gradually larger and larger percentages per share. These payouts qualify as taxable gains, and as such, they are taxable. Additionally, payouts lead to outflows when what you really want to do is preserve your capital. Capital gains don’t often fit into investors’ long-term wealth strategies, so it’s wise to know what other options are available to you.
Prevention is the best cure and since we’ve been in this bull market for so long, you should try to develop a keen eye for funds that rarely make payouts and have low turnover. If two funds are equally attractive but one of them will help you to avoid capital gains taxes, take that into consideration. However, there’s something else you can do that can help you on a larger scale, consider separately managed accounts (SMAs).
SMAs are portfolios managed by professional investment firms and registered investment advisors. They’re different from other pooled investment vehicles like mutual funds; in an SMA, each account owns the holdings directly.
Separately Managed Accounts have been around for some time, but recently they’ve seen a resurgence in popularity among individual investors for several reasons.2 Though, SMAs require higher investment minimums than most traditional mutual funds, they also offer special benefits. Many investors find that they appreciate the flexibility, control, and tax advantages that SMAs offer them.
When you invest through an SMA, you only pay taxes on the capital gains you actually realize.3 The securities in a Separately Managed Account are owned directly, and this offers the flexibility for investors to work with their financial and tax advisors to create and use tax-efficient strategies.
Mutual funds continue to work well as investment vehicles for many people, but if you find that capital gains taxes have eaten into your profits and derailed your investment strategy, you may want to consider alternatives. Carefully choosing your funds can make a difference to some investors, and other investors may find tax relief, as well as more control and flexibility, when they begin taking advantage of Separately Managed Accounts.
As you evaluate your portfolio for capital gains tax implications, consult with your financial advisor about how your funds are performing in relation to your overall financial goals. Markets don’t often behave predictably, but you can use the advice of experts to help you navigate through the ups and downs of the stock market.
For more information on mutual fund taxation or any other investing concern, contact us at WrapManager to speak with one of our Wealth Managers.
Sources:
1. California Hedge Fund Association
3. Dreyfus
The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice, either expressed or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.