There are several ways we can help to reduce taxes and improve after-tax returns for our investors.
Perhaps the most common approach is “asset location,” which involves placing the least tax efficient assets, those that generate taxable income instead of capital gains, in tax-deferred accounts such as IRAs, 401(k)s, or annuities.
For most of our investors, ordinary income (interest) is taxed at a higher rate than long-term capital gains. Our investors can take cash from their tax-deferred portfolios on their own schedule.
Therefore, our investors can defer paying taxes on income or gains until money is taken out of the portfolio and can plan on timing the withdrawals at the most advantageous tax rates. The result is permanent tax savings.
Key Strategies
Tax loss harvesting is a strategy to sell a security in a taxable account when its price is below its cost and capture a loss. By realizing the loss, investors can use the capital loss in the future to offset portfolio income and gains and reduce the tax liability.
Another approach is to evaluate the after-tax return on each investment and emphasize those that produce the highest expected return. Investors in higher tax brackets (federal and/or state) can benefit from holding municipal bonds that provide attractive after-tax returns.
The bottom line
Caxton Asset Management strives to be as tax-efficient as possible. We employ all of these strategies in our portfolio construction and trading processes. Tax savings may seem minimal, but when compounded over time they can be significant. We understand that it’s not what you make, but what you keep that matters most.