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Don’t let taxes erode your investment returns

December 15, 2023

Four ways wealth managers can protect investment returns from excessive taxes

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  • 00:00 Four ways wealth managers can protect investment returns from excessive taxes.
  • 00:39 Tax-lot accounting.
  • 01:00 Tax-loss harvesting.
  • 01:35 Gain-loss offset.
  • 02:00 Managing the holding period.

Want to help minimize tax drag on a taxable account? The ins and outs are complicated, but here are four strategies that may help you. 

Everyone wants to buy low and sell high. But selling an investment within a taxable account at a profit typically triggers a taxable event. And everyone knows that taxes can erode profits.

But taxes can reduce returns in down markets, too. Mutual funds distribute capital gains every calendar year, including when they post losses. That can trigger capital gains taxes even if the overall position lost money.

Luckily, there are ways to minimize tax drag. Let’s take a quick look.

Tax-lot accounting    

Let's start with tax-lot accounting.
Suppose you buy the same security at different times and at different prices. When you’re ready to sell some of that security from your taxable account, you may be able to reap tax advantages by selling specific shares. To make an informed choice, you’ll need the purchase price, sale price, and cost basis of each lot.

Tax-loss harvesting    

Next, let’s take a look at tax-loss harvesting.
Sometimes you have an investing goal that can be met by several similar securities. If you sell one security at a loss and use the proceeds to buy a similar security, you can keep your asset allocation intact and, at the end of the year, use the realized loss to potentially reduce your taxable income.

Gain-loss offset    

A third strategy is gain-loss offset.
Suppose you’ve sold securities within a taxable account at a profit earlier in the year. Gains are great—but taxes are likely going to erode them. To counter the impact of taxes, you may want to offset the taxable gain. With gain-loss offset, the gain is counterbalanced—or offset—by selling other securities that have dropped in price.

Managing the holding period    

And finally, managing the holding period.
Tax rates for long-term investments—investments held for more than one year—tend to be lower than tax rates on short-term investments. When choosing which investments in a taxable portfolio to sell, consider the holding period—and subsequent tax rate—to help you choose. 

It all may sound simple, but investing to minimize taxes is complicated. It’s always best to work with a financial professional. 

Over the past two decades, we’ve built a range of tax-managed solutions—each with a well-established track record for producing more effective outcomes.

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Information provided by SEI Investments Company (“SEI”).

There are risks involved with investing, including loss of principal. There is no guarantee your investment objectives will be achieved. 

SEI does not represent in any manner that the tax consequences described as part of its tax-management techniques and strategies will be achieved or that any of SEI's tax-management techniques, or any of its products and/or services, will result in any particular tax consequence. The tax consequences of the tax-management techniques, including those intended to harvest tax losses, and other strategies that SEI may pursue are complex and uncertain and may be challenged by the IRS. Neither SEI nor its affiliates provide tax advice. 

Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax, penalties and/or interest which may be imposed by the IRS or any other taxing authority; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. Accordingly, Clients should confer with their personal tax advisors regarding the tax consequences of investing with SEI and engaging in the tax-management techniques described herein (including the described tax loss harvesting strategies) based on their particular circumstances. Clients and their personal tax advisors are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the Client’s personal tax returns. SEI assumes no responsibility for the tax consequences to any Client of any transaction.