If future stock and bond returns prove to be more modest, as many analysts are now forecasting, and taxes remain high or continue to grow, as has recently been the case, the use of tax-aware techniques will clearly take on added importance. Unfortunately, advisors often overlook these benefits.
Tax-Aware Techniques Include:
Asset Location Management – Through the use of asset location management (the placement of each client’s portfolio assets with after-tax returns in mind) and separately managed accounts, advisors can support the design of an improved, more efficient after-tax portfolio.
Client objectives will change with retirement. Through the use of asset location management, Clearview Wealth Solutions can limit overall portfolio gain realization while maximizing loss realization. This strategy can have a meaningful impact on after-tax wealth accumulation over time.
Selective Gain Realization – With proactive investment management and thoughtful security selection, the sale of many securities can be deferred, and thus capital gains deferred, for an extended period.
Purchasing securities for the long term can support limiting current period taxes through postponed gain realization in taxable accounts. Limiting tax gains to those budgeted is one of the more important objectives at Clearview.
Harvesting of Tax losses – Selling securities that have fallen below their original purchase price creates realized losses. These losses can be used to offset gains realized elsewhere in the portfolio in the current or future years. With most managers, loss harvesting only takes place near the end of the year.
At Clearview, we look to harvest losses in a disciplined manner throughout the year as opportunities arise.
Holding Period and Tax-Lot Management – Short-term capital gains—investments held for less than 12 months—are taxed as ordinary income. When held beyond 12 months, the investment qualifies for the lower long-term tax rate. Engaged advisors typically use highest in, first out, or HIFO, tax-lot accounting to minimize the negative tax impact on sale and thus improve the timing of after-tax returns.
At Clearview, we implement strategies that can add significant value, including proper tax-lot planning and execution
Wash Sale Avoidance – When a security is sold and then repurchased within 30 days of its sale, the realized loss cannot be used to shelter gains. This wash sale situation can be difficult to avoid when several separate account managers, especially those with similar strategies, manage one portfolio.
At Clearview, we employ one dedicated core manager to better control loss realization and the gains they may offset across the entire portfolio.