Tax-efficient investing
Add increased value by building tax efficiency into clients’ investing and spending strategies.
Understanding the benefits of tax-smart investment decisions
When you practice proactive, tax-aware planning you can help maximize your clients’ investment returns so they keep more of what they earn. This can offer many potential benefits for both your clients and your practice:
For your client
Less money going out in taxes means higher asset balances that increase the likelihood of clients meeting their financial goals. That, in turn, results in higher client satisfaction and retention, along with more referrals.
For your relationship with clients
Articulating your tax-aware approach underscores your commitment as a fiduciary. Meeting your clients’ desire to avoid unnecessary taxes can provide quantifiable proof of the value you deliver.
For you and your practice
Tax-efficiency means more assets in portfolios and greater growth opportunities. With more assets under management your practice could have greater margins and increased client satisfaction, retention, and referrals.
Consider these tax-efficient solutions
There is a myriad of ways to help guide your clients to making tax-efficient investment choices. By helping them understand tax-advantaged investment strategies and how tax-smart solutions can benefit them, you’ll increase your value as an advisor and help grow your client retention—and referrals.
When your clients make tax-aware investment choices, they can minimize the taxes they pay and retain more of their money to grow. Your clients should understand it’s about more than just minimizing the taxes they pay; it’s also about deferring taxes, reducing taxes, and engaging in tax-effective estate planning.
Let’s explore what your clients should (but may not) know when considering tax-efficient investments.
Estate planning
Guide your clients to a comprehensive understanding of the importance of estate planning to preserve their wealth for generations to come, ensure a smooth wealth transfer, and fulfill their charitable giving goals.
Your clients want to pass their wealth on to their loved ones and maybe have their philanthropic goals reached, but they don’t want their wealth eroded by heavy taxes. That’s why tax efficient strategies are a crucial element of comprehensive wealth and estate planning.
Charitable giving is an important piece of a tax-smart plan so your clients can seamlessly and successfully transfer their wealth, minimize taxes, and achieve philanthropic goals.
Tax-loss harvesting is a key strategy in tax-efficient strategies. It can be especially useful for high income clients who may realize significant capital gains. Because of the complexities of implementation, regulations, and timing of offsetting losses against gains, advisors want an automated solution to deliver more value for their clients. Vanguard Personalized Indexing (VPI) automates tax-loss harvesting, helps to streamline portfolio management and optimize your clients’ tax benefits—at scale.
When guiding your clients with long-term investment horizons, asset location is particularly significant. Your clients may not realize that putting assets in the right type of account or fund can help to substantially minimize and defer taxes. To this aim, counsel clients on the value of placing the least tax-efficient investments in tax-advantaged accounts, and the most tax-efficient ones in taxable accounts.
Clients whose goals include maximizing lifetime spending can benefit from minimizing the impact of taxes on their portfolios by spending in the following order: First, required minimum distributions (RMDs), if applicable, followed by cash flows from assets held in taxable accounts, taxable assets, and finally tax-advantaged assets.
The tax-efficient spending strategy above should act as a starting point to determine the order of distributions. There are some situations when your clients might benefit from a blended-distribution strategy. This typically occurs when someone is nearing a threshold determined by that year’s income. In such cases, your clients might opt to change the order of distributions to minimize their tax costs (or maximize the benefit).
Reducing taxes for tax efficiency
It's important to mention the importance of helping your clients plan and budget for health care costs. One valuable but sometimes overlooked tool is a health savings account (HSA) for your clients in high-deductible health plans. While many employers offer these accounts, not all employees use them to their maximum tax-saving benefit. Because HSA contributions, investment earnings, and withdrawals for qualified medical expenses are tax-exempt, they can be an especially powerful wealth-building tool to complement retirement accounts.
Retirement savings accounts
Retirement savings accounts can provide an effective way to reduce taxes. While most people have likely heard of these types of tax-deferring strategies, be sure your clients understand those available to them, and the specific benefits they entail. From the 401(k), 403(b),and 457(b) employer-sponsored plans to individual retirement account (IRA) options, make sure they are taking advantage of the type of retirement savings account that is most suited to helping them achieve their specific long-term goals.
Municipal bonds
Not all municipal (muni) bonds offer the same benefits. Be sure your clients are aware that the income from these government bonds is generally exempt from federal income tax but tax implications vary from state to state and by bond type.
529 Plans
The 529 educational savings plan is a tool that helps defer taxes and defray ever-rising educational expenses. 529 plans have dual advantages. They can grow tax-free and distributions for qualified expenses are exempt from federal taxes and typically state taxes too. Some states even offer a tax deduction for 529 plan contributions.
Roth conversions for tax efficiency
One way to potentially reduce your clients' tax burden in retirement is to consider converting their traditional IRA to a Roth IRA. Exploring the potential benefits of a Roth IRA presents a prime opportunity to discuss tax-advantaged investments with your clients.
Roth conversion calculator
Taxes now, greater returns later? Use this calculator to gauge if a Roth conversion could be a tax-saving investment for your clients.
Tax Center
Your source for tax information on all Vanguard investment products.
- Find the information you need about Vanguard fund dividends and distributions.
- View the calendar of published tax documents and estimated dates of newdocuments.
- Access previous years' tax information.
Disclosures and footnotes
- Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.
- All investments, are subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.
- Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
- Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications. We recommend that you carefully review the terms of the consent and consult a tax professional before taking action.
- Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
- When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
- Withdrawals from a Roth IRA are generally tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.)