Tax aware investing has become increasingly popular in recent years as investors seek to maximize returns while minimizing taxes. With 2020 tax changes and the pdf examples outlined here, investors can use diversification across accounts and assets to lower tax bills. By spreading assets strategically, losses in taxable accounts can offset gains, while allowing tax-advantaged accounts to compound. Additionally, allocating to municipal bonds, real estate, and other tax-efficient areas allows for more after-tax income. This article will provide key pdf examples for 2020 on how to structure a tax aware portfolio.
Use taxable, tax-deferred, and tax-exempt accounts strategically
A key to tax aware investing is understanding how to allocate assets efficiently across different account types. Taxable accounts should hold tax-efficient assets like broad index funds. Tax-deferred accounts like 401ks can hold higher turnover assets like actively managed funds. Tax-exempt accounts like Roths are ideal for high growth assets like small caps or sectors. The 2020 pdf examples show specific asset types for each account. By locating assets strategically, more gains compound tax-free.
Harvest losses to offset realized capital gains
A simple yet effective tax aware investing strategy is tax loss harvesting. By selling losing positions in taxable accounts, investors can generate losses to offset realized capital gains. The 2020 pdf provides clear examples of selling an underperforming stock at a loss to offset the gain from selling an appreciated stock. The net result is lowering total taxable gains for the year. Just be aware of wash sale rules when harvesting losses.
Allocate to municipal bonds in taxable accounts
Municipal bonds offer tax exempt income, making them ideal holdings in taxable accounts per the 2020 pdf examples. The interest income avoids federal and sometimes state income taxes. This results in a higher after-tax yield than corporate bonds. Investors in higher tax brackets benefit the most from muni bonds. The examples show specific muni bond funds and ETFs to purchase for diversified tax-free income.
Consider tax-advantaged real estate investments
Real estate investments like REITs and rental properties qualify for favorable tax treatment, as outlined in the pdf examples for 2020. A large portion of REIT dividends count as tax-advantaged return of capital. Depreciation deductions on rental properties offset income to defer taxes. Holding these assets in taxable accounts results in higher after-tax income. The examples provide sample REITs and metrics on rental property tax benefits.
In summary, tax aware investing strategies like strategic asset location, tax loss harvesting, municipal bond allocation, and real estate investments can help lower tax bills and maximize after-tax returns. The 2020 pdf examples clearly illustrate how to structure a diversified portfolio to minimize taxes and allow for more tax-free compounding.