Vanguard investment strategy and tax reform

As a result of the recent tax reform legislation, investors have an opportunity to reevaluate their retirement savings strategy, including considering taxable bonds and Roth contributions. Vanguard advises investors on how to best navigate their investment strategy in the wake of tax reform. 

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Talli Sperry: You know, Bryan, I’d love for you to comment. In light of the new tax reform overhaul, what advice would you offer clients as it relates to their investment strategy? And, interestingly enough, Samuel from Denver, Colorado, also asked this question. Thanks, Samuel.

Bryan Lewis: When you look at some of the recent tax reform, I mentioned this, typically, Vanguard’s viewed as a buy-and-hold investor, and then rebalance over time. But there is, when you look at some of the recent changes, I think it does take a little bit of an effort to be more proactive and reevaluate your investment strategies.

A couple examples of things to look at with the lower tax rates investors find themselves in. Let’s say you were in, previously, a higher tax bracket and you were using tax-exempt bonds within the portfolio. Is it more advantageous to start looking at taxable bonds as an opportunity, being mindful of the tax implications to sell those tax-exempt bonds, to shift into taxable bonds? I think it presents an opportunity to reevaluate your strategy within the bonds if you have any in a taxable account.

If you look at these lower tax rates we have, it’s presenting an opportunity to reevaluate your retirement savings strategy. If you look at investors who are in a low tax bracket now and have been traditionally contributing to a traditional 401(k) or a traditional IRA, and getting that deduction, well, you’re already in a low enough tax bracket. Would it be more advantageous to start thinking about Roth IRA contributions or Roth 401(k), if you’re eligible to do that?

I think it does highlight potential opportunities around the savings strategy as well as, potentially, Roth conversion. If you think of the tax reform that went into effect with the tax brackets, they’re scheduled to sunset at the end of tax year 2025, meaning they’re going to revert in tax year 2026 to what they were previously.

If you’re an investor who anticipates your tax bracket increasing over time, for example, a younger investor who has several years ahead as far as earning potential, maybe consider looking at the Roth piece to the portfolio, just to help balance that out. But it’s not something investors have to make changes to. If you have a solid plan, there’s nothing wrong with staying the course.

Important information

All investing is subject to risk, including possible loss of principal.

Diversification does not ensure a profit or protect against a loss.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

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