How to increase your portfolio’s tax efficiency

Investing experts Tony Giordano of Vanguard Personal Advisor Services and Joel Dickson of Vanguard Investment Strategy Group discuss some things investors can do to increase the tax efficiency of their portfolio given the current political environment. 

Other highlights from this webcast:

Notes:
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. 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.

Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

It is possible that funds will not meet their objective of being tax-efficient.

© 2016 The Vanguard Group, Inc. All rights reserved.



Transcript
Emily Farrell: Now, one of our audience asked about what’s coming up in year-end or like next tax season, things that we should be looking ahead to. Now, I think this or similar questions are going to be on peoples’ minds. We just came out of the presidential election. We have a new administration ahead of us. Tony, is there anything that people should be thinking about, obviously, keeping in mind that nothing is guaranteed?

Tony Giordano: Yes. So I think there’s really two things that I would think of right now. One is, and my clients really appreciated this, was that they made permanent a piece of the tax code called the qualified charitable distribution. It’s been in and out of the tax code over the last several years. And when it’s been in, it’s typically been in in December and clients had to scramble to take advantage of it. But that’s one thing that’s become permanent. It became permanent towards the end of last year. And if you’re sitting today, November 17, and you’re over 70-1/2 and you need to take your required minimum distribution this year, this qualified charitable distribution would allow you to take out up to $100,000, send that money directly to your favorite charity or charities, and not count that 100,000 as income. So people who are looking for a great strategy going into year-end on how to reduce their tax liability, that one comes to mind. That’s front and center. And then the second thing that I would think of there’s been a lot of proposals. We’ve seen the Trump tax plan and what it could look like. And, obviously, everybody knows that the top rate is currently 39.6 today and that’s potentially, potentially coming down to 33%. We don’t know. Nothing’s been enacted at this particular time. So the only other thing that I would say there is a lot of clients’ strategies, some strategies I should say, clients are looking to accelerate income in the current year in 2016. So that may give that client some reservation to think, “Well, we may have lower tax, may have lower tax rates in the future. Maybe I’ll think about that decision and think about taking that into 2017 where I may pay a lower tax bite.”

Joel Dickson: Yes, when you get these periods where there might be a change, and as Tony said, there’s nothing that’s ever guaranteed.

Emily Farrell: Absolutely.

Joel Dickson: And trying to guess on tax policy can be fraught with peril. But if you think that there’s a good chance that taxes—and this is across the board in many ways—taxes won’t go up and may go down, which I think is not an unreasonable thought post-election, then the types of strategies that Tony was talking about can be very beneficial Maybe what you want to do is defer income and accelerate deductions. So you can get the deductions at higher tax rates, more beneficial; defer income at lower tax rates if that income is realized in a lower tax regime going forward.

Emily Farrell: Absolutely.

Joel Dickson: So lot of different things that are being talked about there.

Emily Farrell: Yes, I think it’s something similar that we told our investors. You know, in leading up to any potential volatility directly after, you kind of tune out the noise, ignore the headlines, and think about what you can control. And in this case, I think that that’s a reasonable kind of assessment of the current situation. And then you’ve got to look at your portfolio, right?

Tony Giordano: Right.

Important information All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. 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. It is possible that funds will not meet their objective of being tax-efficient. © 2016 The Vanguard Group, Inc. All rights reserved.