Advisor Today - March/April 2016 - (Page 32)
An annual review may unveil certain tax inefficiencies.
By Brandon Buckingham, JD, LLM
With tax season upon us, savvy
investors will once again be reviewing
the tax efficiency of their retirement
portfolios. For many, the tax pain caused
by the changes under the American
Taxpayer Relief Act (ATRA) is still fresh
in the mind. ATRA not only increased the
top income tax rates, but also reduced the
value of certain tax expenditures, such as
itemized deductions, personal exemptions
and tax credits for some taxpayers.
But for many, the biggest tax increase
was on their investment income. ATRA
increased the tax rates for long-term
32 ADVISOR TODAY | March/April 2016
capital gains and qualified dividends
from 15 percent to 20 percent for those
in the top tax bracket. In addition,
many are now subject to the 3.8 percent
Medicare surtax introduced as part of the
Affordable Care Act in 2013. An annual
portfolio review may unveil certain tax
inefficiencies and help investors mitigate
the tax pain felt last April.
The impact of taxes
Many people don't think about how taxes
could affect their long-term investment
and retirement goals. The taxes an
investor pays annually on capital
gains, dividends and interest could
significantly erode a portfolio's return
in the future. Morningstar measures the
tax cost ratio of most mutual funds, and
while some funds will have a low tax
cost ratio, other funds can have ratios
as high as 3 percent or more each year.
This means that a mutual fund with
a 2 percent tax ratio will surrender 2
percent of its returns to taxes each year.
The tax drag will be greater for those
funds that are actively managed and
have a high turnover ratio.
Table of Contents for the Digital Edition of Advisor Today - March/April 2016
From the Editor
A Question of Ethics The Details Often Make the Difference
What's Ahead for Financial Advising?
Whos's Saving the Most and Why?
Making the Case for Critical Illness Insurance
Are You a Retirement Expert?
Selling the "Best Plan"
Taking Incremental Steps Toward Success
Investment Strategies for Today’s Consumers
How Tax Efficient is Your Investment and Retirement Portfolio?
Ideas for a Profitable Practice
Crossing the Two Client Relationship Bridges
Working with Muslim-American Clients
Attracting and Serving Today's High-Net-Worth Clients
Becoming a Networking Success
Advisor Today - March/April 2016