10 Ways to Tax Proof Your Portfolio
We just started the new year, and it’s already time to start thinking about taxes. W2 forms will start arriving within the next few weeks…followed by 1099s, K1s, and 1098 mortgage interest forms. For the next four months, all things related to federal income taxes will hang around your neck like an albatross.
At this point, there’s not a lot you can do to lower your tax bill or boost your refund, other than perhaps topping up your IRA or HSA account. What’s done is done for tax year 2014. But it’s still early enough in 2015 to get your affairs in order so that this time next year you’ll have a smaller tax bill to look forward to.
Let’s take a look at some common-sense moves to make to tax proof your portfolio.
1. Dump high-turnover mutual funds. Mutual funds that constantly buy and sell stocks create taxable gains that get pass on to you, the investor.
Don’t worry, this is not a tirade against actively-managed funds. While low-cost index funds have outperformed most active managers in recent years, there is still room in your portfolio for an active manager that adds value. Even better if that active manager’s fund tends to zig when the market zags. But my advice here would be to avoid “closet indexers,” or mutual funds whose performance very closely tracks that of the S&P 500 but with higher turnover. Or at the very least, hold those kinds of funds in a tax-deferred account like a 401k plan or IRA.
