August 01, 2024
When it comes to investing, what matters most isn’t what you make but what you keep.
Key takeaways:
- Investors seeking to maximize returns often overlook an important issue: taxes.
- Taxes can add up over time, impeding the ability to reach long-term goals.
- Tax-loss harvesting can help turn investment losses into tax savings.
- To keep more of what you earn, consider BNY Wealth’s active tax-managed strategies, which help minimize taxes and maximize after-tax wealth.
Taxes Erode Wealth Over Time
Investors often measure success by the return they earn on an investment. However, this overlooks an important issue: taxes. While the impact of taxes may seem minor at first, the compound effect of paying taxes each year can delay you from reaching your goals. This is why managing taxes is essential for creating long-term wealth.
For example, consider an investment in the S&P 500 that generated an average annual return of 12% over the last decade. Taxes reduce that return to 11.5%.
This seemingly small difference in short-term performance can significantly compound over time, reducing returns and weighing down portfolio growth. The good news is investors can mitigate the impact of taxes with tax-loss harvesting.
What is Tax-Loss Harvesting?
Simply put, tax-loss harvesting is a strategy that uses losses from one investment to offset realized capital gains elsewhere in your portfolio, thus lowering taxes.
Here is how it works:
- Identify a security or fund that has declined in value since it was purchased.
- Sell it and use those proceeds to buy another security or fund with similar characteristics to maintain consistent market exposure.
- Use the losses captured with that sale to offset realized capital gains in any area of your portfolio. If the total capital losses exceed the capital gains in a given year, you can carry those losses forward and use them at any time in the future.
By following these steps, you can lower your tax bill on a consistent basis and drive long-term portfolio growth while staying on track to meet objectives.
As a concept, tax-loss harvesting may seem somewhat intuitive. However, there are important nuances to managing the process effectively, proactively and within IRS rules, which require the expertise of an active manager.
Enhance After-Tax Returns with a Proven Process
Many investors who utilize tax-loss harvesting wait until the end of a calendar year to put the process into action. However, that may not be the best approach. When tax-loss harvesting is systematically implemented throughout the year, it is more effective. This is because you can reduce tax drag in a variety of market environments by harvesting losses on a continuous basis.
BNY Wealth’s tax-managed investing approach incorporates an industry-leading, proprietary process that monitors portfolios daily for opportunities to actively harvest losses and enhance after-tax returns. It can be tailored to a variety of equity indices, as well as actively managed fixed income strategies, and customized for your investment goals, preferences and tax situation.
Let us help
Although you can’t control the market, you can control how much you pay in taxes. We have decades of experience in helping clients enhance after-tax returns while keeping their portfolios on track. Let us help you keep more of what you make with a customized, tax-managed investing strategy.
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