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The Tax Efficient Portfolio

What matters most to an investor is the total return of his or her investment portfolio. And among the biggest drains on gross returns are the taxes generated by investment gains. It is a simple statement, easily understood. But managing someone's portfolio in a way that minimizes the impact of taxes on earnings, particularly in light of our incredibly complicated tax code, is far from simple or easy.

Through our close association with HBK CPAs & Consultants, HBKS Wealth Advisors provide an appreciable sensitivity to tax efficiency in asset allocation. Each HBKS advisor, in fact, has immediate access to technical savvy to negotiate the tax code and influence investment decisions. And we are focused - it has always been part of our culture - on managing our clients' portfolios in a tax efficient manner. How is that done? Consider the following three keys to building a tax efficient investment portfolio:

  1. Different income streams are taxed at different rates, so a tax efficient portfolio is built with an understanding of how the various investments and resulting income will be taxed. For example, bank or money market interest is taxed as ordinary income, at rates which can exceed 39.6 percent, the highest 2014 US tax bracket. However, qualified dividends are taxed at maximum rates of 23.8 percent for 2014.
  2. Another key to building a tax efficient portfolio is keeping up with the client's tax bracket. That requires paying attention to all aspects of the client's finances, and making the appropriate adjustments in the portfolio, as he or she moves from one bracket to another. Low or high, there are approaches that can be taken to maximize the opportunities provided by those brackets.
  3. Investment portfolios are built to allocate assets appropriately for the individual - age, investment goals, appetite for risk, etc. From an asset allocation perspective, when it makes sense to own investments that produce income that will be taxed at higher rates, it often makes sense to locate them in tax-deferred accounts where the income can be sheltered.

These are key principles that guide us in our work to build and maintain tax efficient investment portfolios, portfolios designed to produce the greatest overall returns.

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