Investing With Taxes in Mind

It is not only what an investment earns that matters, but what you keep after taxes. Being mindful of taxes will not change the markets, but it can influence how much of your return stays with you over time. These are general concepts, not tax advice for your situation.

Why the type of account matters

Different accounts are treated differently for tax purposes. Taxable accounts, tax-deferred accounts such as traditional retirement accounts, and tax-free accounts such as Roth accounts each have their own rules for contributions, growth, and withdrawals.

Because of those differences, where an investment is held can affect its after-tax result. The practice of placing investments in the account types where they may be treated most favorably is sometimes called asset location.

Holding periods and timing

How long an investment is held can affect how any gains are taxed when it is sold. Short-term and long-term gains are generally treated differently. This does not mean timing decisions should be driven by taxes alone, but taxes are one factor worth being aware of.

Realizing gains and losses in the same year can also interact. Some investors review their portfolios for opportunities to offset gains with losses, a practice often called tax-loss harvesting, though it comes with rules and is not suitable in every situation.

Keeping taxes in their place

Tax considerations are a factor, not the goal. A decision that lowers a tax bill but works against your broader objectives may not be a good trade. The aim is to improve after-tax outcomes without letting the tax tail wag the investment dog.

Tax laws are complex and change over time. What applies in one year, or to one person, may not apply in another.

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