Displaying items by tag: tax efficiency

Model portfolios have been a surprisingly quick growing tool for the financial industry in the last year, and Morgan sStanley’s Wealth Management is capitalizing by adding a series of new model portfolios. These strategies will have hefty minimums of $750k to $1.5 million and are targeting tax and direct indexing strategies from the recently acquired Parametric. This was a key reason Morgan Stanley acquired Parametric last year to rapidly develop and deploy direct indexing strategies. Overall the portfolios have acquired $150 million in assets since their inception in January.

Finsum: Financial companies took a page out of tech companies playbook by just acquiring the companies that might align with them and allow the to quickly scale when it came to direct indexing.

The longer equity portfolios experience growth over time the fewer the opportunities there are to realize the losses and take advantage. Actually quant fund AQR called these appreciated portfolio’s a ‘liability’ for tax purposes. One interesting thing they find is that tax preferred passive equity and direct indexing can develop unrealized gains rapidly. It takes only 3 years for direct indexing to have unrealized gains hit 50% of the portfolio value and 5 years for a tax preferred passive strategy. AQR offers an alternative approach, ‘enhanced indexing’ which is a tax-loss strategy they developed that can help investors. If a direct-indexing strategy already has large unrealized gains it is hard to catch up, but the enhanced indexing strategy can still generate losses for tax purposes. Enhanced indexing is the preferred option when a portfolio is already heavily appreciated.

Finsum: Direct indexing and enhanced indexing are both novel strategies in maintaining an ETF like strategy while taking advantage of tax-loss harvesting.

In the age of ETFs, many advisors may have a harder time justifying their fees to their clients however a new study shows that the fees alone can be justified by an advisor's ability to manage the tax burden of their clients. The primary method by which an advisor can add alpha to the portfolio is by appropriating funds for their most tax-efficient purposes, such as putting taxable bonds in a tax-deferred account and allocating growth stocks to a tax-free account like a Roth. Advisors also can edge out by advising about how to optimally tax-loss harvest when it comes to their portfolio’s crypto holdings. The main way to capitalize is through taking advantage of crypto’s status as property in the wash rule.

Finsum: Everyone is dying to hold crypto right now, but most haven’t made it big; tax-loss harvesting with the Wash rule exception is an edge as long congress doesn’t adjust the rules.

Fixed-income investors are in the doldrums when it comes to today’s ultra low yield environment. Guaranteed income from CDs is just not high enough, and while bonds may be secure their value is at a valley. Laddering annuities is maybe the best strategy, but the questions are on duration. In a flat yield curve going for a short duration makes sense, and as the yield curve steepens moving to long-term contracts is more attractive. In today’s interest rate market, the goldilocks spot is around 5-years, it is a much higher return than shorter-term annuities and longer-term contracts tie your money up without much more of a return boost. The best part is you can integrate this annuity laddering strategy into IRAs and take advantage of all the tax solutions they bring to the table.

Finsum: It's critical to ladder the right duration depending on the current rate environment and given how much interest rate risk there is today it's more important than ever to be precise.

Capital gains taxes vary based on a lot of factors. Those dwelling in California for example may pay up to capital gains like regular income for their state taxes, which can be brutal. However, variation in income and holding duration play a large part in the total expected payments for cap gains. Finally, medicare surtaxes for those couples with over a quarter of a million in income will face additional capital gains taxes. Investors should take early precautions at the beginning of 2022 to consider how to mitigate their tax bill for the upcoming year with tax-loss harvesting. Realizing certain losses in the middle of turmoil can minimize your final tax burden.

Finsum: There are great advantages in tax-loss harvesting that you can take advantage of in crypto still, and now might be a perfect time.