Taxing Times
With the April 15 “Tax Day” just behind us, it’s a timely reminder that taxes are often an outcome of investment success. Trying to avoid taxes entirely is probably a misguided investment mindset. Rather, investors may want to focus on the amount of their investment return they get to consume (or bequeath). Improving after-tax outcomes can result both from maximizing pre-tax returns and tax efficiency.
Tax efficiency starts with the investment strategy. A low turnover strategy managed with flexibility that considers the nature of dividend income can, by design, help reduce tax costs. Strategies that achieve these lower tax costs while keeping a focus on higher overall returns can lead to better after-tax take home returns. While investors often assume exchange-traded funds (ETFs) are inherently tax efficient, the ETF “wrapper” isn’t necessarily a guarantee of low (or no) taxes, especially if the underlying strategy is tax inefficient.
An investment’s relative tax efficiency also depends, in part, on the amount of control and flexibility it gives an investor about when they pay taxes. Generally, an investor must eventually pay taxes on realized gains when they choose to consume those gains. But how a fund is managed can give investors greater control over the timing of when they pay these taxes. If an ETF or a mutual fund can minimize or eliminate capital gains distributions, investors can wait to pay capital gains taxes until they sell their fund shares. While this doesn’t eliminate an investor’s future tax obligation, it gives more control over when they want to pay taxes, and in the meantime allows their full investment amount to compound.
Tax Day
Learn More
Glossary
Capital gains distributions: Money that may be distributed to shareholders when a fund sells a security for a profit.
Turnover: A measure of the portion of securities in a portfolio that are bought or sold over a period of time, generally on an annualized basis.
Disclosures
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
UNITED STATES
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.