Introduction
Investing can be quite complex especially when it comes to the tax issues that are associated with it. But there is no cause to worry! It is possible to increase the returns and at the same time keep the taxes to a minimum if the right approaches and tools are used. One great option available is the tax efficient investing feature offered by Betterment which is definitely an advantage to investors like you. In this article, we are going to outline five ways through which you can enhance your returns using the following approach which is demonstrated by Betterment, together with examples to illustrate the concepts.
What is Means by Tax Efficient Investing?
First, it is important to define what tax efficient investing is. This is the process of reducing the amount of taxes that one pays on the investment returns. It employs such strategies as; implementing tax loss harvesting, selective investment in assets and choosing of appropriate mutual funds with an aim of minimizing taxes that are paid.
Betterment is a great platform that has focused its services on tax efficient investing. As a robo-advisor, it employs mathematical models to come up with investment strategies that are most likely to be effective from a tax perspective. Therefore, with the help of technology, Betterment can assist you to achieve your financial goals with less tax consequences.
Five Tips for Enhancing Your Returns with the Help of Betterment’s Tax Efficient Investing Strategy.
1. Learn to Trade with Tax Losses
Tax-loss harvesting is a preferred technique that involves the sale of losses investments to offset gains and decrease taxable income. The technology of Betterment searches for such opportunities and executes the required trades on your behalf. For example, if you have invested $10,000 in a stock and it depreciates to $8,000, then selling that stock realizes a loss of $2,000. This loss can be used to shelter $2,000 of capital gains and therefore decrease your taxable income by the same amount. It monitors your portfolio for such events and therefore seeks to realize the most gains for you.
2. Optimize Asset Location
Asset location refers to the process of situating your investments between your taxable and tax-exempt accounts so as to minimize your taxes. Betterment looks at your investment portfolio as a whole including your taxable and non-taxed accounts to suggest the best asset location strategy. For example, high yielding bonds are known to produce higher yields which are all taxable income and therefore should be put in tax exempt accounts such as IRAs or 401(k). The company’s savvy algorithms will study the situation to suggest the proper course of action for you and help you keep as much of the money you earn as possible.
3. Select Tax Efficient Fund Manager
Not all funds are created equally regarding taxes. Some funds produce more taxable interest and dividends that can really take a bite out of your investments. The tax efficient investing feature of Betterment helps you select funds that have low tax impacts. For example, Betterment may recommend that you put your money into low cost index funds that are characterized by low turnover, which is a key cause of taxable events. This is because it helps to reduce your tax liabilities and therefore keep more of your money.
4. Try a Tax Optimized Portfolio
Betterment has this interesting feature called the tax coordinated portfolio that determines the best placement of your assets across different accounts including taxable, tax exempt and even joint accounts. It does this by identifying the different tax treatments of the various accounts and then making the necessary investments. For instance, if you have a taxable account and an IRA, the tax coordinated portfolio can place the tax efficient investments in the taxable account and the tax inefficient investments in the IRA. This approach not only minimizes the taxes paid but also increases the portfolio’s returns.
5. Stay Informed and Rebalance Regularly
It is very important to understand the impact of changes in tax laws and regulations on your investments. In order to assist you in this endeavor, Betterment provides updates and informational materials to enable you to make informed financial decisions. However, it is very important to understand that rebalancing your portfolio is very important in order to maintain tax efficiency. This process involves the process of readjusting the asset mix in order to return to the initial level of risk and return that you wanted. Rebalancing ensures that your investment strategy is appropriate for your objectives and that any tax efficient methods are being used.
