Hey, what’s the saying about death and taxes being the only certainties in life? Maybe, but there ought to be another addition to the list. We’re talking tax efficient investing and yes, it doesn’t have quite the same ring to it as Benjamin Franklin’s oft-quoted observation. But, let’s face it, the world has changed mightily over the last 225 years although the need to hand every penny over to Uncle Sam still has rather the same sort of resonance today as it did then.
Seek and Ye Shall Find a Definition
What are we talking about when we say tax efficient investing? An interesting and helpful discussion paper published by Ameriprise Financial, for example, explores the difference between a tax advantaged investment – the concentration on only one particular aspect of reducing taxes, as in buying a dividend-paying stock and holding it for a sufficient length of time to meet the definition of qualified dividend income – and tax efficient investing which takes a much broader view.
Ameriprise Financial says, “Tax efficient means planning nearly every savings and investment decision around how, when and where to invest, to potentially achieve the lowest possible impact from income taxes now, and in the future, realizing that tax laws and a taxpayer’s situation may change. Timing of certain decisions becomes critical; types of investments are taken into consideration; and even account type – taxable vs. non-taxable – is critical to decision making.”
A Crystal Ball Would Help But…
There are no crystal-ball certainties when it comes to figuring out the likely tax-take over the coming years. The Pennsylvania-based Vanguard Group, an American investment management company which manages around $2.0 trillion in assets, believes investors should seek to build their portfolios around the more controllable aspects of investing – asset allocation, costs, and tax efficiency – and not the ones over which they have less control, such as which investments are likely to outperform in the future.
Vanguard says, “Over the long term, tax-wary investors have learned one sure thing: The tax code is never static. Nearly every year, new tax legislation is considered or enacted by the US Congress. The wealth you realize today and tomorrow is dependent on both current and future income tax and capital gains tax rates. Yet, who can foresee what those rates will be 20 or even 10 years from now?”
A Down-In-The-Mouth Perspective
Yep, even dentists are into tax efficient investments. Adrian Reynolds and Greg Taylor, described as wealth optimization specialists with DentalWealth, a multi-family office catering for successful dentists and high net worth individuals in the dental industry, have produced a handy little report that’s well worth the read. DentalWealth, by the way, has a rather neat aim – to help successful dentists make work optional. Now that’s an aim we can all subscribe to, don’t you think?
Tax-efficient investment solutions are likely to become more crucial in the near future, says the report, but it’s not merely a question of selecting investments that incur the least amount of tax. Otherwise, people would simply hide their savings under their mattresses.
The report examines what it calls the four pillars of tax efficient investing, that is, tax-efficient growth, tax-efficient switching, tax-efficient cash flow and tax-efficient estate planning. But download the report here to see if you agree – or not.