Bob Seawright: Tax Efficiency Should Be Your Default Setting

My friend and fellow advisor Bob Seawright, the knowledgeable proprietor of Above the Market, has a post up about what your “investing default settings” should be.

These 10 rules are more valuable than any stock idea or trade of the day, so please make time for them. Bob likes to write these amazing, epic posts – if I were him these 10 rules would have been 10 separate posts and then a master one reprinting them all together, lol…

Here’s what he says about tax-efficient investing:

Tax efficient is better. Experienced money managers routinely argue that you shouldn’t “let the tax tail wag the investment dog.”  And it’s true that a poor investment isn’t often salvaged by good tax treatment.  However, the difference between having a $1,000 gain taxed at the long-term capital gains rate of 20 percent versus the income tax rate of 35 percent would save the investor $150 before considering state taxes and without even using the top income tax rate or noting that other new provisions could hit investment income as well.

Individuals with adjusted gross income over $200,000 ($250,000 for joint-filing couples) will face a 3.8 percent Medicare surtax on investment income. Singles who earn over $400,000 (joint filers over $450,000) will face a new top marginal tax bracket of 39.6 percent. Those same people will see their tax rates on dividends and long-term capital gains go up to 20 percent from 15 percent. And limits on itemized deductions and personal exemptions will start to kick in on incomes over $250,000. Details on recent tax law changes are available at the fine blog of Michael Kitces (here).  Taxes matter a great deal.

Moreover, tax efficiency has not generally hindered performance.  According to Lipper, for example, over the 10 years ended December 31, 2012, tax-managed large cap core stock funds returned an annual average of 5.82 percent after taxes while the entire category (which includes hundreds more funds) returned 5.71 percent after taxes.  Tax efficiency is the appropriate default setting.

Hit the jump for the whole thing:

Establishing Your Top 10 Investment Default Settings (Above the Market)

Follow Bob on Twitter: @RPSeawright