Ben Franklin Got It Half Right

Managing Taxes through MarketPlus® Investing

By SJS Founder & CEO Scott Savage

You’ve heard Ben Franklin’s famous words, “In this world nothing can be said to be certain except death and taxes.” He uttered them way back in 1789, and for centuries, most of us have accepted his belief as inevitable and true. But maybe, just maybe, Ben was wrong about taxes. When it comes to investing, you can potentially avoid taxes, or at the very least postpone them. Death? Well, Ben was right about that one.

Tax planning and tax mitigation are topics that have always been important to the team at SJS. But the 2013 Affordable Care Act’s surtax of 3.8% on the investment income of higher earners makes being smart about taxes even more critical.  The good news for you is that tax planning is inherent in MarketPlus Investing. It’s what we do, and in case you were wondering how we do it, our focus is on four key strategies:

Strategy 1:  Design a portfolio with low turnover to “realize” minimal gains

This time of year, many mutual fund shareholders discover the level of income and capital gains distributions they can expect. And it’s the time of year when many unsuspecting investors learn the unfortunate truth that activity within their funds has left them with the bitter taste of unexpected taxes. For many non-MarketPlus investors, 2014 may not be a good year.

According to Dan Culloton, writing for Morningstar, “After more than five years of generally rising markets, many actively-managed stock funds have exhausted pent-up losses that they usually use to offset realized gains. That, plus the usual store of manager switches, outflows, and profit-taking, has made it difficult for managers to avoid making distributions.”[1] That’s long hand for, “In 2014, investors are getting a tax bill.”

And some of the distribution numbers are downright alarming. Consider these: Black Rock Small Cap Growth Equity (CSGEX) will distribute between 25% and 27% of the fund’s October 10, 2014, net asset value (NAV) to shareholders. That comes a year after the fund paid out a gain that was about 50% of the fund’s 2013 year-end value. Putnam Voyager (PVOYX) anticipates paying out 11% to 13% of NAV in early December.  To add insult to injury, more than 40% of Putnam Voyager’s distributions will come in the form of short-term gains, taxed at higher ordinary income rates. Likewise, Putnam Multi-Cap Growth (PNOPX) will distribute 11% to 13% of NAV before year-end.[2]

Ouch!  These funds are “losers” for tax-paying shareholders. By contrast, MarketPlus Investing portfolios strive to offer a relatively tax-efficient investment process, with disciplined design and low turnover as hallmarks.  We expect that 2014 will be no different with less than a 1% capital gain distribution forecasted for our portfolios this December.  At SJS, we view taxable distributions as one of the aspects we can control.  How? By choosing to invest with fund companies that pay diligent attention to trading and tax efficiencies. This is an important aspect of our service to you because as an investor, it’s not what you can earn, it’s what you keep that matters.

Strategy 2: Offset realized gains through proactive tax-loss harvesting

Throughout the year and in times of significant market corrections, we review the tax lots of your holdings for possible losses.  We look for opportunities to “harvest” sizeable losses by selling a security or mutual fund that has lost value and simultaneously buying a similar investment. You can benefit from this process because it may offset current/future income and capital gains and reduce your tax bill, all while maintaining the same investment strategy. There are limitations and specific rules that we follow, and we often work with your tax professional to take advantage of the inevitable volatility of the global financial markets.

Strategy 3:  Advise our charitably-inclined clients of their gifting options

If you make charitable gifts on a regular basis or on special occasions, or believe a portion of your legacy might include giving to a charitable organization you care about, we can work with your attorney and accountant to make these gifts both philanthropic and tax-wise. Giving away appreciated securities, making gifts from required IRA distributions, changing beneficiaries, and coordinating your estate plans with your attorney are just a few of the ways we can help make a difference in your tax bill.

Strategy 4:  Consider asset location

One of the tax strategies SJS has implemented for years on your behalf is the strategy of “asset location.” If you have tax-deferred accounts like 401(k) plans, profit sharing plans, or IRA accounts, this strategy can benefit you. MarketPlus Investing portfolios employ various asset classes, and some are more tax-efficient than others. Placing the less tax-efficient investments in tax-deferred accounts may help delay the related tax associated with investment income and gains until you withdraw the funds, assisting you in reducing your current tax burden.

While paying taxes is inevitable, there are ways to structure a portfolio and its activity to work to gain control over how much tax you pay, and when you pay it.  Taxes are a fact of life, but you do have options. Options that may help you keep more of your nest egg for yourself and the people and causes you care about. 


Important Disclosure Information and Sources:

[1]  “4 Funds About to Break Capital Gainless Streaks.” Dan Culloton, 03-Nov-2014, Fund Spy: Morningstar Medalist Edition (morningstar.com).

[2] Sustainable Leaders Fund (PNOPX). Putnam Investments, putnam.com. Ibid.

SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professional for specific advice. This material has been prepared for informational purposes only.


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