Taxes: The Hidden Drag on Investment Returns
Taxes are one of the biggest—and often most overlooked—costs in investing. In fact, they can have a greater impact on long-term returns than inflation, transaction costs, or management fees. Recent studies show that taxes can reduce investment returns by 1% to 3% per year on average.1
That’s where Tax Alpha comes in. Tax Alpha refers to the value added through effective tax management. As awareness grows, more investors are looking to their advisors to help them capture this edge.
At the heart of Tax Alpha is a simple principle: use the tax code to your advantage. The Internal Revenue Code offers numerous statutory tax shelters—some familiar, some more advanced. When used strategically, they can significantly improve after-tax outcomes.
Here are 10 strategies worth considering:
- Roth IRA Conversions Convert traditional IRA assets to Roth IRAs in lower-income years to “fill up” lower tax brackets.
- Harvest Capital Losses Offset gains with losses and reduce exposure to regular tax and the net investment income tax.
- Adopt Low-Turnover Strategies Avoid unnecessary taxable events by minimizing trading activity.
- Use Tax-Exempt Bonds Municipal bonds can provide federally tax-free income—and sometimes state tax-free as well.
- Focus on Qualified Dividends Low-volatility, dividend-yielding stocks may offer better tax treatment than interest income.
- Give from IRAs Using QCDs If you’re over 70½, use Qualified Charitable Distributions (QCDs) to satisfy your RMD while supporting a cause.
- Locate Assets Tax-Efficiently Place interest-generating bonds in pre-tax accounts and growth stocks in taxable accounts.
- Manage Social Security Taxation Strategic withdrawal timing can reduce the taxable portion of your Social Security benefits.
- Be Strategic with Legacy Planning Leave tax-heavy assets like IRAs to charities and more favorable ones to heirs.
- Donate Appreciated Assets Giving appreciated stocks instead of cash can unlock more significant income tax savings.
Albert Einstein once joked, “The hardest thing in the world to understand is income taxes.” While that might be up for debate, what’s not in question is the power of smart tax planning.
These tax strategies won’t apply to everyone, but they are worth discussing with your advisor. The goal isn’t just to grow your wealth—it’s to keep more of it.
Converting from a traditional IRA to a Roth IRA is a taxable event.
1 Russell Investments
8 Blunders to Avoid in Retirement
Retirement should be a time to enjoy the rewards of your hard work—not a period filled with financial stress or uncertainty. That’s why we’re sharing 8 Blunders to Avoid in Retirement, a complimentary resource that outlines the most common pitfalls retirees face and how to sidestep them. Whether it’s underestimating healthcare costs, overlooking tax implications, or misjudging how long your savings need to last, this guide offers practical tips to help you plan confidently.
Download it today to help ensure your retirement years are as fulfilling—and financially secure—as possible.
Magnolia State Chapter of Charitable Gift Planners
Scot Thigpen and David Martin have been instrumental in the formation of The Magnolia State Chapter of Charitable Gift Planners, the newest chapter of the National Association of Charitable Gift Planners. This organization brings together professionals from across Mississippi who are dedicated to advancing charitable giving through education, collaboration, and ethical stewardship. The Thigpen Group is proud to support and participate in this meaningful work, partnering with charitable gift planners to help clients align their financial goals with their philanthropic values. Together, we’re helping to strengthen communities and create lasting impact across our state.
