Consider tax efficiency from "summary" of The Bogleheads' Guide to Investing by Taylor Larimore,Mel Lindauer,Michael LeBoeuf
When building your investment portfolio, it's important to pay attention to tax efficiency. This means being mindful of the tax implications of your investment decisions and seeking to minimize the taxes you owe. By considering tax efficiency, you can potentially increase your after-tax returns and keep more of your hard-earned money in your pocket. One way to achieve tax efficiency is by holding tax-inefficient investments, such as actively managed mutual funds, in tax-advantaged accounts like IRAs or 401(k)s. Since these accounts offer tax-deferred or tax-free growth, you can avoid paying taxes on the dividends and capital gains generated by these investments. This can help your investments grow more quickly over time compared to holding them in a taxable account. On the other hand, tax-efficient investments like index funds or exchange-traded funds (ETFs) may be better suited for taxable accounts. These investments typically have lower turnover and generate fewer capital gains distributions, resulting in lower tax liabilities for you. By strategically placing your investments in the right type of accounts based on their tax efficiency, you can optimize your tax situation and maximize your after-tax returns. Furthermore, tax-efficient investing also involves being mindful of how and when you realize capital gains. By holding onto your investments for the long term, you may qualify for lower long-term capital gains tax rates, which can help reduce the amount of taxes you owe. Additionally, you can use tax-loss harvesting strategies to offset capital gains with capital losses, reducing your tax bill even further.- Considering tax efficiency is a crucial aspect of successful investing. By being aware of the tax implications of your investment decisions and taking steps to minimize your taxes, you can potentially increase your overall investment returns and achieve your financial goals more efficiently.
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