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Tax-Efficient Investing: Strategies for Maximizing Returns and Reducing Capital Gains

Explore the nuances of tax-efficient investing with insights from David E. Hultstrom, MBA, CFP. This presentation covers key concepts like portfolio turnover, asset location, and the impact of investment products on net returns. Learn how different turnover rates affect long-term gains, the importance of strategic asset allocation, and when to consider products like permanent life insurance or variable annuities. Discover strategies to optimize your investments and minimize tax implications over a 20-year horizon, ensuring a more secure financial future.

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Tax-Efficient Investing: Strategies for Maximizing Returns and Reducing Capital Gains

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Presentation Transcript

  1. Tax Efficient Investing – Potential Alpha? David E. Hultstrom, MBA, CFP

  2. Outline • Portfolio Turnover • Asset Location • Products

  3. Portfolio Turnover • Good vs. Bad Turnover • Example: • 10% return, 20 year horizon, 15% capital gain bracket, ALL gains long term • 100% turnover = 8.50% net return • 50% turnover = 8.60% net return • 10% turnover = 8.95% net return • Step-up on death

  4. Asset Location • Example: • 60/40 allocation, 50/50 deferred/taxable • Stocks – 10% return, 10% turnover • Bonds – 4% return • Taxes – 15% CG vs. 35% OI • 20 year horizon, annual rebalancing • Bad allocation = 6.44% net return • Naïve allocation = 6.89% net return • Optimal allocation = 7.36% net return

  5. Products – Permanent Life Insurance • Permanent Life Insurance ONLY: • After maximizing tax advantaged options AND • If long-term (>20-year) need OR • If GUARANTEED to NEVER need the $ AND • If good pricing

  6. Products – Variable Annuities • Almost NEVER – Example: • 65 bps marginal cost (Vanguard) • 10% return, 100% turnover! (but LT) • Taxes – 15% CG vs. 25% OI • Breakeven – 36 years • @ 10% turnover – >100 years • @ 35% OI – 63 years • Annuities INCREASE standard deviation • Death is TERRIBLE

  7. Products – Miscellaneous • Deductible IRA v. Roth IRA • Index funds & ETFs • Core & Satellite approaches • Fee & Commission efficiency

  8. Contact Information David Hultstrom, MBA, CFP Financial Architects, LLC 804-795-5500 DEH@FinancialArchitectsLLC.com www.FinancialArchitectsLLC.com

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