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Tax Efficient Investing – Potential Alpha?

Tax Efficient Investing – Potential Alpha?. David E. Hultstrom, MBA, CFP. Outline. Portfolio Turnover Asset Location Products. 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

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Tax Efficient Investing – Potential Alpha?

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  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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