Tax-ManagementWhether you are seeking an equity or fixed income separately managed account (SMA), or both, we have strategies designed to help you keep more of what you earn. |
Your equity SMA will be managed in an effort to harness the long-term growth potential of stocks while seeking to enhance after-tax returns through the ongoing monitoring and application of tax-smart investing strategies.1 In fact, 95% of our clients investing in SMAs in taxable accounts have had their advisory fees covered by the tax savings we provided.2
Beyond tax-loss harvesting—our comprehensive tax-smart approach
When it comes to tax management, not every approach is the same. Our approach is ongoing, active, and consistent. We evaluate your account during every trading day in search of tax-loss harvesting opportunities. We also look for ways to apply a number of other strategies that have potential to create additional tax savings.
Tax-loss harvesting
Even when markets are generally rising, certain asset classes, categories of stocks, or even individual stocks may fall. When an investment loses value, we may sell that investment, "realizing" the loss. This loss can be used to offset gains within the SMA, or elsewhere in a clients portfolio. If there are any losses left over after offsetting these gains, up to $3,000 can be used to offset ordinary income. These harvested losses also do not expire, and can be carried forward to use them to offset gains in a future year. Tax losses can be used up until the final tax filing of the estate.
How does tax-loss harvesting work?3
A hypothetical investor has a long-term capital gain of $5,000 in Investment A, and a long-term capital loss of $4,000 in Investment B. If that investor were to sell Investment A, that would result in a federal capital gains liability of $1,190 (assuming a $23.8% federal tax rate).
However, by selling Investment B and realizing the $4,000 loss during the same tax year the investor sold Investment A, that loss can be used to partially offset the gain in Investment A. By doing this, the net long-term capital gain is reduced from $5,000 to $1,000, which would reduce the tax liability from $1,190 to $238. No one likes losses. But if employed strategically, they can be used to help reduce your tax liability.
This illustration is hypothetical and is not intended to represent the performance of any security held or sold in a Fidelity SMA. Investing in this manner involves risk, including the risk of loss, and will not ensure a profit.
While the benefits of tax-loss harvesting can be significant, the trick is knowing when to harvest losses and how to do it without changing the portfolio's risk profile. This can mean monitoring hundreds of different tax lots on a daily basis. Our investment managers are continuously on the lookout for potential opportunities on behalf of each investor, while being mindful of their unique financial situation.
Transition existing holdings
We look to build your portfolio around the existing eligible holdings you use to fund your account.4 Unlike funding a mutual fund or ETF where you must sell all of your holdings and fund with cash, SMAs can accept certain eligible securities, such as stocks, into your strategy. This can help reduce the potential tax consequences of creating your personalized SMA.
Manage capital gains
When possible, we avoid realizing short-term gains, which are taxed at a higher rate than long-term capital gains, reducing your tax obligations.
Tax-smart withdrawals
When you need to withdraw money, we'll seek to reduce the tax impact by selecting which tax lots and positions to sell.
Line of Credit
If you’re looking to make a major purchase, there are ways to access the cash to do it without having to sell assets. You can borrow against the holdings in your managed portfolio using a securities-backed line of credit for a wide range of needs. This allows you to keep your investment strategy on track, allowing your money to stay invested and working for you. Learn more about how Fidelity makes it easy to leverage the power of your portfolio.
Tax-advantaged municipal bonds can be a way to enhance a portfolio's after-tax returns, as income paid by these bonds is generally exempt from federal taxes, and in some cases, state taxes. The degree to which these bonds can enhance your returns will depend largely on your federal tax bracket.
Predictable federally tax-exempt income
Let's look at two bonds, each with the same maturity and credit quality. The only difference is that one is a US Treasury and the other is a tax-exempt municipal bond.
Chances are the US Treasury is going to have a higher coupon, or interest payment. But does that mean the amount of interest you'll earn is greater? Not necessarily.
Depending on your tax bracket, the after-tax yield of the tax-exempt municipal bond may actually be higher than the yield offered by a taxable US Treasury bond5. The higher your tax bracket, the greater the potential benefit.
Depending on your state of residence, the interest income from some municipal bonds may also be exempt from state income taxes, further enhancing their after-tax income potential.
