INVESTING FOR AFTER-TAX RETURNS

Tax Center for Advisors

For taxable investors who incur gains, optimizing for after-tax returns across the portfolio can make a big impact. Explore solutions, tools and insights to help you build portfolios with taxes in mind.

When building portfolios, many investors focus on risk and fees, but that’s only part of the picture. What about taxes?  They can drag down investment returns and remember, 'It’s not what you make. It’s what you keep'.

Investors are increasingly focused on structuring their accounts for what really matters, after-tax returns – returns they can actually spend.

This is where BlackRock’s Fill First strategy can help you keep more of what you earn. Here’s how it works - think about filling buckets with pitchers of water. The buckets are your accounts – your tax-deferred IRA and your traditional taxable account.  And the pitchers are your assets – bonds, equity ETFs and equity mutual funds.

So, how do you best fill the buckets?

Let’s start with bonds.

Now, on to stocks.

To diversify, investors can choose from ETFs or active mutual funds or both, depending on your needs – but where you put each matters.

ETFs tend to distribute capital gains far less frequently than active mutual funds, making them more tax efficient. Anchor your taxable accounts with ETFs to help minimize capital gains taxes.

Active mutual funds seek to outperform the market but trade a lot to do so. This leads to capital gains distributions for fund shareholders, which means taxes.  Give your active managers their best chance to shine by overweighting them in your IRA.

Don’t bank on pre-tax returns. Get the full picture using the “fill first” framework to help optimize for after-tax returns and consider BlackRock for tax-smart investing strategies.

See our framework to build tax-efficient portfolios

When investing for after-tax returns, it's important to take a holistic view across IRAs and taxable accounts. Use BlackRock's "Fill First" framework to help you get started on building tax-efficient asset location.

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Taxes can drag down investment returns and, in many cases, be just as important as risk and fee considerations. Help clients reach their investment goals by building a more tax-efficient portfolio.
Don't bank on pre-tax returns

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Investors want to build wealth over time, but if you aren’t careful, taxes can eat away at that wealth.

One way to reduce your tax burden may be to use a tax-loss harvesting strategy.

With this strategy, you look to sell investments at a loss and use the proceeds to buy investments with similar exposures.

Let’s take a look at a hypothetical example to see how it works.

Generally, if you sell a taxable investment for more than you paid for it, you have a realized gain.

Similarly, when you sell an investment for less than you paid for it, you have a realized loss.

With tax-loss harvesting, you realize losses, and reinvest the proceeds into your portfolio.

When realized losses offset realized gains, this means less taxes paid and more money to invest and potentially grow. 

Any losses that were not used this year can be carried forward into future years.

Some things to consider with tax-loss harvesting:

First, if you harvested losses but don’t have enough gains to fully offset, you can still lower your year-end tax bill with a reduction of up to $3,000 of ordinary income per year.

Second, the Internal Revenue Services, or IRS, has stipulations around netting gains and losses.

Finally, the IRS 30-day wash-sale rule generally prevents you from recognizing a tax loss if you repurchase the same or a substantially identical security during the 30-day wash sale window.

And as always, tax-loss harvesting may not be for everyone.

Help your clients stay invested while potentially saving money on taxes.

Use BlackRock's Tax Evaluator to help identify tax loss harvesting opportunities.

Tax-loss harvesting: more opportunity than ever

When markets are down, find a silver lining by tax-loss harvesting to help reduce your clients’ tax bill. With this strategy, you look to sell investments at a loss and use the proceeds to buy investments with similar exposures.

The latest insights on taxes