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Staying In Shape In A Low (Tax) Gravity Environment

Staying in Shape in a Low (Tax) Gravity Environment

Anytime the International Space Station (ISS) is mentioned in the news, I see the same video played back on the screen – an astronaut strapped down to a treadmill jogging in place to stay in shape.  It turns out astronauts need to exercise a lot, as much as three hours a day.  The reason they do this is that they live in a low gravity environment, where most activities take very little effort.  If they didn’t exercise, they would lose their strength and have a hard time getting around when they come back down to Earth, where they will face the full effect of gravity.

Investors have lived in a low gravity environment of their own in recent years.  Tax rates on investments have been at some of the lowest levels in history until recently, so “tax gravity” was not a big issue.  With the highest tax rates applicable to capital gains, dividends and interest all rising in 2013, investors may find themselves being pulled back down to Earth.

We at RegentAtlantic have spent the low gravity, low tax years like the astronauts on the ISS.  We have kept our tax muscles strong by focusing on a host of strategies that can help make investment portfolios more tax efficient.  We believe that one of the most important of these strategies is known as tax location.

Investments produce their returns in a combination of two major ways.  The first is income, which may be taxable in the year in which it is earned.  The second is capital appreciation, which may only be taxable when a profitable holding is sold.  Investments that produce the majority of their returns through capital gain as opposed to income are more tax efficient because investors have control of when they sell their profitable holdings.  That means they can defer the capital gains and any taxes on them into future years.

The strategy behind smart tax location is to consider how different investments produce their returns and locate them into either taxable accounts or tax sheltered accounts such as IRAs to limit the tax drag on a portfolio.  Investments that produce most of their returns through income are much less tax efficient, and should be held in tax sheltered accounts.  Investments that produce most of their return through capital gain are much more tax efficient, and should be held in taxable accounts.  Investments that have a strong likelihood of larger capital appreciation over the long-term  should also be considered to be held in income or transfer tax-free accounts, such as Roth IRAs or Bypass Trusts, respectively.

When we select an investment at RegentAtlantic, we rank its tax efficiency based on how much of its return will be income versus capital gain.  This is one of the exercises we have done over the years to keep our tax muscles in shape.  Now that we are in a higher gravity, higher tax environment we will continue to emphasize income producing, less tax efficient investments in tax sheltered accounts and more tax efficient investments in taxable accounts.

 

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested.  Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic.  This information is current only as of the date on which it was sent.  The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic.  Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

 

Please remember that RegentAtlantic does not provide tax advice.  Please consult with a tax professional of your choosing prior to implementing any of the strategies discussed in this article.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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