Based upon a study conducted by Lipper, Inc., owners of stock funds in taxable accounts give up an average of 1.98 to 2.50 percentage points in total returns to taxes annually.
There are some steps that you can take in order to mitigate the impact of taxes on your investments:
- Invest in index funds, particularly in taxable accounts. They usually have a buy and hold strategy, resulting in low turnover of fund holdings (lower capital gain distributions).
- Consider investing in tax-managed funds. These funds take an index-oriented approach and employ additional techniques, such as loss harvesting, and selecting higher cost-basis holdings when selling.
- Hold your less tax efficient funds, such as actively managed funds and taxable bond funds in tax-deferred accounts.
