Reto Gallati - Tax Efficient Investing

TAX EFFICIENT INVESTING

by Reto R. Gallati

Copyright 2013 Reto R. Gallati

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews.

ISBN-10: 1482534045

ISBN-13: 978-1482534047

eBook ISBN: 978-1-63003-704-8

Library of Congress Control Number: 2013903448

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COPYRIGHT

The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them. The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation warranties of fitness for a particular purpose, no warranty may be created or extended by sales or promotional materials. This book is designed to provide accurate and authoritative information about finance and investing. The advice and strategies contained herein may not be suitable for every situation. The author and publisher will not be responsible for any liability, loss, or risk incurred as a result of the use and application of any of the information contained in this book. This work is sold with the understanding that the publisher and/or author is not engaged in rendering legal, accounting, tax or other professional services. Neither the publisher nor the author shall be liable for damage arising herefrom. If professional assistance is required, the services of a qualified professional person should be sought. The fact that an organization or website is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or website may provide or recommendations it may make. Further, because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid.

Cover illustration by Catherine Satrun. Copyright Reto R. Gallati 2013.

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ACKNOWLEDGEMENT

Through the process of writing this book, I was fortunate to receive tremendous feedback from numerous friends and colleagues. I would like to take the opportunity to thank a few individuals in particular who encouraged me to publish my manuscript and make my thoughts available as a hard copy and eBook.

My wife Celeste has endured again many evenings and weekends when I worked on this book. Without her love and unconditional support, I would not have finished this new book.

A special note of thanks goes to Michael D. Brown, CPA, CFA, Chief Investment Officer at The Planning Group, who not only provides invaluable financial planning advice, but encouraged me along the way not to capitulate from the never-ending changes in the tax code. Heather Carmody, JD, CPA, my own tax lawyer and partner at Barnes & Thornburg for her detailed assistance in creating this book.

Finally, my editor Michael Whatling from McGill University, for his patience and diligence with bringing this manuscript to its highest quality.

INTRODUCTION

We tend to make investment decisions based purely on future expected return, the expected value, and tend to think about the tax consequences after the fact. We should think about taxes throughout the year as part of the investment process, not just in the days and weeks before we file the tax return.

In this book, we will examine the basic framework of individual taxation in the United States as it relates to investing, and review some simple steps you can take to be a more tax-efficient investor. Unlike death, taxation can at least be minimized.

Every investment decision has a tax consequence. This book is not about how to cheat Im not giving you any advice in that direction. The information provided is not intended to be tax advice and should not be treated as such. This book is about taxes as part of the investment process, and how you can build a tax efficient portfolio embracing tax considerations in your investment decisions.

Is it possible to keep more of what you earn on investments? This book will give you the insight youre looking for to answer that question.

This book focuses on taxes; specifically, the impact investment-related taxation can have on long-term portfolio returns, and the strategies and solutions you can use to help minimize these effects. We discuss the difference between tax advantaged and tax efficiency, and show how taxes can affect returns over the long term. We introduce the concept of asset location, and illustrate it by applying tax-deferred, tax advantage, and tax-efficient strategies to optimize our investment return.

These pages explore tax-efficient investing strategies designed specifically to minimize the negative impact taxes can have, particularly on long-term savings and investment returns. Many investors employ tax-advantaged strategies, but these are not the same as building a tax-efficient portfolio. In a tax-efficient portfolio, assets are diversified among taxable, tax-deferred, and tax-free accounts to reduce tax exposure. The tax-efficient investor takes intentional steps when realizing gains and losses, and allocates assets among investments that have differing tax treatments. Tax efficiency is especially crucial in a retirement savings portfolio where you may gain a material advantage by strategically drawing down certain assets before others. Although this publication is not a comprehensive guide to the U.S. tax code, it does offer a number of strategies and specific investment ideas that may help you enhance your long-term investment returns by carefully managing your tax liability.