Effective tax-saving strategies for investors | Vanguard (2024)

FAQs

Effective tax-saving strategies for investors | Vanguard? ›

As a result, both ETFs have a very low expense ratio of 0.03% and a minimum investment of $1.00. Since VTI and VOO are both ETFs, they have the same trading and liquidity, tax efficiency, and tax-loss harvesting rules.

As a result, both ETFs have a very low expense ratio of 0.03% and a minimum investment of $1.00. Since VTI and VOO are both ETFs, they have the same trading and liquidity, tax efficiency, and tax-loss harvesting rules.

Thanks to the tax treatment of in-kind redemptions, ETFs typically record no gains at all. That means the tax hit from winning stock bets is postponed until the investor sells the ETF, a perk holders of mutual funds, hedge funds and individual brokerage accounts don't typically enjoy.

Tax-Loss Harvesting is a strategy that takes advantage of movements in the markets to capture investment losses, which can reduce your tax bill, leaving more money to invest. In fact, Tax-Loss Harvesting typically generates savings worth at least 6x our advisory fee¹.

A good way to maximize tax efficiency is to put your investments in the right account. In general, investments that lose less of their returns to taxes are better suited for taxable accounts. Conversely, investments that tend to lose more of their returns to taxes are good candidates for tax-advantaged accounts.

If you only want to own the biggest and safest companies, choose VOO. If you want broader exposure and more diversification, choose VTI. Or, you could also invest in both, for example, by putting half in VOO and half in VTI.

The only difference is that VTI's expense ratio is slightly lower at 0.03% compared with 0.04% for VTSAX. This is in alignment with other Vanguard comparisons, such as VOO versus VFIAX. The lower expense ratio gives VTI a slight edge in performance, especially for periods of less than 10 years.

Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

Hold Funds in a Retirement Account

This means you can sell shares of your mutual fund or collect a capital gains distribution without paying the relevant taxes so long as you keep the money in that retirement account. You will ultimately owe any related taxes once you withdraw the money, of course.

Because index funds buy and sell stocks so infrequently, they rarely trigger capital gains taxes for investors. When it comes to tax efficiency, ETFs have the edge. Unlike index funds, ETFs rarely buy or sell stock for cash.

What is the downside of tax-loss harvesting? ›

All investing is subject to risk, including the possible loss of the money you invest. Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts.

If you have a financial advisor, they may already be doing your tax-loss harvesting. If you're doing it yourself, it's always a good idea to consult a tax professional. (Learn more about how Fidelity can help with tax-smart investing: Make tax-smart investing part of your tax planning.)

The main con of Wealthfront is that its required $500 minimum deposit is higher than other free robo-advisors like SoFi Invest and Betterment Investing.

In higher-earning years, reduce your taxable income

Especially, if you're right on the cusp of two tax brackets. For example, you might: Max out tax-advantaged savings. Contributing the maximum amount to your tax-deferred retirement plan or health savings account (HSA) can help reduce your taxable income for the year.

Average Return

Over the past 10 years, VOO has had annualized average returns of 12.83% , compared to 12.11% for VTI.

VTI - Dividend Comparison. VOO's dividend yield for the trailing twelve months is around 1.30%, less than VTI's 1.34% yield.

To tax-loss harvest, I sell all $80,000 of VOO and lock in a $20,000 tax loss to offset future gains. I then immediately reinvest the $80,000 into another ETF that is not legally “substantially identical” to VOO. In this case, I chose the Vanguard Total Stock Market Index (VTI).

Funds that employ a buy-and-hold strategy and invest in growth stocks and long-term bonds are generally more tax-efficient because they generate income that is taxable at the lower capital gains rate.