Debt Free

Taxes are one thing every investor, and just about everyone else, would much rather avoid. There are a plethora of vehicles that will allow you to legally avoid or defer taxes you would otherwise have to pay. Many investors employ a mix of them to create their tax avoidance strategy. Some less astute investors don’t have much of a tax avoidance strategy at all, while others are perhaps a bit too aggressive when it comes to minimizing their tax burden. 

First of all, simply avoiding taxes shouldn’t be the driving force behind your investment decisions. Return maximization and portfolio risk level should first be balanced to get you the returns you need to meet your retirement goals without turning your hair prematurely gray. After you’ve done this, you can turn to the task of minimizing your tax burden so you can keep, and reinvest, more of your investment returns.

On tool that could benefit many investors tax avoidance plan is the tax managed fund. This class of funds is used outside of your 401(k), which has its own set of tax advantages. What is a tax managed fund, and how does it compare to other funds? A tax managed fund, as the name suggests, is actively managed by the find manager in order to reduce the portfolio’s taxable capital gains that would otherwise be distributed to fund shareholders. Does it work? You bet, but the efficacy of the particular fund at reducing taxes depends to a great extent on the manager him/herself. Their decisions will determine weather you in fact pay taxable capital gains or not.

Bond laden funds or equity funds that pay hefty dividends may still cause income distributions, but these are most likely  a good deal smaller than what an investor would otherwise be dealing with from more traditional mutual funds. Something to be aware of however is that due to the more hands on approach taken by managers of tax managed funds, they tend to have relatively high expense ratios compared to say an index fund. This is definitely something to be considered when shopping for your next retirement vehicle. When you’re shopping however, tax managed funds are just an additional can on the shelf of the retirement fund aisle, and having a larger selection is never a bad thing.