Comparing Separate Accounts with Mutual Funds:
Control Over Taxes
Control over taxes is the number one reason investors are leaving mutual funds and moving to separate accounts.
Reducing your taxes may be the strongest reason you have for
establishing a separate account.
It’s no secret that mutual funds can be a tax nightmare. Investors with taxable mutual fund assets have been hammered for a number of years now.
Not only did the average fund experience performance losses in recent years, but investors got hit with taxes on capital gains—especially if they purchased a fund late in the year. In other words, a November buyer has to pay taxes on the same capital gains as investors who purchased in January.
A separate accounts manager, on the other hand, can do “tax harvesting,” offsetting gains with losses to deliver a higher after-tax return than mutual funds.
Since mutual funds usually record short-term capital gains, fund investors in the 39.6% federal tax bracket have to yield a gross of 16.56% to net 10%.
SAM investors have to gross only 12.5% to net the same 10%.
Excerpt from Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts—The Smart Alternative
Chapter 6—Taxes: Tax Pain or Less Tax Gain?
Remember, skilled trading—not excessive trading—keeps costs low. Excessive trading generates high trading costs and capital gains. This, in turn, saps after-tax returns in mutual funds. By establishing a separate account, excessive trading that causes bounce-back tax bills will no longer be a concern. You own the stocks in your portfolio, and you’re in sync with your financial advisor and money manager, who can sell under-performing stocks on a systematic basis to offset capital gains.
Less Turnover = Fewer Costs + Lower Taxes
Fewer Costs + Lower Taxes = Higher Returns
Mutual Funds:
- Most mutual funds are not tax efficient.
- Limited tax-efficient mutual funds are marketed heavily
by some fund companies.
- Mutual funds have embedded capital gains by their nature.
Separate Accounts:
- Separate accounts allow the investor the opportunity for maximum control over his tax situation.
- Minimizing taxes means higher returns.
- You own the stocks in your portfolio.
|
