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Financial Planning > Tax Planning

Are Your Investments Tax-Efficient?

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“It’s not what you earn, it’s what you keep.”

David Peterson’s time-tested quip makes the case, succinctly, for tax-efficient investing, something on which he’s an expert. Despite all that’s happening, he says, many of the issues with tax-efficient investing have remained surprisingly constant in recent years.

“That’s why I still think ETFs are one of the top tax-efficient investing vehicles,” Peterson, managing director with United Capital Financial Advisers, says when asked about tax themes to watch for in the wake of fiscal cliffs, sequesters and everything else happening in 2013. “So many advisors point to separately managed accounts, but I’ve never really seen them perform well from a tax-efficiency standpoint.”

Tax Planning 2013He’s not alone in his ETF admiration, as the combined assets of U.S. listed exchange-traded funds ended 2012 at $1.337 trillion, according to the Investment Company Institute (ICI). The increase in assets invested in ETFs showed a 27.6% gain compared with levels in December 2011. Granted, tax efficiency is only one of many reasons for the trends, but it’s telling nonetheless.

ETFs allow you to “play games,” he says, but not like one would think. By way of example he notes that, from a rebalancing standpoint, if the S&P 500 isn’t performing well, the investor can sell 50% for a loss, thereby reaping the tax harvest. It can then be reinvested it in the Russell 1000 Large Cap Value or Russell 1000 Large Cap Growth indexes.

“Investors tend to put tax ramifications of an investment above the importance of portfolio construction, which is a mistake,” Peterson adds. “They can actually combine the two by reinvesting in the same asset class and actually avoiding wash-sale rules. Experience the loss for tax purposes and rebalance for investing purposes.”

Surprisingly (but accurately), he points to the fact that for the majority of investors, the capital gains tax rate did not go up, calling the controversy surrounding an increase “a lot of pomp, but not a lot of circumstance.”

But for those that did see an increase, namely high-net-worth investors, “municipal bonds are surprisingly attractive, but investors should be careful about the specific municipality in which they choose to invest. I’m not really a fan of individual municipal bonds, because of a lack of liquidity. But ETFs that focus on the space offer lots of liquidity and low costs.”

Peterson founded Peak Capital Investment Services with partner John Mumford in 1997. Formerly affiliated with LPL Financial, the firm was purchased by United Capital in 2011.

“It’s been great,” he says of the acquisition, before conceding, “If you had asked me a year ago I wouldn’t have said that, because we were in the midst of transitioning. But United Capital did everything they said they would do. We would call and yell and then feel stupid afterward because they would simply say ‘sure, we can do that,’ and they would.”


Check out more of AdvisorOne’s 20 Days of Tax Planning Advice for 2013.

For even more tax planning advice, read 22 Days of Tax Planning Advice for 2012.


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