REPLACE. By replacing taxable bonds with municipal bonds and replacing high dividend-paying stocks with low- or non-dividend paying stocks, the investor’s tax bill is once again reduced. Three techniques may be beneficial.
• First, use municipal bonds instead of taxable bonds.
• Second, when interest rates are at an appropriate level, obtain a greater portion of the risk mitigation properties of a portfolio from municipal bonds instead of other taxable asset categories.
• Third, substitute low- and non-dividend paying stocks for high-yielding equities.
Through the consistent and fully integrated use of these seven active tax management techniques, it is quite reasonable to expect the type of benefit identified above in the hypothetical example - improving the after-tax return by a third for those in the highest possible marginal tax brackets. The taxman is coming; it is best to be prepared.
(All data for this article was provided by Ned Davis Research Inc., Atlanta, Ga., and is current as of 11/28/2012.)
Rob Brown, Ph.D., CFA, is the chief financial strategist for Eqis Capital Management Inc. You can reach him at [email protected].