The impact of taxes on investments may be significant
A comprehensive tax-smart investment plan can help reduce your tax burden
Funding and withdrawals
Harvest tax losses
Manage capital gains
Invest in municipal bonds
We search for ways to integrate your existing eligible holdings* into your managed account, as opposed to selling all of your existing investments in order to "start from scratch." This can help reduce the potential tax consequences of creating your personalized investment strategy.
For clients with eligible investments, we take a personalized approach, carefully considering which investments to keep and which to sell in an effort to reach the desired investment mix and reduce potential capital gains taxes.
In addition, when it's time to take money from your account, we'll work to reduce the impact of those withdrawals. We can do that by anticipating any planned withdrawal needs and maintaining an adequate cash position in your account in order to meet those needs. When we do sell securities to raise cash in your account, we’ll make an effort to be mindful of the tax impact of those sales.
Unlike some investment firms, which wait until year end to search for tax-loss harvesting opportunities, we're looking at your account throughout the year.1 This enhances our ability to offset any realized gains you may have in your account.
Periods of market volatility, while often difficult for investors, can also create opportunities. Very often the periods of greatest market volatility can lead to the highest number of tax-loss harvesting opportunities, which can help increase after-tax returns when markets recover. As the graphic shows, in 2019, Fidelity helped generate over $160 million* in harvested tax losses across clients' Portfolio Advisory Services accounts.
Tax-loss harvesting may offer significant benefits during volatile markets
*This chart, and the $160 million value, represent the cumulative total tax lot harvested losses or potential tax savings for all tax-smart managed accounts in the Fidelity Wealth Services offering that are in good order and have account values of $20,000 and above with at least 10 holdings. Each tax lot loss within the population of accounts was evaluated. The specific tax rate applicable to the respective client account was applied to calculate the dollar loss of each tax lot, applying the client's ordinary income tax rate to short-term losses and applying the client's capital gains tax rate to long-term losses. All capital losses harvested in a single tax year may not result in a tax benefit for that tax year. Any remaining unused capital losses may be carried forward and applied to offset income in future tax years indefinitely. Results will vary. In our analysis over the past three years, cumulative tax savings from tax-loss harvesting differed from year to year and was as small as half the amount shown in the chart. Source: Fidelity Tax Account System as of 12/31/2019.
We work to manage your exposure to income distributed by the mutual funds in which you're invested, due to either capital gains or because the securities held by those funds pay dividends or interest.
Mutual fund distributions present an opportunity to potentially reduce your tax obligations
We seek to manage exposure to mutual fund distributions that can have costly tax implications
Depending on your tax bracket and financial situation, the investment team may look to municipal bond funds when it comes to the fixed income portion of your strategy, drawing on the extensive analysis of our in-house research team. Municipal bond funds may help you keep more of what your investments earn because they typically generate income free from federal taxes and, in some cases, state taxes. Note that municipal bond yields are often lower than similarly rated taxable bonds. However, when you adjust for federal tax rates, their after-tax yields may actually be higher.
A closer look at after-tax yields shows that income from municipal bonds may be more attractive
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal funds. Although municipal funds seek to provide interest dividends exempt from federal income taxes and some of these funds may seek to generate income that is also exempt from the federal alternative minimum tax, outcomes cannot be guaranteed, and the funds may generate some income subject to these taxes. Income from these funds is usually subject to state and local income taxes.
Tax-smart (i.e., tax-sensitive) investing techniques (including tax-loss harvesting) are applied in managing certain taxable accounts on a limited basis, at the discretion of the portfolio manager primarily with respect to determining when assets in a client's account should be bought or sold. As the discretionary portfolio manager, Strategic Advisers LLC ("Strategic Advisers") may elect to sell assets in an account at any time. A client may have a gain or loss when assets are sold. There are no guarantees as to the effectiveness of the tax-smart investing techniques applied in serving to reduce or minimize a client's overall tax liabilities, or as to the tax results that may be generated by a given transaction. Strategic Advisers does not currently invest in tax-deferred products, such as variable insurance products, or in tax-managed funds, but may do so in the future if it deems such to be appropriate for a client. Strategic Advisers does not actively manage for alternative minimum taxes; state or local taxes; foreign taxes on non-U.S. investments; federal tax rules applicable to entities; or estate, gift, or generation-skipping transfer taxes. Strategic Advisers relies on information provided by clients in an effort to provide tax-sensitive investment management, and does not offer tax advice. Except where Fidelity Personal Trust Company (FPTC) is serving as trustee, clients are responsible for all tax liabilities arising from transactions in their accounts, for the adequacy and accuracy of any positions taken on tax returns, for the actual filing of tax returns, and for the remittance of tax payments to taxing authorities.
This hypothetical example assumes an initial $1 million investment in a Growth with Income Strategy (60% stocks/40% bonds and short-term investments) from 1/1/2002 through 12/31/2019 with no contributions or withdrawals. When tax-sensitive investment techniques were applied, the result was an increase in account value of $402,808 for a portfolio that started in 2002, $224,993 for a portfolio that started in 2007, $30,154 for a portfolio that started in 2012, and $33,690 for a portfolio that started in 2017.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
Fidelity® Wealth Services provides non-discretionary financial planning and discretionary investment management through one or more Portfolio Advisory Services accounts for a fee. Advisory services offered by Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser, and Fidelity Personal Trust Company, FSB (FPTC), a federal savings bank. Nondeposit investment products and trust services offered through FPTC and its affiliates are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, are not obligations of any bank, and are subject to risk, including possible loss of principal. Discretionary portfolio management services provided by Strategic Advisers LLC (Strategic Advisers), a registered investment adviser. Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE and SIPC. FPWA, Strategic Advisers, FPTC, FBS, and NFS are Fidelity Investments companies.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917