The impact of taxes on investments may be significant

A comprehensive tax-sensitive investment plan can help reduce your tax burden

If you are not managing your account with taxes in mind, you may be paying more in taxes than necessary. As the graph below shows, taxes can have a significant impact on investment returns. The goal of our tax-smart approach is to improve your after-tax returns, helping you keep more of what your investments earn.

Improving after-tax returns may have a significant long-term impact1



This is a hypothetical example designed to show the potential impact of tax-smart investment management. Two accounts are shown, represented by lines on the graph, with tax-smart investment techniques applied to one, with the other having no tax-smart techniques applied. The difference between the performance of the two accounts over time is meant to show the impact that tax-smart investment management could have. In this example, employing tax-smart investment techniques generated approximately $400,000 in additional return over a 15-year period.
This is a hypothetical example designed to show the potential impact of tax-smart investment management. Two accounts are shown, represented by lines on the graph, with tax-smart investment techniques applied to one, with the other having no tax-smart techniques applied. The difference between the performance of the two accounts over time is meant to show the impact that tax-smart investment management could have. In this example, employing tax-smart investment techniques generated approximately $400,000 in additional return over a 15-year period.

In an effort to accomplish this, the investment team applies a wide range of techniques at different times throughout the year. Unlike some firms that engage in tax-loss harvesting at year-end, we're continually looking for ways to boost your after-tax returns.

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.


Graphic shows how we may employ a tax-sensitive approach, when we make initial investments on your behalf. Without a tax-sensitive approach, all holdings are sold and then reinvested in your new account, which could lead to tax consequences. When using a tax-sensitive approach, we may be able to integrate some of your existing holdings, which could help reduce the tax consequences of getting into your 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.


Smart withdrawals
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.


*For a list of eligible investments, contact a Fidelity representative. Clients may elect to transfer noneligible securities into their Accounts. Should they do so, Strategic Advisers or its designee will liquidate those securities as soon as reasonably practicable, and clients acknowledge that transferring such securities into their Accounts acts as a direction to Strategic Advisers to sell any such securities. Clients may realize a taxable gain or loss when these shares are sold, which may affect the after‐tax performance/return within their Accounts, and Strategic Advisers does not consider the potential tax consequences of these sales when following a client's deemed direction to sell such securities. Strategic Advisers reserves the right not to accept otherwise eligible securities, at its sole discretion. When a client funds their account with existing investments, transition results will vary depending on the number of concentrated positions, alignment with the new portfolio, and level of embedded gains. Outcomes can range from selling none of your existing positions, to selling all of your existing positions.

As markets fluctuate, sometimes losses from an investment can create the opportunity to reduce the tax impact of investments that have risen in value. 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. This enhances our ability to offset any realized gains you may have in your account.


We can harvest tax losses to help reduce the impact of capital gains*


Graphic shows a hypothetical situation highlighting the benefits of tax-loss harvesting. If an investor has a $5,000 long-term gain from investment A and a $4,000 loss from investment B, if the gain and loss are realized in the same year the loss can be used to partially offset the gain, thereby resulting in a net long-term gain and federal capital gains tax liability of $1,000.


Tax-loss harvesting is a way to reduce the taxes associated with capital gains. Let's assume an investor has a long-term capital gain of $5,000 in Investment A, and a long-term capital loss of $4,000 in Investment B. If that investor sells Investment A, they would have a federal capital gains liability of $1,190 (assuming a $23.8% federal tax rate).

However, by selling Investment B and realizing the $4,000 loss during the same tax year the investor sold Investment A, they can use that loss to partially offset the gain in Investment A. By doing this, they net long-term capital gain from $5,000 to $1,000, which would reduce their tax liability from $1,190 to $238.

*This illustration is hypothetical and is not intended to represent the performance of any security in a Fidelity® Wealth Services account. Investing in this manner involves risk, including the risk of loss, and will not ensure a profit.

This hypothetical illustration assumes the investor met the holding requirement for long-term capital gains tax rates (longer than one year), the gains were taxed at the current maximum federal rate of 23.8%, and the loss was not disallowed for tax purposes due to a wash sale, related party sale, or other reason. It does not take into account state or local taxes, fees, or expenses, or the net gain's potential impact on adjusted gross income, which could impact exemption and deduction phaseouts and eligibility for other tax benefits.

Potential tax savings are based on the following calculation: (Realized Long-Term Losses x Long-Term Tax Rate) + (Realized Short-Term Losses x Short-Term Tax Rate). A 3.8% Medicare surtax may be added to tax rates, if applicable to your situation. If an investor subject to the alternative minimum tax (AMT), the appropriate AMT tax rate may also be added to the calculation.

When selling investments in your account, we'll generally first look to sell those that you've held for a longer time period, allowing us to take advantage of lower long-term capital gains tax rates.


We may defer realization of short-term gains in favor of seeking the lower tax rate associated with longer-term capital gains


Bar chart shows the difference between the taxes owed on long- and short-term gains. In this hypothetical example, two gains of $10,000 are shown. The short-term gain has a tax rate of 40.8%, leaving the investor with an after-tax gain of $5,920. The long-term gain has a tax rates of 23.8%, leaving the investor with an after-tax rate of $7,620.


Take a hypothetical investment with a pre-tax gain of $10,000. In this case, the potential tax savings available as the result of waiting for a year are $1,700, assuming the investor is in the top marginal tax bracket. $10,000 (40.8%–23.8%) = $1,700.

The amount of time until long-term status is reached is important. Consider a $100,000 investment made 365 days ago that is now worth $110,000 (a gain of 10%). If the security were sold today, the tax bill would be $10,000 x 40.8% = $4,080, with an after-tax return of 5.92%. However, assuming the value has held steady, by waiting one additional day, the tax liability drops to $2,380, and the return increases to 7.62%. This hypothetical illustration assumes the gains were taxed at the current maximum federal rate of 23.8%. These calculations also include a 3.8% Medicare surtax.

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 for tax-sensitive investment management

We seek to manage exposure to mutual fund distributions that can have costly tax implications


Graphic shows a hypothetical example of how your investment team seeks to manage your exposure to distributions. Because different funds in a portfolio may pay out distributions during different months of the year, the team can seek to time when certain holdings are bought and sold in order to reduce the amount of distributions received and in turn reduce the taxes on those distributions.

Each account will hold shares of different funds that pay out distributions on different dates. Account owners may also need to pay taxes on some of these distributions, which could add to their tax bill.

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


Bar chart shows a hypothetical example comparing annual income from a $10,000 investment in a taxable account in a 10 Year AAA municipal yielding 2.14% versus a 10 Year AAA taxable Bond yielding 2.79%. Taxable bonds with higher income look great at first glance, but once you adjust for federal tax rates, income from municipal bonds may be more attractive. Chart shows the municipal bond's pre and post‐tax income is $214. This is lower than the taxable bond's pre‐tax income of $279. But after taxes, the taxable bond only provides income of $212, $190, $171, and $165 across the different tax brackets (the 24%, 32%, 38.8%, and 40.8% tax brackets, respectively). Once your federal tax bracket has been factored in, municipal bond yields may be more attractive, with municipal bonds producing greater income than taxable bonds.


FOR ILLUSTRATIVE PURPOSES ONLY. This hypothetical example shows annual income from a $10,000 investment in a taxable account. The municipal bond investment has a 2.14% assumed yield and the taxable bond yield is assumed to be 2.79%; actual investment results may vary. This hypothetical example does not take into account state taxes, alternative minimum taxes, fees, or expenses. If it did, after-tax income might be lower. Tax information based on 2018 tax rates. *Rate includes a Medicare surtax of 3.8% imposed by the Patient Protection and Affordable Care Act of 2010.