The impact of taxes on investments may be significant

A comprehensive tax-smart 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, employing tax-smart investing techniques1 over time may have a significant impact on your long-term returns. The longer you apply these techniques, the greater the potential impact. The goal of our tax-smart approach is to improve your after-tax returns, helping you keep more of what your investments earn.

Tax-smart investing techniques can have a significant impact on your portfolio over time2



Each line represents the hypothetical value from tax‐smart investing techniques at various starting dates, based on a starting portfolio value of $1 million


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.

Transition management
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.


Tax-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. Clients may realize taxable gains or losses if eligible securities are sold.

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



The right axis and green line represent the movements of the U.S. stock market as measured by the Dow Jones U.S. Total Stock Market (Price Index).

*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.

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 to potentially reduce your tax obligations

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 and the impact to that income from the four highest Federal tax rates. The municipal bond investment has a 1.44% assumed yield and the taxable US Treasury yield is assumed to be 1.93% yield (Thomson Reuters and Fidelity Investments, respectively, as of 12/31/2019). This hypothetical example is used for illustrative purposes only; actual investment results may vary. It does not reflect the impact of state taxes, federal and/or state alternative minimum taxes, tax credits, exemptions, fees, or expenses. If it did, after-tax income might be lower. Please consult a tax advisor for further details. All or a portion of the income may be subject to the federal alternative minimum tax. Income attributable to capital gains are usually subject to both state and federal income taxes. Rate includes a Medicare surtax of 3.8% imposed by the Patient Protection and Affordable Care Act of 2010.

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.