2019 Tax-Smart Investing Review: For Fidelity® Wealth Services Tax-Sensitive Accounts

Helping you keep more of what you earn

Chris Fuse, Portfolio Manager, Strategic Advisers LLC

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After you file your taxes, contact us with your updated information so we can better manage your account.

Your investment team at Strategic Advisers was hard at work throughout 2019 to help reduce your tax liability in your Fidelity® Wealth Services tax-sensitive account. While stocks and bonds performed well this year, there were some challenges for investors. Market volatility was relatively muted, but picked up in the third quarter, due to concerns over trade and a slowing global economy. This, along with uncertainty about the direction of interest rates, had an impact on client accounts. To help mitigate these challenges, we sought to enhance after-tax returns by applying a number of tax-smart investment techniques1 throughout the year.


Tax-smart investment techniques: 2019 highlights

Tax-loss harvesting

Opportunistically harvested tax losses in your account

Capital gains management

Reduced exposure to short-term capital gains taxes, when possible

Distribution management

Managed your exposure to this year's mutual fund distributions

Municipal bond investment

Tax-efficient investments, including municipal bonds, helped reduce the impact of taxes

Tax-smart investment management is a time-consuming process that demands research, analysis, and attention to detail throughout the life of your account. Our advanced technology platform allows us take into consideration your specific tax rates and gains or losses outside of the account. It also helps our investment managers to identify when and how to perform specific tax-smart activities during the year, coordinating them as needed, to increase tax efficiency. Our personalized investment approach empowers us to manage your account with a full picture of your assets.

Periods of market volatility created opportunities to harvest tax losses in your account

When an investment in your account declines in value, we may sell it at a loss and replace it with an investment that has similar characteristics. We can then use that loss to help offset realized gains in your account and potentially reduce the amount of capital gains taxes you owe.

In 2019, there were opportunities for tax-loss harvesting due to periods of increased market volatility. Concerns about slower corporate earnings, weaker manufacturing activity, and the ongoing US and China trade talks and higher tariffs weighed on investors. Throughout the year, we found opportunities to harvest tax losses in US, developed, and emerging-market stocks, as well as domestic bonds, including municipal bonds.


Tax-loss harvesting may offer significant benefits during volatile markets3

The chart highlights the potential tax savings accrued from harvesting losses during the year ending December 31, 2019, for clients in our Fidelity Wealth Services tax-sensitive accounts.
*The right axis and blue line represents the movements of the U.S. stock market as measured by the Dow Jones U.S. Total Stock Market (Price Index).

Our efforts to manage capital gains helped clients avoid paying higher taxes on short-term gains

Short-term capital gains are taxed at a higher rate than long-term gains. One of the most powerful tax-smart techniques available is to put off realizing a capital gain so that it’s taxed at the lower, long-term rate. Considering the differences between short and long-term capital gains rates when making portfolio management decisions is a straightforward way to reduce a portfolio’s tax burden.

While our investment managers monitor the holdings in your account, including individual purchase dates, and look to defer capital gains, they also carefully consider the risk and return expectations for each security before trading.

Throughout 2019, we applied our disciplined investment process and extensive research capabilities to rebalance accounts when appropriate. Periods of market volatility may have provided opportunities to sell investments held for less than one year, at a loss. These short-term losses can be used to offset short-term gains in your account.


A gain of $10,000 may be taxed differently depending on how long it was held

Bar chart shows hypothetical example of taxes and after‐tax gains on a $10,000 capital gain when sold as a short vs a long‐term investment. In general, selling an investment that is subject to long‐term capital gains taxes results in a greater after‐tax profit, when compared to selling an investment that is subject to short‐term capital gains taxes.

FOR ILLUSTRATIVE PURPOSES ONLY. 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 300 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%. Tax Information based on 2018 tax rates.

Managing exposure to this year's mutual fund distributions helped avoid some unnecessary taxes

Mutual funds are required to distribute any net capital gains that they have realized for the year. These gains are paid out to shareholders in the form of capital gains distributions. This creates a taxable event for each shareholder in the year they are received. Our team monitors capital gains distributions from mutual funds used in our program and incorporates this information into their investment process. Once we identify a fund that is paying a distribution, we may remove it from our buyable list in an effort to avoid purchasing shares of the fund in your account prior to its payment.

We analyze each fund that is paying a distribution and decide whether or not to sell your shares of the fund to avoid receiving the distribution and the tax liability that comes with it. However, sometimes it may be wiser to continue holding the fund, especially if selling it would trigger an even larger capital gains tax, if the outlook for the fund is positive. When a fund pays out their distribution, we use the excess cash to rebalance your portfolio.

The average total distribution in 2019 was slightly lower than what we saw in 2018 for most asset classes, including US and international stock funds.4 As a result of a 10-year bull market in US stocks, domestic stock funds, led by small-cap and growth stock funds, had larger distributions than their international counterparts. Your investment team sought to manage the exposure to funds associated with those distributions. In many instances, our approach may have helped you avoid unnecessary taxes.


We managed exposure to large year-end distributions, particularly in US and international stock mutual funds
A calendar for November and December shows how different funds in a hypothetical portfolio may pay distributions during the latter part of a calendar year. We generally seek to manage your exposure to some of these distributions in an effort to reduce the taxes on your investments.
FOR ILLUSTRATIVE PURPOSES ONLY. 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.

Tax-efficient investments helped reduce the impact of taxes

In each asset class, we seek to find tax-efficient investments for our clients. Some, like municipal bond funds, are used across most taxable accounts. In 2019, strong demand and falling interest rates helped municipal bond performance. Positive economic growth has bolstered healthy sales and local tax receipts. These healthy tax receipts can support interest payments on existing bonds and new bond issuances by states and cities. When it comes to municipal bonds, it's important to remember that sometimes yields appear lower than similarly rated taxable bonds. When you factor in that interest is exempt from federal, and in some cases, state income taxes, their after-tax yields may actually be higher. That is why we continue to believe that municipal bond funds can play an important role in taxable accounts.


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.

Regardless of the upcoming election, our approach remains unchanged

As we head into the 2020 Presidential election cycle, investors in tax-sensitive Portfolio Advisory Services accounts may be concerned about how the results could impact tax policy, among other issues. While political campaigns bring a lot of promises and rhetoric, we believe it’s too early to make changes in your account due to these campaign proposals. That’s because the campaign proposals of today, which often require congressional approval, are unlikely to look like the policies of 2021 and beyond.

We follow a disciplined investment approach to managing your account. Backed by our rigorous research, we seek to understand how policies, rather than politics, influence the key drivers of investment performance. This includes the pace of economic growth, changes in corporate earnings, and levels of stock valuations.

From this perspective, when the results of the November 2020 elections come in, you should feel confident that we will consider the potential impact that they may have on tax rates and your investments. In the months leading up to and following an election, markets might experience volatility, but stock prices will likely settle based on potential economic growth and future corporate earnings.

While election cycles can bring up a host of emotions, we believe it’s more prudent for investors to maintain focus on their financial plan and time horizon. We will watch for any potential tax changes and apply our tax-smart investing techniques.

Next steps

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See your estimated tax savings

Log in to your account, and on your account summary page, see "Track Your Potential Tax Savings."

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Speak with your advisor

After you've filed your taxes, we encourage you to contact your Fidelity advisor and provide your most up to date, current tax information. This will help us effectively manage the impact of taxes on your account.


We look forward to partnering with you throughout the coming year. Your Fidelity advisor remains dedicated to providing clear recommendations designed to help you grow and protect your wealth.

1. Tax-sensitive investment management techniques (also referred to as “tax-smart” investing techniques or strategies) (including “tax-loss harvesting”) are applied in managing taxable accounts on a limited basis, at the discretion of Strategic Advisers primarily with respect to determining when assets in a client’s account should be bought or sold. As a discretionary portfolio manager, 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. 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; 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. There are no guarantees as to the effectiveness of the investment management 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. Except where 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.
2. Clients in the 22% income tax bracket and above are defaulted into municipal bond funds.
3. This chart represents the cumulative total tax lot losses harvested or potential tax savings in all accounts in good order in Fidelity Wealth Services tax-sensitive accounts for calendar year 2019 with account values of $50,000 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.
4. Based on our proprietary research of publicly available information. Source: Strategic Advisers LLC, as of 12/31/2019. We monitor the funds held in each account in an effort to stay on top of the amount and timing of when mutual fund distributions will be paid out, for both Strategic Adviser Funds and other mutual funds.

Past performance is no guarantee of future results.

Generally, among asset classes, stocks are more volatile than bonds or short-term instruments and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Although the bond market is also volatile, lower-quality debt securities including leveraged loans generally offer higher yields compared to investment grade securities, but also involve greater risk of default or price changes. Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets.
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. Generally, municipal securities are not appropriate for tax-advantaged accounts such as IRAs and 401(k)s.
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.
Indexes are unmanaged. It is not possible to invest directly in an index.
The Dow Jones U.S. Total Stock Market Index is a float-adjusted market capitalization–weighted index of all equity securities of U.S.-headquartered companies with readily available price data.
This material may not be reproduced or redistributed without the express written permission of Strategic Advisers LLC.
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.

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