Introducing tax-smart investing
We understand that you may have questions about the new tax-smart investing techniques1 that we'll use in managing your account, the assumptions we're making about your tax profile, and what these enhancements mean for your account going forward.
Why are we doing this?
As the table below shows, taxes have historically had a significant impact on returns for both stock and bond investors. While we can't fully eliminate the impact of taxes on your returns, these new techniques in your managed account are designed to help you keep more of what your investments earn.
Taxes Significantly Reduce Returns* (1926-2018)
The impact of taxes is even more significant when viewed over a multi-year cumulative period.
*Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Stocks are represented by the Ibbotson® Large Company Stock Index. Bonds are represented by the 20-year U.S. government bond. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for transaction costs. Returns data provided by Morningstar, Inc., 2/25/2019. Federal income tax is calculated using the historical marginal and capital gains tax rates for a single taxpayer earning $120,000 in 2015 dollars every year. This annual income is adjusted using the Consumer Price Index in order to obtain the corresponding income level for each year. Income is taxed at the appropriate federal income tax rate as it occurs. When realized, capital gains are calculated assuming the appropriate capital gains rates. The holding period for capital gains tax calculation is assumed to be five years for stocks, while government bonds are held until replaced in the index. No state income taxes are included. Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate. Although bonds generally present less short-term risk and volatility than stocks, bonds do entail interest rate risk (as interest rates rise, bond prices usually fall, and vice versa), issuer credit risk, and the risk of default, or the risk that an issuer will be unable to make income or principal payments. The effect of interest rate changes is usually more pronounced for longer-term securities. Additionally, bonds and short-term investments entail greater inflation risk, or the risk that the return of an investment will not keep up with increases in the prices of goods and services, than stocks.
© 2019 Morningstar, Inc. All rights reserved. 2/25/2019.
What enhancements are being made to my account?
Your account will soon become eligible for tax-smart investing techniques. These techniques, which are designed to help mitigate the impact of taxes on your account and seek to enhance your after-tax returns, will be applied based on your personal situation.
Are these enhancements new to Fidelity?
Actually, we've been offering tax-smart investing techniques for more than 20 years. We currently manage more than 90,000 accounts with more than $65 billion in assets in strategies that use tax-smart investing techniques. As part of our continuing effort to find more ways to help people reach their investment goals, we're now offering this capability to a wider range of clients—all at no additional cost.
Will my advisory fee schedule increase?
No, your advisory fee schedule will not change.
With this enhancement, what should I expect to change with my account?
We'll continue to manage your account based on your long term goals. However, going forward, we'll take your specific tax situation into consideration when making investment decisions in your account. You will also now see a display showing the impact of any tax-loss harvesting we do on your behalf on your Fidelity.com summary page, and new after-tax returns highlighted in your quarterly investment report. At the beginning of each new year, we'll send you a summary of all the tax-smart techniques that your Investment Team used in client accounts over the previous year so you have insight into their process.
Dividend reinvestment—All distributions in taxable accounts will be paid in cash. For retirement accounts, mutual fund distributions will be reinvested and all other distributions will be paid in cash. Dividend reinvestment activity can be found in your account's monthly statements.
Tax-smart withdrawals—See "What kinds of tax-smart techniques could be used in managing my account?" for details. Generally, partial and full withdrawals may take up to 10 business days to process.
Trade confirmations—Once your account converts to the new tax-smart account, your trade confirmations will look similar to that of other Fidelity clients.
Lot-disposal methods—We will sell the tax lots with the highest cost basis (HICO or "High Cost") first to help reduce taxable gains. When you have an investment that consists of multiple tax lots that were made on different dates and at different prices, and we're only selling part of the position, we will use the HICO lot-disposal method to sell your shares. This will be the standard method used for all clients in Fidelity managed accounts.
Wash sales2—Because we'll be managing for taxes, we need to collect 30 days of managed account tax history in order to potentially avoid selling/buying securities within a wash sale period and/or within accounts. As a result, short-term trading oversight and wash sale monitoring will be delayed for the first 30 days while we work to collect your account tax history. See the "Frequent Purchases and Redemptions" section in any Fidelity fund prospectus for more details on wash sales.
When these enhancements take effect, what aspects of my account will remain unchanged?
While the addition of tax-smart investment techniques represents a change to your account, most things will remain the same. Most importantly, this includes the dedicated service and unwavering focus on your financial needs that you've come to expect from Fidelity.
- Your account number and account features, including money movement
- Your managed account relationship
- Your advisory fee schedule
- The risk profile of your account mix and investment preferences
- Our primary focus is managing to your long-term goals
When will you begin using these tax-smart techniques in managing my account?
We expect that these changes could begin to be applied to your account over the next few months or quarters. Given that each client comes to us with unique financial goals and preferences, we'll take a customized approach when it comes to implementing these changes on your behalf.
What kinds of tax-smart techniques could be used in managing my account?
Here's a list of the techniques we'll be considering at different times throughout the year. Remember, because we're taking a personalized approach to your account, the use of tax-smart investing techniques, and the frequency with which they're applied, will vary by client. We take your specific tax situation and long-term goals into consideration with the investment decisions we make. However, we believe that an appropriate asset allocation is of primary importance. Therefore, in order to manage risk in your portfolio appropriately, we may make trades in your account that could trigger tax consequences in the near-term. But as has always been the case for accounts that are managed in a tax-sensitive manner, our goal is to deliver strong risk-adjusted after-tax returns over the long term.
Tax-loss harvesting—We'll review your account regularly for opportunities to realize, or "harvest" tax losses in an effort to help mitigate your tax burden by offsetting other investment gains that you may have.
Manage capital gains—When selling investments in your account, we'll generally look to sell those that you've held for a longer time period first, in an effort to take advantage of lower long-term capital gains tax rates.
Investing in municipal securities—When we believe it is appropriate, we may purchase municipal bond funds that generate interest that may be exempt from federal taxes, and depending on your state of residence, state taxes as well.
Manage distributions—We'll work to manage your exposure to capital gains and income distributed by the mutual funds in which you're invested.
Tax-smart withdrawals—We'll work to keep enough cash in your account to fund your planned withdrawals. If we sell securities to fund a withdrawal, we'll seek to reduce the tax impact.
Transition management—When you bring additional eligible securities3 into your account, we'll seek to integrate those holdings into your account, if appropriate—rather than selling them, which could help you keep more of what your investments earn.
Will my investment strategy and investment preferences change?
No, your current investment strategy and investment preferences will not change with the introduction of these tax-smart techniques.
Will there be increased trading activity in my account?
Due to this more personalized approach, over time there might be a slight increase in the number of trades we make on your behalf as we work to improve your after-tax performance. However, it's important to remember that any increased trading will not result in any additional fees or commissions.4 We will continue to seek to maintain an appropriate asset allocation for your long-term goals, and you will continue to receive notifications when we’ve made adjustments to your account, including any changes made in connection with our efforts to enhance your after-tax returns.
What assumptions about my situation are you making when applying these tax-smart investing techniques to my account?
We start with information you've provided to us in your Investor Profile Questionnaire, such as your Federal tax rate5 and your state of taxation.6 Based on this information we're able to make the following assumptions:
- Your state of taxation is the same state where you receive legal mail.
- An estimated value for your long-term capital gains rate7 will be used based on your federal income tax rate. (See chart.)
- If your federal income tax rate is 24% or higher, we have assumed that you're subject to the Medicare surtax.8
Please note: While it's not required, it will be beneficial if you would provide information regarding any loss carryforwards or gains/losses in accounts outside of your Fidelity® Wealth Services account, and whether or not you are subject to the Alternative Minimum Tax (AMT).
Mapping federal marginal tax rate to long-term capital gains tax rate
Federal Tax Rate LT Capital Gains Tax Rate 0% 0% 10% 0% 12% 0% 22% 15% 24% 15% 32% 15% 35% 20% 37% 20%
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