Tax-sensitive Methods of Investing in Mutual Funds

It’s been said that taxes are one of the certainties in life. While this may be true, remember that every dollar you pay in taxes is one less you can put toward your long-term financial goals. When you invest in mutual funds, taxes shouldn’t be the only focus, but they are an important consideration.

Tax Considerations
While no one can predict what will happen in the future, many economists believe tax rates may increase over time. Regardless of whether they rise, you can take steps now to incorporate strategies designed to help reduce the impact of taxes on your mutual fund returns.

One strategy to consider is investing in tax-free municipal bond funds. Don’t be discouraged by the apparently lower yields offered by municipal bond funds when compared to bond funds paying taxable interest dividends. A bond fund that invests in municipal bonds may actually generate more net interest income than a taxable bond fund with a higher stated yield. That’s because with municipal bonds, the income is generally exempt from federal taxes and possibly state and local taxes. Please note that capital gains distributions from bond funds may be taxable.

If you, like many investors, are paying closer attention to your costs now, consider choosing mutual funds with low turnover. The turnover rate helps gauge how quickly the holdings in a fund are traded. (You can find the turnover rate in your fund’s prospectus.) A higher turnover rate can lead to higher trading costs – and potential capital gains distributions. Even if you don’t sell any shares of a fund, you may be responsible for taxes incurred by the fund’s trading activity. If you own a fund that has net capital gains for the year, it must distribute them to you, and you must report the gains on your tax return. As a result, the lower a fund’s trading activity, the lower the potential for short- and long-term capital gains.

You may also want to look for funds with embedded capital losses, which represent a combination of realized and unrealized losses in taxable accounts. An embedded capital loss occurs when a portfolio manager sells a stock position at a loss. The fund can then use these losses to offset future capital gains and help reduce future taxable distributions from the fund.

Finally, you may want to consider funds that are managed specifically for after-tax returns, with a goal of helping to reduce distributions. These funds typically use various trading practices, including:

  • Minimizing short-term gains
  • Keeping turnover low
  • Tax-loss harvesting (selling securities at a loss to offset capital gains)

An Appropriate Way to Help You Invest
Taxes are already an important issue for many mutual fund investors – causing them to look for ways to reduce taxes while working toward their financial goals. As you consider an investment solution for your taxable accounts, the Tax-Sensitive Research Models offered through Edward Jones Advisory Solutions® may help you take advantage of tax-efficient strategies.

The Tax-Sensitive Research Models give you the benefits of an advisory program, including an additional level of research and investment management, along with tax efficiency. To learn more about tax-sensitive investing with Advisory Solutions, contact your local Edward Jones financial advisor. Or visit www.edwardjones.com/advisorysolutions to find out more about Advisory Solutions.

Edward Jones is a dually registered broker-dealer and investment adviser. Edward Jones Advisory Solutions® is an asset allocation program that provides investment advisory services. Depending on a client’s minimum investment, a client can select Fund Models, which invest in affiliated mutual funds (if available), unaffiliated mutual funds and exchange-traded funds (ETFs), or UMA Models, which also include separately managed allocations (SMAs). Please review the applicable Edward Jones Advisory Solutions Brochure for more information.

Mutual Funds and the investments in Advisory Solutions, including money market funds, are offered by prospectus. You should consider the investment objective, risks, and charges and expenses carefully before investing. The prospectus contains this and other information. Your Edward Jones financial advisor can provide a prospectus, which should be read carefully before investing. Your investment return and principal value will fluctuate, and you may lose money.

Diversification does not guarantee a profit or protect against loss.

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