Do your investment funds increase your taxes?

For many investors, one of their largest expenses per year is income tax. This podcast discusses the question whether your investments are increasing the taxes you pay each year. The analysis may surprise you, and the size of the taxes you may be paying.

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Podcast Summary

Scott Wait, CPA and President of RSW Wealth Management, explained in the Podcast how investment vehicles can impact tax liability depending on the type of account and investment structure. Scott discussed two scenarios: taxable brokerage accounts where mutual funds are required by law to distribute most of long-term capital gains annually, and exchange-traded funds which offer tax advantages through in-kind redemption processes that allow portfolio managers to offset gains and losses. Using a $10 million investment example, Scott demonstrated how mutual funds could result in significantly higher taxable distributions compared to ETFs, potentially costing investors hundreds of thousands of dollars more in taxes annually, not including additional state and net investment income taxes.

ETF Tax Efficiency Advantages

Scott provided an example comparing the tax impact of a mutual fund versus an ETF, showing that mutual funds could result in substantially higher tax liabilities. He discussed how investment funds can increase taxes, explaining that mutual funds are required by law to distribute 95% of their long-term capital gains, while ETFs have an advantage with in-kind redemption that can help offset gains and reduce taxable distributions. Scott provided an example comparing a taxable brokerage account with $10 million, where a mutual fund would distribute $821,000 in taxable gains versus $100,000 for an equivalent ETF, resulting in a tax difference of $108,000. He concluded that while investments can increase taxes, converting from mutual funds to ETFs could help reduce tax liability over the long term. In the next podcast, the topic will focus on investing during inflation and offered complimentary meetings for clients to discuss their questions and plans.