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Tax Efficiency Still Key Amid New Law

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Major changes to the tax code are going into effect for the 2018 tax year. The good news is that the key principles for tax-efficient portfolio management aren't changing in any major way.

The starting point for reducing the drag of taxes on your investments is to make sure you're taking maximum advantage of tax-sheltered vehicles. For retirement savings, that means IRAs and company retirement plans like 401(k)s, 403(b)s, and 457 plans. For college savings, 529 plans enable your money to grow on a tax-free basis, and qualified educational withdrawals are also tax-free.

Taxable accounts don't offer tax breaks on your contributions or withdrawals, which is why you want to focus on accounts that do that first. But if you have taxable assets, either because you've already invested everything you can in tax-sheltered accounts or you need to be able to tap your money without strictures, you should make sure those holdings are tax-efficient, too. Because their income is generally taxed at the lower dividend tax rate, stocks are generally more tax-efficient than bonds. Equity index mutual funds and exchange-traded funds are extremely tax-efficient options, as are individual stocks. If you want to hold individual bonds or bond funds in a taxable account, municipal bonds can be a good choice.

Thanks for watching. I’m Christine Benz for Morningstar.com.