Growth Funds for Tax Efficiency

Ray’s Take When it comes to real return, it’s not what you make, but what you keep after taxes and inflation that counts. 

Being mindful of taxes is more important than ever. Tax-efficiency in taxable portfolios is imperative, whether they’re pre-retirement accumulation accounts or retirement distribution portfolios. It’s incumbent upon investors to understand the tax implications for the various funds in their portfolios to plan the best strategy for their retirement.

Tax-efficient funds generate fewer dividends or capital gains. So you will want to find mutual fund types that do this if you want to minimize taxes. One way to accomplish this is using growth funds. 

These companies typically reinvest their profits back into the company to grow it rather than paying dividends. Hence, the name “growth fund.” Managers of these funds prefer longer holding periods allowing for fewer capital gain distributions. So a mutual fund with a growth objective tends to be more tax-efficient. 

Growth funds are typically long-term investment vehicles and vary widely in their risk forecast. Over the long term, returns tend to be higher but much more volatile. Gains from growth funds come from an increase in stock prices over time.

Diversifying by tax treatment can be especially important if you’re uncertain about the tax bracket you’ll be in down the road. Utilizing a tax-efficient strategy is a component of building that diversity.

Having said all of that, you don’t want to let the tax tail wag the dog. Remember that your objective is to increase your wealth after taxes and inflation. Tax codes come and go just like congressmen. Predicting future tax rates is speculative at best. Unless you have a crystal ball, it’s best to cover a variety of tax treatments in addition to investments. 

Dana’s Take Long-term goals for parents tend to focus a lot on their kids – such as getting them the best education possible, as well as helping them get a good start in life as adults and leaving them a little something after we’re gone. So efficiency is something that works in a lot of different aspects when planning for those events.

What does efficiency look like when planning for your kids? Like any good strategy, plan early for best results. That way, when life takes an unexpected turn, you’ll be able to reassess better.

Take the time to look around you, to gauge your kids’ interests, and where they may lead, to give you a direction to start. Success is built over the long term and starting with an efficiently built foundation makes for a strong platform to build out.

Do you want your days to have a plain brick wall or a cathedral? Make the future happen, don’t let it happen by accident.

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