What is the Most Tax-Efficient Investment?



An AAII member recently asked, “What is the most tax-efficient investment?” Before you answer, stop and give the question some thought. The answer is not as straightforward as it may seem.

A few factors influence the tax efficiency of investing. One, of course, is the type of investment. Municipal bonds receive very favorable tax treatment, particularly if they are held until maturity.

A stock held for the long term can also be very tax-efficient. Since it is held for more than one year, it will qualify for long-term capital gains. An individual stock also gives the investor the ability to sell shares in increments. The latter allows any capital gains to be recognized over time, thereby limiting the size of the tax bill for any calendar year. Losses can also be strategically realized to reduce taxes. Mutual funds, even those managed in a tax-efficient manner, do not give shareholders any control over the timing of distributions.

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AAII Sentiment Survey

Optimism is below 20% and neutral sentiment is above 50% on the same week, for just the sixth time in the survey’s history. More about this week’s results.

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The Week Ahead

The U.S. financial markets will be closed on Monday. On behalf of everyone at AAII, I wish you a happy and sunny Memorial Day.

Just three members of the S&P 500 will report earnings next week as first-quarter earnings season wraps up: Medtronic (MDT) on Tuesday, Michael Kors Holdings (KORS) on Wednesday and Broadcom (AVGO) on Thursday.

The week’s first economic reports will be April personal income and outlays, the March S&P Case-Shiller housing index, the May Chicago PMI and the Conference Board’s May consumer confidence survey, all of which will be released on Tuesday. Wednesday will feature the May ADP Employment Report, the May PMI manufacturing index, the May ISM manufacturing index, April construction spending and the Federal Reserve’s periodic Beige Book. May jobs data (including the unemployment rate and the change in nonfarm payrolls), April international trade, April factory orders and the May ISM non-manufacturing index will be released on Friday.

Only two Federal Reserve officials will make public appearances: Federal Reserve Board Governor Jerome Powell on Thursday and Chicago president Charles Evans on Friday.

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