Over the past few weeks, I’ve taken a deep dive into tax efficiency and after-tax returns—a crucial but often overlooked investment topic. If you missed the three-part series, read it here, here, and here. Since publishing the first installment, I’ve heard from several IVA readers with thoughtful follow-up questions. In this week’s Mailbag, I’m tackling two of them.
A Lower Tax Bracket
As a retiree with no work-related income, I am in the 24% income tax bracket. What do the after-tax returns at a lower tax rate look like? Should even a short tax-tail wag the dog?
The short answer: If you’re in a lower tax bracket, taxes take a smaller bite out of your returns. So, you don’t need to be quite as tax-focused. That said, it’s still worth paying attention to taxes; ignoring them entirely would be a mistake.
In my series on after-tax returns, I analyzed performance from the perspective of an investor in the top federal tax bracket. That meant applying a 20% tax rate to qualified income (like dividends) and long-term capital gains while utilizing a 40.8% tax rate for short-term capital gains and regular income (such as interest).
Of course, not everyone faces those steep marginal tax rates.
So, this week, I’m revisiting last week’s article on the actively managed IVA mutual fund picks. But this time I’ll do it from the viewpoint of an investor in a lower tax bracket. For this analysis, I’ll assume a 15% tax rate for qualified income and long-term gains and a 24% tax rate for short-term capital gains and ordinary income.