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Why Choose Tax-Smart Investing?
Enjoy year-round active tax management services with a highly customizable approach for tax-loss harvesting to help offset capital gains and other solutions.
Meeting financial goals takes a combination of planning and an inventive edge. There is no one winning strategy. The best strategy may be a combination that’s constructed just for you. And at Morgan Stanley, we can build that together.
But there’s one component that is often overlooked—even though it can make the biggest difference over the long run: taxes.
Taken together, tax-aware solutions, may potentially add up to 2% to your annual returns, on average, depending on your specific portfolios and approaches.
By adding our complimentary -- and personalized -- Tax Management investment platform to your taxable managed account, we can help maximize your potential after-tax return, year-round. That’s our Total Tax 365 approach.
Do you want to be more in control of your capital gains each year? Our platform enables you to set gain or tax limits that put you in control of the impact of taxes on your investments. Because after all, taxes are personal.
While tax-loss harvesting is common for many investors these days, it tends to be labor intensive. Morgan Stanley’s advanced platform lets you design your own tax-loss harvesting experience.
For instance, you can select the loss harvesting frequency, your loss targeting approach or customize our opportunistic tax-loss harvest feature that systematically identifies losses to capture throughout the year.
And when losses are created, we look to preserve those losses by adhering to certain IRS wash sale rules so that those realized losses can help potentially offset future gains.
In today’s market, every trade decision matters. But how you tax-optimize your trades may matter even more.
That’s why we also provide our best-tax-outcome approach when trading your securities. This feature looks through your various tax lots and attempts to achieve the most favorable tax outcome on every sale transaction.
Lastly, if you are considering transitioning assets to Morgan Stanley, but are concerned about large capital gains and subsequent taxes, don’t be.
Our sophisticated platform helps you unwind existing positions into a new diversified investment portfolio gradually, and on your terms.
And every step of the way, we report back results that show how much tax savings you may have captured over time. Because the returns you keep are the ones that count.
So, when working to meet your financial goals, you set the rules. Together, we’ll refine your strategy … and offer the tax-smart edge that puts you in control of your assets and your wealth.
Contact your Morgan Stanley Financial Advisor and ask how to enroll in this complimentary service.
We design and implement personalized tax strategies at the portfolio level to help reduce your taxes and enhance your overall returns.
By offsetting capital gains with capital losses, tax-loss harvesting can help you minimize your liability on tax day.
Set realized-gain limits, defer short-term gain recognition, and choose the tax-loss harvesting frequency that is best for you.
Replicate a market index through direct ownership of individual stocks which enables you to strategically harvest losses to offset your capital gains.
As an investor you naturally want your stocks to appreciate. But when the time comes to sell, will you be ready for the capital gains taxes?
Planning ahead is critical when aiming to reduce your tax bill—so you can keep more of what you earn.
But while the goal is clear, how you get there may not be.
Your Morgan Stanley Financial Advisor is equipped to guide you, using a broad range of innovative, tax-smart strategies that can make a difference.
We call it Total Tax 365, and it’s how we help you reduce the impact of taxes, all year round.
Taken together, tax-aware investing may potentially add up to 2 percent to your annual returns, on average, depending on your specific portfolios and approaches.*
[on screen] *Source: Morgan Stanley Global Investment Committee Special Report: “Tax Efficiency: Getting to What You Need by Keeping More of What You Earn” Past performance is not a guarantee of future results. Intended results may not be achieved.
Consider tax-loss harvesting, a strategy that enables you to realize or “harvest” losses—and then use them to offset capital gains elsewhere.
This is different from simply selling a stock—because your goal is to realize the tax benefit from the loss. However, by selling, you have less invested, and therefore, less participation should the market recover.
So, a better goal may be to realize losses but still remain invested in the market and not disrupt your asset-allocation strategy.
Why can this become complex? Because the IRS doesn’t allow you to sell an investment at a loss and replace it with a "substantially identical" investment within 30 days before, or after, the sale date. They call it the “wash sale rule” and breaking it means you can’t deduct the loss.
So how can you keep your tax benefit AND maintain exposure if there is a recovery?
Consider a simple example. Suppose you are invested in a Big Box Retailer and it experiences a loss. We sell that position and purchase a different Big Box Retailer— with similar characteristics.
Because the new securities have a similar risk-return profile, your portfolio can continue to track its target asset allocation without violating IRS wash sale rules—while you “harvest” the losses from selling the first Big Box Retailer to offset a gain elsewhere in your investment portfolio.
Sophisticated clients increasingly understand the benefits of tax-loss harvesting. But they don’t want to give up the risk management and diversification benefits of passive index investing.
They seek both broad market exposure and access to active tax management, ESG screens and more.
That’s where a customized direct indexing strategy may be appropriate.
What is that? It’s a separately managed account strategy that allows you to own individual securities in a portfolio that seeks to replicate the characteristics of an index. Note that a direct indexing strategy may not necessarily own all the stocks in the underlying index—just what the manager believes to be a representative subset, when appropriate.
To better understand how this technique can help you with your tax planning, let’s look at an example based on tracking the S&P 500 Index during a recent period of volatility—2020.
So, if a hypothetical investor bought all the stocks (in the same proportions) that make up the S&P 500 on December 31, 2019, by the end of the year 2020, their portfolio would have grown by 18%, with dividends reinvested*.
[On screen: * gross of fees
For illustrative purposes only and does not represent the performance of any specific investment or strategy. An investor’s actual performance will vary. Past performance is not a guarantee of future results. Indexes are unmanaged and not available for direct investment.
Source: Morgan Stanley Investment Management]
But the markets sold off sharply at the beginning of the pandemic, and even though the index finished the year higher…
…96% of stocks that make up the S&P 500 were down at least 20% from their high at one point during the year…
[On screen: Source: Morgan Stanley Investment Management]
…and 56% were down 40% or more.
So, while resisting the urge to sell in periods of market volatility is generally a good thing, staying invested while strategically harvesting losses that can shelter gains in any of your portfolios, may at times be even better.
2020 was an extreme example of short-term volatility, but the underlying components of the index ebb and flow every year. In fact, in 9 out of the last 10 years where the S&P 500 has produced a positive return for the year, at least 85% of stocks that make up the S&P 500 each year experienced a decline of 10%—offering potential opportunities to harvest losses. Since it’s impossible to know when a stock is at its lowest, tax-loss harvesting can’t capture every dollar of loss. But active, purposeful tax-loss harvesting can help.
And while passive investing is most common, this technique can be applied to other benchmark portfolios as well.
[On screen: Source: Morgan Stanley Investment Management]
Customized direct indexing has additional advantages. Because you own the stocks directly, you can customize your portfolio. We can tailor your holdings to your views, values, reasonable restrictions or personal investment objectives.
Let’s return to our example of the Big Box retailers.
You might already have a large investment in a stock in the S&P 500 and don’t want to add to it.
You might have non-investment related risks tied to an index’s stock, such as being employed by that company.
You might have more conviction in smaller market-cap companies in the sector.
Or you may have other more personal views, such as a preference for renewable energy over a traditional energy provider. You can choose to direct the portfolio manager to a Big Renewable Energy Company instead, if you wish. Or you can help limit exposure to risk around any industry, and the manager will work to deliver results while still working to produce valuable tax losses that offset other gains.
By turning passive investing into something personal, you get to combine the diversification of an index with customization options, while potentially boosting your overall after-tax returns.
In practice, decisions like whether to realize gains today or defer them to tomorrow are often more complex than they look. And their solutions—like all our strategies—are generally most efficient at mitigating future taxes when we can factor in all your assets based on a comprehensive view across all your accounts and holdings.
Many of us keep accounts at different firms for different reasons. But if some of your assets are not visible, you may not reach your full tax-saving potential.
That’s why consolidation may itself be a tax-smart move.
For investors with all of their assets at Morgan Stanley, your Financial Advisor can apply the specific strategies that are most relevant to each part of your investment portfolio into your personalized plan. That helps you transition your portfolios in an effort to obtain peak tax optimization over time.
Working with us, you gain access to some of the industry's leading tax-management solutions and services—making planning for taxes less taxing.
Get in touch with your Morgan Stanley Financial Advisor to get started.
Direct indexing combines the benefits of year-round opportunistic tax-loss harvesting with the diversification of a broad market index.
When we sell a position to harvest a loss, we replace it with a similar security. This allows you to both capture the loss and participate in a potential recovery.
You can customize your direct indexing strategy by restricting investments to stocks, industries, sectors, or by introducing factors, themes, and sustainability metrics.
Exchange funds enable holders of concentrated stock positions to exchange those stocks for a diversified portfolio.
One of the first things every investor learns is that diversification can help mitigate risk. As the saying goes, “Don’t put all your eggs in one basket.”
But the reality of investing is that despite your best efforts you may still find yourself with highly concentrated positions. Meaning too much of a single stock.
This can happen through an inheritance, a buildup of employee stock in an equity compensation plan or simply by holding assets that have grown over time.
Of course, it's possible to sell most of a concentrated position and diversify into other investments. But without the right planning, that could easily lead to a big capital gains tax bill.
Your Morgan Stanley Financial Advisor can help you, and other investors with the same issue, manage concentrated positions and re-diversify in a tax-efficient way by potentially taking advantage of exchange funds.
If you quality, an exchange fund lets you swap your concentrated shares in one security for the equivalent value of shares in a diversified fund.
Because this is not a taxable transaction for US federal income tax purposes, you can potentially defer capital gains taxes until you sell the fund shares down the road.
It’s part of our Total Tax 365 approach – which lets you incorporate a full range of tax-smart strategies into your investment planning, all year round.
Taken together, the solutions that make up Total Tax 365 may potentially add up to 2% to your annual returns, on average, depending on your specific portfolios and approaches.*
[on screen] * Source: Morgan Stanley Global Investment Committee Special Report: “Tax Efficiency: Getting to What You Need by Keeping More of What You Earn” Past performance is not a guarantee of future results. Intended results may not be achieved.
Let’s take a closer look at what it means to have a concentrated portfolio. A stock position is typically considered concentrated when it represents 10% to 20% or more of your portfolio value.
There are many ways investors end up with concentrated positions and many factors that inhibit investors from selling—including taxes, bullish expectations, psychological barriers, regulations or public perceptions.
But if you have an outsized position in your portfolio, you may be taking on outsized investment risks.
Let’s look at a recent example. Consider what happened to the S&P 500 Index in 2020. While the index finished the year up 18%, just five high-performing stocks – Apple, Amazon, Microsoft, Nvidia, and Meta – accounted for nearly half of the index’s return. In fact, over 24% of the stocks in the index were actually down by 10% or more by year end 2020.
[on screen: Source: Bloomberg and Factset. Past performance is not indicative of future results. It’s not possible to invest directly in an index.]
Even longer-term, the story is similar. Over the 25 years ended in 2021, the S&P 500 has only declined by more than 10% in three calendar years. By comparison, a quarter of the stocks in the index declined by more than 10% in each year on average.
[on screen: Source: Bloomberg and Factset. Past performance is not indicative of future results. It’s not possible to invest directly in an index.]
All said, the odds of a concentrated position being one of the underperformers in any given year, may be higher than you realize.
That’s where exchange funds come in. They allow qualified investors to move into a diversified fund in a tax-smart way.
Because you and other investors may run into the same issue, exchange funds are an aggregate of many investors’ concentrated stock -- enabling investors to exchange their concentrated shares for the equivalent value of shares in a diversified fund.
Since many Exchange Funds seek to track the performance of a broad index, like the S&P 500, despite some tracking error, you can gain exposure to hundreds of varied securities.
Let’s look at what tax-deferred growth can mean in the real world. Since taxes vary by state, let’s say you’re a California resident whose assets are all in Stock A.
Concerned about the increased risks of a concentrated portfolio, you sell $1 million worth of your stock A shares. Assuming a zero cost-basis and an effective tax of 37.1%, you would have $629,000 dollars left to invest in a diversified portfolio. That means you’d need a return of over 58.9% just to get back what you paid in taxes.
[on screen: Source: Eaton Vance Parametric Investment Tax Calculator. The output of this calculator is for educational purposes only and should not be considered investment, legal or tax advice. It is intended for use by U.S. individual taxpayer's resident in the 50 states or the District of Columbia and is not applicable to trusts, estates, corporations or persons subject to special rules under federal, state or local income tax laws. The indicated tax treatment of investment income and gains applies to positions in securities held outside qualified retirement plans and other tax-deferred or tax-exempt investment vehicles. The output is general in nature and is not intended to serve as the primary or sole basis for investment or tax planning decisions. Indicated tax rates are those in effect for 2024, as updated June 21, 2024. Indicated rates are those that apply to an incremental dollar of additional income or gain, which may vary from average tax rates. The displayed rates have been rounded to the nearest hundredth of a percent. The indicated Total Tax Rate may not add up to the displayed component rates due to rounding.
For illustrative purposes only and does not represent the performance of any specific investment or strategy. An investor’s actual performance will vary. Past performance is not a guarantee of future results.]
Swapping into an exchange fund, on the other hand, means you could invest the full million into a professionally managed, diversified fund.
Let’s see that in action--assuming an 8% annual growth rate over 20 years for both hypothetical portfolios.
For the “sell and buy” approach you pay taxes up front – but you sacrifice the power of investment exposure over time.
On the other hand, with the Exchange Fund you got to keep the full value of your investment power – but at the expense of a larger tax bill at the end.
However, when all is said and done, the “sell and buy” portfolio would be worth roughly 2 million dollars, while the exchange fund would be worth roughly 3 million dollars. That’s a big difference in final value on a post liquidation, after tax basis.
Exchange funds may not be for everyone. They’re designed for long-term, qualified investors. While many offer early redemptions, some may charge fees for early withdrawals, or they may have other liquidity constraints.
But all things considered, exchange funds can offer an efficient way to diversify holdings while benefiting from potential growth.
In practice, decisions like whether to realize gains today, defer recognizing them by continuing to hold your portfolio or consider an exchange fund strategy, are often more complex than they look. And their solutions—like all our Total Tax 365 strategies— work best when factoring in all your accounts and holdings.
Many of us keep accounts at different firms for different reasons. But if some of your assets are not visible, you may not reach full potential.
That’s why consolidation may itself be a tax-smart move. By bringing all your accounts together, we can take a holistic view of your portfolio, understand what changes could help you seek the most tax-efficient outcome.
With Total Tax 365, your Morgan Stanley Financial Advisor can help bring innovative technology to the old wisdom about eggs and baskets.
Diversification has typically played a key role in managing risk—and if you qualify, you can do it in a tax-smart way that’s integrated into your investment plan and financial goals.
Contact your Financial Advisor to see how Total Tax 365 can help.
Swap concentrated positions for shares in an exchange fund. This allows you to diversify your portfolio without triggering a taxable event.
Exchange funds allow you to reduce concentrations and improve diversification without realizing capital gains.
Your heirs inherit exchange fund shares with a stepped-up basis, potentially eliminating all capital gains from both your original stock position and any fund appreciation.
Identify the most tax-efficient combinations of positions and lots across your accounts to sell to raise a target amount of cash.
As an investor, you’ve built your wealth carefully over time. But when you need to access your money, by selling securities, you may be faced with an unwelcome tax hit.
Your Morgan Stanley Financial Advisor has a newly enhanced, powerful tool that can help. We call it Intelligent Withdrawals.
This innovative technology enables you to look across your entire portfolio of multiple Morgan Stanley accounts to help identify the most tax-efficient way to liquidate assets.
It’s part of our Total Tax 365 approach, which equips your Financial Advisor with a broad range of solutions to help you reduce the impact of taxes, every day, all year round.
Taken together, these solutions may potentially add up to 2 percent on average to your annual after-tax returns, depending on your specific portfolios and strategies.
[on screen] * Source: Morgan Stanley Global Investment Committee Special Report: “Tax Efficiency: Getting to What You Need by Keeping More of What You Earn”
Past performance is not a guarantee of future results. Intended results may not be achieved.
Intelligent Withdrawals works with any size transaction—there's no dollar minimum. It can help you fund a broad range of needs, whether it’s a big purchase, a new investment …
—or simply to rebalance your portfolio when the market environment changes or after an individual position has grown to become overly concentrated. When that security has large, embedded gains, you can use Intelligent Withdrawals to identify loss positions that, if sold, may offset those gains. So that you potentially pay less in taxes.
And it's especially valuable for people who are approaching retirement, or already retired. It can help mitigate tax drag as you turn the assets you've built into a reliable income stream.
Like other Total Tax 365 solutions, Intelligent Withdrawals works best when factoring in all your accounts and holdings. Many of us keep accounts at different firms for different reasons.
So ask yourself, are those reasons worth missing out on potential significant tax savings? Because the more combinations the technology can consider, the greater its opportunities to identify tax savings.
Intelligent Withdrawals works by understanding four key factors that will determine your tax impact:
• What you own
• How long you’ve owned it
• What type of account it’s held in
• And whether the security has increased or decreased in value since you bought it
Here’s why that’s more complex—and more powerful—than it may look.
If you own a dividend-paying stock, you may be re-investing those dividends. In a single year, one tax lot can turn into five—all of different sizes, prices and holding periods.
Five years of reinvesting dividends could create 21 individual tax lots, some of which may have appreciated, some fallen in value.
And that’s just for one company.
Most portfolios have many more investments.
In addition, different account types confer different tax treatments. Some produce gains that are taxed as long- or short-term capital gains or losses.
Some retirement accounts produce gains that are treated as ordinary income.
Finally, some retirement accounts produce gains that are tax free, if you meet the requirements.
Over time, considering dividends, accounts, securities, tax lots, price movements and changing regulations -- the complexity can grow exponentially.
This is where our state-of-the-art technology comes in.
Let’s dig deeper. Say you've been invested for 15 years, with assets in a brokerage account and both Traditional and Roth IRAs.
Once you determine the amount of cash you need, net of taxes, the Intelligent Withdrawals system goes to work.
First, it determines the order of accounts to use. In this example, the system will first look at taxable brokerage, then into tax-deferred accounts, and will deplete tax-free Roth accounts last.
Then it compares each tax lot of each holding in any eligible account against all the other tax lots to help arrive at the optimal lots to sell.
Since in a group of accounts with 100 securities there could be 500 or more tax lots, this comparison might evaluate over 100,000 combinations to arrive at the most tax efficient one—all the time working to help reduce your current tax burden.
The power of this technology grows out of its ability to look at ALL the relevant combinations and optimize them. The more combinations across securities, tax lots and account types it can analyze, the more efficient the withdrawal solution. But that means it won’t reach its full potential if some of your assets are not visible.
That’s the value of consolidation. By bringing all your accounts together, Intelligent Withdrawals can compare all the possible combinations available to you—in order to help reveal all your potential tax savings.
Because its power is based on how complete your information is, a parallel analysis done separately on accounts at different firms would likely be far less efficient.
So, if you’re interested in truly optimizing your potential tax savings when selling securities, consolidating assets itself can be a tax-smart strategy. In tandem with other solutions, it can help you add up to 2% annually to your after-tax returns.*
[on screen] * Source: Morgan Stanley Global Investment Committee Special Report: “Tax Efficiency: Getting to What You Need by Keeping More of What You Earn”
Past performance is not a guarantee of future results. Intended results may not be achieved.
Intelligent Withdrawals also affords you the flexibility to control additional factors, such as excluding specific accounts, individual holdings or other considerations that influence what you sell.
So, when it’s time to use your wealth, remember to be as smart about taking money out of your portfolio as you are about building it up. Have a talk with your Morgan Stanley Financial Advisor to see how we can help.
Intelligent Withdrawals identifies the most tax-efficient combination of assets to sell for your target cash amount.
The tool works best when factoring in all your accounts and holdings. The more combinations it can consider, the more accurate the recommendation.
Intelligent Withdrawals considers factors such as account type, how long you’ve owned a position, and the various tax lots you have built up over time.
Connect with a Morgan Stanley Financial Advisor to explore tax-smart strategies that may help you keep more of what you earn.
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Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Individuals are urged to consult their personal tax or legal advisors to understand the tax and legal consequences of any actions, including any implementation of any strategies or investments described herein.
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