Tag Archives: taxes

Even Warren Buffett Prefers Index Funds

In last year’s Berkshire Hathaway annual report and shareholder letter Warren Buffett caused quite a stir by suggesting that upon his demise the assets he was leaving his wife, in trust, should be invested in index funds (see “Warren Buffett: ‘Investing Advice For You–And My Wife,’” “Will Warren Buffett’s investment advice work for you?,” “Warren Buffett’s 90-10 Rule of Thumb for Retirement Investing,” or “The Warren Buffett Guide to Retirement Investing“). The primary reason for the hubbub was probably the contradiction it represented in coming from Mr. Buffett. An endorsement of index investing from the man who is thought of as one of the greatest stock pickers of all time seemed to fly in the face of all that Buffett […]

What Long-Term Return Should I Expect?

One of the most common questions posed to our client services team is “What is the expected long-term rate of return I can assume if I invest in a diversified portfolio?” Based on return estimates derived from the market (not Wealthfront’s opinion), an optimally diversified portfolio of low-cost index funds is expected to generate an annual long-term pre-tax  return of 4% – 6%, depending on how much risk you are willing to tolerate. It should be noted that the returns achieved over the past two years were much higher, but as you know past returns are not indicative of future returns. Returns Are Almost Impossible to Predict Some of you might be disappointed with this expected long-term return. I wish it […]

Minimize Your Investment Taxes

Our Chief Investment Officer, Burt Malkiel, famed author of “A Random Walk Down Wall Street,” has spent the past 40 years explaining that investors can’t control the market, so they should focus their efforts on the three investment tactics within their control: Diversify and rebalance your portfolio Minimize fees Minimize taxes Previously, we published posts on the value of diversification and minimizing fees. However, too often the industry avoids talking about one of the most important aspects of maximizing your long-term investment results: minimizing taxes. The Seven Ways to Minimize Taxes There are seven ways Wealthfront can significantly reduce your investment taxes: Using Index Funds Rebalancing your portfolio with dividends Applying different asset allocations for taxable & retirement accounts Tax–loss […]

When Should You Exercise Your Stock Options?

Stock options have value precisely because they are an option. The fact that you have an extended amount of time to decide whether and when to buy your employer’s stock at a fixed price should have tremendous value. That’s why publicly-traded stock options are valued higher than the amount by which the price of the underlying stock exceeds the exercise price (please see Why Employee Stock Options are More Valuable than Exchange-Traded Stock Options for a more detailed explanation). Your stock option loses its option value the moment you exercise because you no longer have flexibility around when and if you should exercise. As a result many people wonder when does it make sense to exercise an option. Tax Rates […]

14 Things to Consider for Your Year-End Financial Checklist

The last few weeks of the year are always a mad rush to wrap up loose ends, often in a frantic fashion. In the spirit of the season, we thought it a good time to share a checklist of important items to consider before the calendar year ends, all related to your investments and finances. We also wanted to reiterate some key topics we’ve already discussed, but that are especially important to review by end-of-year. Here are some brief pieces of financial advice on several fronts that could benefit you and yours in multiple ways, and that could ultimately add to your long-term bottom line, not to mention peace of mind. 1. Establish or Tune Up Your Emergency Fund If you […]

New Research on the Efficacy of Tax-Loss Harvesting

Tax-loss harvesting isn’t something new. It’s actually been around for decades. It’s also one of the few ways you can intelligently lower your investment-related taxes. More than $100 billion has been invested with dedicated firms like Parametric Associates and Aperio, and with high-end private wealth managers like Goldman Sachs and Morgan Stanley — specifically  to access their tax-loss harvesting strategies. Unfortunately, until recently, tax-loss harvesting was only available to the ultra-wealthy. That changed two years ago when Wealthfront became the first automated investment service to offer tax-loss harvesting to its clients. Wealthfront now manages almost $1 Billion in accounts enabled with tax-loss harvesting. Tax-Loss Harvesting Helps You Defer Investment Related Taxes Tax-loss harvesting is a method to defer taxes, not […]

What to Expect When Expecting an Inheritance

Over the next 16 years, generations X and Y are expected to inherit $30 trillion from baby boomers. In the next five years alone an average of approximately $1 trillion will be inherited each year  according to an Accenture report published in 2012. Even small inheritances can create a lot of questions for the heirs. Therefore it’s not surprising we’ve received a number of requests to explain what kind of issues a young person might face when inheriting money or other assets. The days following the passing of a loved one are usually filled with stress, so it’s comforting to know there isn’t much you need to do in order to receive  an inheritance (known in legal terminology as a […]

When Do You Use a Traditional vs. Roth IRA?

If you’re like most people you’re not quite sure when you should open a Traditional vs. a Roth IRA. Unfortunately the answer is not straightforward due to all the arcane income limitations and tax treatments associated with each. With this post we attempt to explain the differences between the two types of retirement accounts, why they were created and when each might be preferable. Similarities Both types of IRA allow individuals younger than 50 to contribute $5,500 each year and individuals 50 and older to contribute $6,500. Returns generated in both IRAs compound tax-free over their entire life. Each allows you to withdraw money without penalty for various reasons including qualified higher education expenses, certain medical expenses, and a limited […]

How To Sell Your Single-Stock Position Tax-Efficiently

We recently launched the Single-Stock Diversification Service — an easy way to transition from large holdings of a single stock (perhaps that of your current or ex-employer) to a Wealthfront diversified portfolio. One of the problems we aimed to solve with the Single-Stock Diversification Service is tax-optimization. We knew that many of our Single-Stock Diversification Service clients would have multiple types and lots of employee stock that they would want to diversify. It becomes difficult to know which shares to sell first to get the best after-tax outcome when some of your shares come from restricted stock units (RSUs) and others from exercised stock options. To make matters more confusing, many of the shares have vested at different times and […]

Improving Tax Results for Your Stock Option or Restricted Stock Grant, Part 3

Wrapping It All Up: Tax Strategies In this third and final part to our series on the taxation of stock options and restricted stock units (RSUs), we’ll outline some strategies you can use to achieve better tax consequences. While the list below is definitely not comprehensive, it does cover some impactful strategies. Remember that — based on the various types of taxes described in Part 1 of this series — through good tax planning, you may be able to achieve a 19.6% improvement in your federal taxation rate. This improvement represents the difference between the federal ordinary income tax at 39.6% and the long-term capital gains rate at 20%. Early-Stage ISO Exercise and Hold While this may seem like it […]