Adopt a tax-efficient investment strategy

Posted: 4/30/2024 by Fidelity Investments

Consider making variable annuities a part of your investment strategy.

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High-income clients have limited options for tax-advantaged accounts. Consider a variable annuity that provides tax-deferred growth and a recurring stream of income.1

Power of Tax Deferral

Tax deferral can help your clients' portfolios grow faster?even after taxes.

201715142410111215182117141211Number of YearsPretax Return (%)4%5%6%7%8%051015202530PretaxTax DeferredFully Taxable

Who Can Benefit from Tax Deferral?

Use these indicators to assess clients' tax exposure:

Ten years or more until retirement

The longer the money is invested, the greater the benefit from tax deferral and compounding.

Assets largely held in taxable accounts

Affluent clients with assets in taxable accounts may benefit from tax deferral because of their typically higher marginal income tax rate.

Income tax subject to high marginal rates

In general, this affects investors in the top three federal income tax brackets (currently 33% and above) and those with high state and local taxes.

Lower anticipated income taxes in retirement

As an example, retirees may incur lower tax rates or may move to a state with lower taxes (assuming they do not withdraw assets before retirement).

Significant exposure to highly tax-inefficient assets

Tax-inefficient assets tend to deliver most or all of their total returns from investments that are taxed at a relatively high rate.

Tax-Efficient Investments

Help your clients keep more of their investment earnings by choosing investments that are more tax efficient.

Higher Tax Efficiency

  • Equity index funds (other than REITs)
  • Equity index ETFs (other than REITs)
  • Equity income ETFs
  • Tax-managed equity funds
  • Equity separately managed accounts
Higher Tax Efficiency

Medium Tax Efficiency

  • Bond funds with large U.S. Treasury allocations††
  • Typical actively managed equity funds
  • Equity income funds
Medium Tax Efficiency

Lower Tax Efficiency

  • High-turnover equity funds
  • Mortgage bond funds
  • Corporate bond funds
  • Leveraged loan/floating rate bond funds
  • U.S. high-yield bond funds
  • Emerging-market bond funds
Lower Tax Efficiency
Higher Tax Efficiency
Medium Tax Efficiency
Lower Tax Efficiency
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