Most investors think about tax-efficiency in making our investments. Of course, many tax-advantaged investments (i.e., municipal bonds) are no free lunch because they trade to significantly lower (pre-tax) expected returns. It’s even fair to assume (although reasonable people might disagree) that US public equity markets should have relatively lower expected returns because of the tremendous tax advantages over income-generating instruments.
Now, I’ve been lucky enough to have spent a lot of my adult life in reasonably high income-tax brackets, and have developed investment habits to match—contributions to 401(k) and IRA accounts, and a preference for qualified dividends and long-term capital gains. However, that’s all about to change as I’ve started working on an entrepreneurial endeavor and, frankly, expect to be in a very low tax bracket for the near future.
I wanted to ask for interesting/fun ideas for tax-inefficient investing options, so I can take as much advantage as possible of my relatively tax-advantaged situation over the next few years. There’s no sense in optimizing for better tax treatment when I expect to be in a pretty low income bracket. So it almost seems like I should develop a new preference for tax-inefficient options, and I want to get help getting ideas to reset my frame of reference!
Some things I’ve considered already—looking for thoughts on these, as well as additional ideas:
- * There are various “income portfolios” out there, but they seem often designed for retirees who are also in a relatively low tax bracket. But the problem with a lot of these is that I’m still in my mid-30s, so I have much higher risk tolerance than most retirees.
- * TLT (iShares 20+ Yr Tsy ETF) is a nice starting point, but the yield is definitely not exciting, plus “everyone knows” rates are going up (which is a whole ‘nother topic)
- * High yield ETFs and closed-end funds seem to give a chance at better pre-tax returns, but it’s still lower-risk and lower-return than, say, equities. Plus a large concentration in that market would make me uneasy, since the high yield market isn't really that diversified (witness the recent panic in energy-related high yield)
- * REIT preferred shares seem promising because the dividend yields are pretty high and the income is largely non-qualified. Notice REIT preferreds have a higher yield than REIT common shares because they aren’t going to participate in capital appreciation. But again, doesn't seem diversified enough to occupy a large piece of my portfolio