We’re back with more tips on investing in stocks in a taxable account. This week, Fab explains what portfolio turnover is and why it’s important from a tax perspective. Watch this week’s Weekly Tax Planning Tip video to check it out…
Hey everybody. Fabio Campanella here and welcome to today’s tax tip video.
So, I want to continue with the previous topic I had, which is investing in stocks in a taxable account
So, in my previous video, I talked about the way you compensate your investment manager or your investment advisor. And I talked about how fees were more tax efficient than paying the advisor commission.
Today I want to talk about portfolio turnover and what is portfolio turnover and why is it important from a tax perspective?
Portfolio turnover is loosely defined as how many times you buy and sell stocks in your portfolio over any given period of time. Why is this important for tax? So when you’re investing in a taxable account as opposed to an RSP, or TFSA, or any other number of nontaxable accounts.
Every time you make a trade you are probably going to have a gain or loss on that trade. Okay? So, you buy Apple stock at, you know, whatever, $1000 bucks, you sell it at $1,500 bucks, you have a $500 gain.
That game, for the most part, will be a capital gain, which is inherently tax efficient because you only pay tax at half the normal rate. However, the more often you turn your portfolio over, the more often you will trigger taxable capital gains. Why is this bad? Because it actually triggers an immediate tax burden for you. You actually have to pay the taxes when you file your corporate tax return or your personal tax return.
Instead, my personal view and my personal preference when I’m managing money for my clients is to have more of a buy and hold strategy with respect to a corporate, a taxable account or a personal tax account. Or I will use something called tax loss harvesting, which will be the topic of another video.
So when you have more of a buy and hold strategy, you could have huge gains in particular stocks or particular investment positions, but because you’re not selling them, you’re not triggering a taxable event, which means you can defer paying tax way into the future. And tax deferral is a huge part of tax planning.
So once again to recoup last times video and this video, fees are better than commissions, all things being equal for a taxable account, and lower portfolio turnover is better than high portfolio turnover, all things being equal for taxable account.
Thanks. And I’ll see you next time.