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How do you personalize my portfolio based on tax levels?
As of November 2024, we use your self-reported tax filing status, household income, and state of residence and apply the standard deduction to determine the tax level for your portfolio. You can change your tax level any time.
We design tax levels to best reflect the type of tax exemptions that each portfolio type may have. It is possible for your tax level to vary between your portfolios because each portfolio has a different composition, and you may benefit differently tax-wise from different accounts. For example, you may have a high tax level for your Automated Investing Account, but a medium tax level for your Automated Bond Portfolio.
For Automated Investing Accounts:
- For high tax levels, we typically include fewer corporate bonds, more municipal bonds, and the appropriate mix of stocks and other bonds for your risk level.
- For medium tax levels, we balance portfolios between corporate bonds and municipal bonds, and include the appropriate mix of stocks and other bonds for your risk level.
- For low tax levels, we typically include more corporate bonds, fewer municipal bonds, and the appropriate mix of stocks and other bonds for your risk level.
- For California residents, we further tax-optimize your portfolios with California municipal bond ETFs in your Classic or Socially Responsible portfolio because interest income from those ETFs is exempt from both California state and federal taxes. We’ll keep evaluating opportunities for other state-specific portfolios as other state-specific municipal bond ETFs meet our requirements.
For Automated Bond Portfolios:
- For high tax levels, we generally include fewer corporate and floating rate bonds, and more Treasuries.
- For medium tax levels, we generally include a balanced mix of corporate and floating rate bonds and Treasuries.
- For low tax levels, we generally include more corporate and floating rate bonds, and fewer Treasuries.
What if I move to a different state, how does my portfolio change?
If you move to a different state, we recommend updating your state of residence in Settings, on your Profile page under Tax Information. Changing your state may put you into a different tax level, but it may not. Tax levels depend on several factors, including state of residence, household income, tax filing status, and the type of portfolio you have. If changing your state of residence does impact your tax level, you’ll be prompted to review those changes for any impacted account. Once you’ve reviewed and accepted your new tax level, your portfolio will be reallocated to help optimize after-tax returns for your new tax level.
What should I do if I select the wrong tax level? What does this mean for my portfolio?
To ensure you’re in the correct tax level for your Automated Investing Account, it’s important to make sure you’ve provided your most up-to-date income, state of residence, and tax filing status. You can update this any time in settings.
If you’ve selected the wrong tax level, it may mean you won’t get the optimal after-tax returns for your tax situation. You might miss out on potential returns or pay additional taxes. While it’s important to make sure your portfolio is optimized for the right tax level, it’s even more important to ensure you’ve selected the correct risk tolerance because your risk can affect expected returns and volatility.
You can manually update your tax level at any time by editing your portfolio. If you do move to a new tax level, we will make any changes to your portfolio tax efficiently, which could take some time. Note, manually editing the tax level is not yet available for Automated Bond Portfolios.
Learn more about reasons you might want to change your tax level.
The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront Advisers and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short-term or long-term).
Wealthfront Advisers’ investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes.
Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.
The possibility of tax advantages from state municipal bond ETFs is dependent on a client's state of residence and individual tax situation. Clients should consult with their personal tax advisors regarding the tax consequences of investing with Wealthfront Advisers and engaging in these tax strategies, based on their particular circumstances. Clients and their personal tax advisors are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the investor’s personal tax returns. Wealthfront Advisers assumes no responsibility for the tax consequences to any investor of any transaction.
Wealthfront Advisers and its affiliates do not provide legal or tax advice and do not assume any liability for the tax consequences of any client transaction. Clients should consult with their personal tax advisors regarding the tax consequences of investing with Wealthfront Advisers and engaging in these tax strategies, based on their particular circumstances.
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as a solicitation, offer or recommendation to buy or sell any security. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Please see our Full Disclosure for important details.
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