Innovative tax-efficient bond portfolio

Money Bizwiz Team
6 Min Read

Key Takeaways:

  • As interest rates begin to drop, bonds may offer higher after-tax yield compared to high-yield cash accounts in 2024 and beyond.
  • For high-income investors in higher tax brackets (32% and above), certain bond strategies may provide tax advantages over high-yield cash accounts.
  • The Goldman Sachs Tax-Smart Bonds portfolio, exclusively personalized by Betterment, aims to offer a tax-smart strategy for higher-income investors, potentially with lower risk than stocks, and is designed to increase after-tax yield.

Recently, investors have enjoyed high yields in savings and cash accounts. With interest rate hikes by the Fed pausing, the expectation is for rates to decrease.

What does this mean for investors?

With a decline in interest rates, high-yield savings and cash accounts could offer less appealing yields, prompting a shift towards bonds as a potential avenue for earning additional yield.

The allure of bonds in 2024 and beyond

As interest rates trend downwards, bonds could provide a lucrative option for generating extra yield. Here are three key points to consider:

  1. High-yield cash accounts are likely to see a decrease in variable interest rates post-Fed rate cuts, while bonds tend to appreciate when rates drop, leading to returns.
  2. Bonds, especially those with short maturities, can safeguard your capital compared to stocks.
  3. For high earners in the 32% or higher tax bracket, certain bonds may deliver tax advantages over high-yield cash accounts.

When the Fed lowers rates, opting for bonds may be a prudent decision. It’s important to note that while bond portfolios carry some risk compared to FDIC-insured cash management accounts, they offer the potential for increased after-tax yield.

Introducing the Goldman Sachs Tax-Smart Bonds Portfolio

Our groundbreaking Goldman Sachs Tax-Smart Bonds portfolio presents a unique opportunity for affluent investors.

Designed to mitigate risk versus stock investments and enhance after-tax yield compared to cash accounts, this portfolio curated by Betterment incorporates Goldman Sachs’ bond market expertise.

How does this portfolio operate?

Let’s delve into a hypothetical scenario with a $100,000 investment…

Unlocking the Power of After-Tax Yield

  • The Goldman Sachs Tax-Smart Bonds portfolio strives to boost after-tax yield relative to a cash account.
  • By elevating after-tax yield, investors can potentially earn a higher post-tax return than a standard high-yield cash account, offering a compelling advantage for high-income individuals.

Consider the pre-tax and after-tax yields for a theoretical $100,000 investment in our Cash Reserve and Goldman Sachs Tax-Smart Bonds portfolios by a taxpayer in the 35% tax bracket.*

 

Pre-Tax Yield

After-Tax Yield**

Take Home on $100,000

Cash Reserve

5.00% (variable)*

2.60%

$2,595

Goldman Sachs Tax-Smart Bonds Portfolio

4.61%

2.85%

$2,864

**Annualized Blended 30-day SEC Yield. After-tax assumes individual filing single in CA, 35% federal tax rate, and $260K income. Results may vary significantly.

When assessing these products, it’s vital to consider inherent risks, as discussed below. The content provided does not constitute tax advice, and clients should seek independent tax advice based on their specific circumstances.

In our hypothetical example, the Goldman Sachs portfolio emerges as the top performer post-tax payments.

Understanding After-Tax Yield

  • After-tax yield represents the percentage of returns an investment generates after accounting for taxes.
  • We leverage after-tax yield to facilitate a comparison of profitability among portfolios that face different tax rates, such as our cash and bond portfolios.
  • Municipal bonds are federally tax-exempt, offering an after-tax benefit for high-income investors. Treasury bonds are state tax-exempt, particularly advantageous for residents in high-tax states.
  • For the Tax-Smart Bonds portfolio, after-tax yield is calculated as the weighted average of 30-Day SEC yields of each ETF in the portfolio, net of fees (0.25%), and net of taxes based on your Betterment profile data, capturing interest earned post-expenses.

How the Goldman Sachs Tax-Smart Bonds Portfolio Considers After-Tax Yield

Here’s how we incorporate after-tax yield:

  • Goldman Sachs constructs the portfolio with a blend of short-term bond ETFs containing treasuries, municipals, and corporates, aiming to offer lower risk than stock investments leveraging their bond market proficiency.
  • Betterment customizes the portfolio based on your tax details—state of residence, federal tax bracket, and income—to cater specifically to you.
  • The portfolio strategy regularly evaluates market conditions and taxable equivalent yields. Upon notifying Betterment of tax changes and rate fluctuations, your customized portfolio undergoes rebalancing.

Explore your Goldman Sachs Tax-Smart Bonds portfolio.



Invest in bonds

At Betterment, we advocate for investor choice, constantly innovating portfolios to offer options based on your risk tolerance and yield preferences. As interest rates shift, your cash should remain a productive asset.

When evaluating risk and yield and selecting the optimal portfolio, we compare portfolio choices across various factors.

Upon enrolling in a bond investment account, Betterment presents a customized after-tax yield, allowing you to compare our Cash Reserve account with our bond portfolios. Based on your risk appetite and the various after-tax yields calculated from the information in your financial profile, you can choose the portfolio in alignment with your objectives and financial status. Get started today!

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