Quick Answers: How Taxes Impact Long-Term Returns

Strategies to Keep More of What You Earn

When investors discuss performance, the focus often falls on gross returns — how much a portfolio grew before fees and taxes. Yet over time, taxes can be one of the largest drags on wealth. A seemingly modest difference in annual tax efficiency compounds across decades into a wide gap in outcomes. 

For that reason, investors who pay attention to taxes often find themselves far ahead of peers who overlook them, even when their investment selections appear similar.

The Silent Erosion of Returns

Taxes affect nearly every source of portfolio income. Interest from bonds, dividends from stocks, and realized capital gains each carry their own rules. An investor who sells frequently in a taxable account may owe taxes annually, reducing the money left to compound. By contrast, a tax-deferred or tax-free account allows that compounding to continue uninterrupted.

Consider two investors who both earn 7% annually for 30 years. The first invests in a taxable account and pays an effective 20% tax on gains each year. The second invests in a tax-deferred account and pays no taxes until withdrawals. The difference between them after three decades can be measured in hundreds of thousands of dollars. Taxes, though rarely discussed with the same intensity as stock selection, are one of the most important variables in wealth.