Welcome to the Third View Perspectives Newsletter, your monthly source for financial intelligence and trusted advice to help you make more informed decisions on behalf of you, your family, and your legacy.

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We’re excited to share that Third View has settled into its new headquarters at 257 Riverside Avenue in Westport, right on the Saugatuck River.

The new office gives our growing team room to build and keeps us close to the families we serve throughout the region. Thank you to everyone who joined us for our grand opening celebration on September 24. If you couldn't make it, the door is always open. Stop by and see the view.

By Third View Co-Founder Zoltan Pongracz

Say you earn 15% in a high-turnover hedge fund that generates significant short-term capital gains, or you earn 15% in a tax-efficient investment. Those may look like the same return on paper, but they can produce vastly different outcomes in terms of what you actually keep. Especially if you're in a high-tax state like New York, a 15% pre-tax return could end up closer to 7% after taxes.

That’s because short-term capital gains are taxed as ordinary income. For someone in the top brackets, federal income tax, the 3.8% net investment income tax, and New York state tax can collectively consume more than half of that return. That doesn't mean the hedge fund is necessarily a bad investment or should automatically be eliminated from the portfolio. It means the tax impact needs to be part of the decision-making process when deciding whether to make (or continue holding) an investment.

When it comes to investing, people tend to focus on the headline return, but what matters is what you keep. With thoughtful planning, proper asset location, and tax-management strategies, you can reduce unnecessary tax drag and increase the amount of your investment returns that ultimately contributes to your net worth.

Taxes can be one of the biggest drags on long-term investment returns.

What we often see with new clients is an investment portfolio that was built through accumulation rather than around a cohesive strategy. The individual pieces may be perfectly reasonable on their own, but they don’t necessarily work well together from a tax perspective.

One of the primary purposes of a financial plan is to coordinate those different pieces so the portfolio works as a whole, including making sure investments are structured and located in a tax-efficient way.

Tax-aware investing is about focusing on what you keep, not just what you earn. There are a few different components of tax-aware investing that we focus on with clients:

1) Asset Location. It’s not just what you own, it’s where you own it. Tax-inefficient investments, like taxable bonds, private credit, or high-turnover strategies, are often better suited for IRAs and other tax-advantaged accounts. More tax-efficient investments, such as broad-market ETFs and municipal bonds, are generally better candidates for taxable accounts.

2) Direct Indexing. For clients where it makes sense, instead of buying an S&P 500 ETF as a single line item, you own the individual stocks that make up the index. You get similar market exposure, but each position can be managed individually, creating more opportunities for tax-loss harvesting.

3) Tax-Loss Harvesting. Tax-loss harvesting means selling an investment that has declined in value, realizing the loss for tax purposes, and reinvesting the proceeds into a similar investment so you remain invested. That realized loss can then be used to offset capital gains elsewhere in the portfolio.

Now, the thing we have to keep in mind is not letting the tax tail wag the dog. Don't make a bad investment just to save taxes. The tax benefits can make a good investment great, but they're not going to make a bad investment good.

Be tax aware, not tax driven.

There are certain situations where it makes sense to take a closer look at how taxes are affecting your investment decisions and overall financial plan:

- You have a significant capital gain this year from selling a business, real estate, or investments.

- You hold highly appreciated or concentrated positions with significant embedded gains.

- You own actively managed or otherwise tax-inefficient mutual funds in a taxable account.

- You hold income-producing or high-turnover investments in taxable accounts that may be better suited for tax-advantaged accounts.

- Your portfolio is being rebalanced, sold, or repositioned without considering tax lots, losses, and the timing of gains.

- Most of your tax planning happens after the year is already over.

These are the types of situations we regularly evaluate with clients as part of the broader financial planning and investment-management process.

If any of these apply to you, reply to this email. If you’re already a client, we’re happy to review how these issues are being addressed within your plan. If you’re not yet a client, we’d be glad to take a look at your current portfolio and discuss whether there are opportunities to improve its tax efficiency.

Owning the right things in the wrong accounts. We’ve reviewed portfolios where municipal bonds, for example, were held in an IRA for no compelling reason. The primary benefit of municipal bonds is their tax-exempt income, which provides little value inside an account that is already tax-advantaged. That’s a straightforward example of why asset location matters.

Now take the hedge fund example from the article above: if a strategy is generating strong returns but also producing significant short-term capital gains, can it be held in an IRA or Roth IRA instead? The same question applies to income-producing investments like private credit. In many cases, placing tax-inefficient investments in tax-advantaged accounts can materially improve the after-tax outcome, assuming the investment structure is appropriate for that account.

Waiting until December. A lot of advisors and clients wait until year-end to harvest losses and think about taxes. Or they just walk into their CPA's office in March and ask what they owe. The IRS is a partner in your taxable accounts and, as such, should be thought about throughout the entire year.

Blindly rebalancing. If you're targeting a 60/40 mix of stocks and bonds, for example, and a strong equity market pushes you closer to 70/30, you may need to rebalance. The mistake is doing that mechanically and realizing unnecessary capital gains in the process.

Instead, you may be able to use new cash contributions, direct withdrawals from overweight positions, or adjust elsewhere in the portfolio to move back toward your target allocation in a more tax-efficient way.

Not watching which shares you sell. If you own 2,000 shares of Apple and need to sell 200, which 200 shares are you actually selling? Different tax lots can have very different cost bases and holding periods, which can materially change the tax impact of the sale.

Rather than blindly using a default like first in, first out, we pay attention to the specific lots being sold. At Third View, we use Schwab’s Tax Lot Optimizer and other tools to prioritize losses and lower-tax gains in an effort to minimize the tax impact of a sale.

Holding tax-inefficient mutual funds in taxable accounts. Actively managed mutual funds can create tax bills you don’t fully control. The fund may sell appreciated holdings because of redemptions, rebalancing, or changes in the portfolio, and those realized gains can be distributed to shareholders. So even if you personally never sold a share, you may still receive a taxable capital-gain distribution. In some cases, you can even lose money in the fund over the year and still owe taxes.

One potential solution is a separately managed account, or SMA. You still get professional portfolio management, but unlike a mutual fund, you directly own the underlying securities. That gives you much more control over taxes: losses can be harvested at the individual security level, gains can be managed more intentionally, and the actions of other investors don’t create a capital-gains distribution for you.

For taxable investors, that additional control can make an SMA a much more tax-efficient way to own an actively managed strategy. Fees are also often significantly lower for SMAs than their mutual fund versions.

Have a question you'd like us to answer in a future newsletter? Simply reply to this email to submit it to us.

That’s all for this month. If you enjoyed the newsletter, the greatest compliment would be to forward it to someone you think would find it valuable. We’ll be back with more next month.

- Frank, Jerry, and Zoltan

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Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, and Third View Private Wealth makes no representation or warranty as to the accuracy or completeness of the information, which should not be used as the basis of any investment decision. Information contained on third party websites that Third View Private Wealth may link to is not reviewed in their entirety for accuracy and Third View Private Wealth assumes no liability for the information contained on these websites. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Third View Private Wealth. For more information about Third View Private Wealth, including our Form ADV brochures, please visit https://adviserinfo.sec.gov or contact us at (203) 408-0098.