For investors at or near retirement, making the most of income matters. Increasing the tax efficiency of a retiree’s income portfolio with the NEOS ETF suite may offer several benefits.
NEOS offers a range of ETFs for core portfolio exposures. With a focus on tax-efficient, high monthly income, these funds are worth consideration in a retirement portfolio.
All five funds are actively managed by NEOS, which uses its long-established experience within options-based investing. Retirees need not look outside of the traditional sandbox when augmenting their income portfolios. Each ETF offers exposure to a core asset class alongside an options strategy designed to seek enhanced income.
Enhanced Tax Efficiency for Income Investors
The funds provide layers of tax efficiency for investors, a notable benefit for those clients at or near retirement. The three equity funds use covered calls to generate premiums, while the fixed income funds use puts.
All of the options are index options that receive favorable tax treatment as Section 1256 Contracts under IRS rules. This means the options held at the end of the year are treated as if sold on the last market day of the year at fair market value.
Any capital gains or losses are taxed as 60% long-term and 40% short-term. Notably, this tax treatment applies regardless of how long the portfolio held the options, thereby offering noteworthy tax advantages.
A portion of the distributions of the funds also may quality as return of capital. These distributions are a return of some (or all) of the original investment made into an asset. In the case of options strategies, this may mean a return on premiums earned by an investment as opposed to principal, such as with the NEOS ETF suite.
RoC distributions provide flexibility for retirees when it comes to tax season. Taxes owed are delayed until the security or fund is sold, allowing a potential level of control over tax timing.
The fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the options. This may help to hedge capital gains earned over the course of the year, an additional benefit to investors.
