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The wealth you build isn’t defined by what you earn—it’s defined by what you keep. While many investors focus on pre-tax returns, after-tax outcomes can have an even greater impact on long-term results. By incorporating strategies such as tax-exempt municipal bonds and systematic tax-loss harvesting, investors may be able to reduce their tax burden while staying aligned with their broader investment goals.

The hidden cost: tax drag

Investors have a silent partner taking 20-30% of their returns–and that partner never invested a dime. Over a lifetime, tax drag can potentially cost hundreds of thousands, even millions, of dollars.

While investors naturally focus on pre-tax returns, it’s what they keep after taxes that compounds into real wealth.

How to keep more? Two approaches:

  • AVOID paying taxes on income
  • MITIGATE by reducing taxes on gains

The compounding penalty of tax drag1
 

Growth of a Hypothetical $1 Million Investment

For the 20-Year Period Ending 12/31/2025

Avoid taxes with tax-free income

The simplest form of tax awareness? Never pay the tax in the first place.

Municipal bonds are designed to deliver income that’s exempt from federal taxes–and often state taxes too. At today’s yields, munis offer higher potential than taxable bonds on an after-tax basis.

Munis Shine After Tax2

As of December 31, 2025

The real dollar impact:
 

Hypothetical $1 Million Investment2


To match this with taxable bonds? That requires a 7.55% yield—200+ basis points above what taxable bonds offered as of December 31, 2025.

Mitigate taxes with tax-loss harvesting

Turn market losses into tax savings

Even in good markets, individual investments experience losses. On average, 35% of S&P 500 stocks are down in any given year—and many more experience temporary declines at some point during the year. Tax-loss harvesting captures losses to offset capital gains—reducing taxes without changing market exposure.

Individual Stocks Create Harvest Opportunities—Even in Up Markets3

The real dollar impact:
 

Hypothetical $1 Million Portfolio With a $200K Embedded Gain Wants to Rebalance Portfolio4

  • No tax management: $47,600 tax cost (23.8% rate)
  • With tax loss harvesting: $11,900 tax cost
  • Tax savings: $35,700

Tax awareness matters

Tax drag can sap 20-30% of investment returns—the question is which approach to use:

Need income? AVOID taxes with municipal bonds

Have capital gains? MITIGATE taxes with tax-loss harvesting

Featured funds

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FLMI
Franklin Dynamic Municipal Bond ETF
Total Net AssetsAs of 04/29/2026
$1.97 Billion
Asset Class
Fixed Income
Inception Date
08/31/2017
Dividend Frequency
Monthly
NAVAs of 04/29/2026
$24.96
FHYVX
Franklin High Yield Tax-Free Income Fund - Advisor Class
Total Net AssetsAs of 03/31/2026
$4.67 Billion
Asset Class
Fixed Income
Inception Date
01/03/2006
Dividend Frequency
Monthly
NAVAs of 04/29/2026
$8.94
PAMYX
Putnam Strategic Intermediate Municipal Fund - Class Y
Total Net AssetsAs of 03/31/2026
$2.35 Billion
Asset Class
Fixed Income
Inception Date
01/02/2008
Dividend Frequency
Monthly
NAVAs of 04/29/2026
$14.16
FTFZX
Franklin Federal Limited-Term Tax-Free Income Fund - Advisor Class
Total Net AssetsAs of 03/31/2026
$873.26 Million
Asset Class
Fixed Income
Inception Date
02/01/2011
Dividend Frequency
Monthly
NAVAs of 04/29/2026
$10.39
Franklin Municipal Ladder 5-20 Year SMA
Asset Class
Fixed Income

A full range of customizable, laddered strategies across the maturity and duration spectrum.

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Learn more about investing in tax aware solutions

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All charts are for illustrative purposes only and do not reflect the performance of any Franklin Templeton affiliated fund. Past performance does not guarantee future results.

1. Source: Chaudhuri, S. E., Burnham T. C., and Lo, A. W. (2020). “An Empirical Evaluation ofTax-Loss Harvesting Alpha. Financial Analysts Journal, 76:3, 99-108. The study found thata tax-loss harvesting strategy produced an average 1.08% tax alpha peryear over the period 1926-2018 and ranged from 0.57% to 2.29% peryear during low and high volatility periods. This study did not involve Franklin Templeton or O’Shaughnessy Asset Management, LLC. Tax drag represents the reduction of potential investment returns due to taxes. There is no guarantee a tax-managed strategy will result in increased after-tax returns. Results will differ based on an individual investor’s circumstances.

2. Source: Bloomberg. Assumes the maximum US marginal tax rate of40.8%, inclusive of the 3.8% net investment income tax.

3. Source: FactSet, S&P Global. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect anyfees, expenses or sales charges.

4. Source: O’Shaughnessy Asset Management, LLC (OSAM). Assumes 23.8% federal long-term capital gains tax rate, all gains are eligible for long-term rate, and no state tax rate. The feasibility of potentially reducing the tax cost from $47,600 to $11,900 is dependent on market environment, incumbent securities, and investor preferences and capital gains considerations. This scenario assumes that over time the portfolio generates losses that can be used to offset $200k in capital gains. When transitioning to tax-managed strategies, individual accounts will deviate from the target model due to tax management practices.

WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Generally, investments offering the potential for higher returns are accompanied by a higher degree of risk. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in a portfolio adjust to a rise in interest rates, the portfolio’s value may decline. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. All bonds are subject to the potential for default. High-yield, lower-rated (junk) bonds generally have greater price swings and higher default risks. Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable. Tax management practices may impact performance, portfolio characteristics and holdings; and may not result in favorable outcomes.

These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account.

Please see each product's web page for specific details regarding investment objective, risks, performance, and other important information. Review this information carefully before you make any investment decision.

Investors should carefully consider a fund's investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

Franklin Distributors, LLC. Member FINRA/SIPC. Investment Products: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE.