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Other Articles
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Strategy
Strategies to Minimize Taxes: Tax Efficient Asset Allocation
By Tim Bock
President, Summit Portfolio Management
Some general advantages with owning taxable bonds in a qualified account over holding municipal bonds in a taxable account are as follows:
Less risk of negative impact due to tax law changes
No AMT exposure
No geographic risk
Better credit quality control
Better liquidity
Lower transaction costs
During the non-IRA withdrawal stage the taxable bonds will generally produce higher pre-tax returns. During the withdrawal phase of IRA assets, municipals may provide a slight after-tax advantage, but probably no more than .1% to .5% annually.
Equities Placement
Accumulation Phase
Taxable Account
98%+ tax efficient return (estimate)
Tax Deferred
100% tax efficient return
Withdrawal Phase
Taxable Account
Gain is taxed at maximum 15% federal and your state rate
May select tax lots - capital is not taxed
Tax-loss harvesting is available
Step up on basis at death
Tax Deferred
Withdrawal taxed at maximum marginal state/federal rates
No tax lot selection
No tax-loss harvesting
No step-up at death
Conclusion
Astute asset class placement between accounts, utilizing tax loss harvesting, and employing tax-managed index funds can provide the optimal benefits of tax-efficiency with maximum effective diversification. The rigorous application of these powerful tax-minimization techniques can help an investor retain more of their hard-earned wealth and be able to have more spendable income.
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