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Strategies to Minimize Taxes: Tax Efficient Asset Allocation

Strategies to Minimize Taxes: Tax Efficient Asset Allocation

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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